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18 Jul. 2011 | Comments (0)

If you sit on the board of any of the 39 companies that had a failed Say on Pay vote the past proxy season, I don’t need to tell you that despite the fact the votes were only “advisory” there will be some shareholder repercussions. In the past year, seven companies have already faced one of those repercussions – the dreaded derivative shareholder lawsuit. It’s possible the plaintiff’s bar may not limit their targets to companies with failed SOP votes; the word is that any vote below 70 percent is troubling. And in some cases compensation consultants have been named as defendants. At last check, the companies facing derivative lawsuits from shareholders after negative SOP votes include:
  • Occidental Petroleum (2010)
  • Keycorp (2010)
  • Beazer Homes (2011)
  • Umpqua Holdings Corp. (2011)
  • Jacobs Engineering Group (2011)
  • Hercules Offshore Inc. (2011)
  • Bank of New York Mellon (2011)*
*=It should be noted that BNY Mellon is the only company to be sued following a successful SOP vote. So just what are shareholders trying to achieve with these lawsuits and what kind of impact will it have on those companies named? “Shareholders are looking at Say on Pay as one way to have their voices heard,” said Russ Miller, managing director of ClearBridge Compensation Group. “They see the lawsuits as a way to achieve change in the executive compensation program.” Meantime, Philadelphia law firm Drinker Biddle & Reath LLP in a client memo [free registration required] today reports that there has been at least “six notable derivative lawsuits filed in which plaintiffs have argued that shareholders ‘disapproval’ of a company’s executive compensation plan supports claims that the directors breached their fiduciary duties when they approved the plans, and that the directors are therefore personally liable for damages to the company from allegedly excessive compensation payments.” The client memo goes on to say that shareholders have alleged directors and other defendants are guilty of breach of fiduciary duty, misrepresentation (based on a pay for performance model that wasn’t followed at companies that actually had net losses), corporate waste, unjust enrichment, aiding and abetting and breach of contract. Drinker Biddle also discovered that there has been a certain fact pattern in the legal complaints where the following are true of the defendants’ companies:
  1. The company advises shareholders it maintains a pay for performance compensation philosophy.
  2. The board relies in part on the advice of a compensation consultant.
  3. The board approves an executive compensation plan in which non-executive officers (NEO) receive a compensation increase.
  4. The company has poor financial results.
  5. Directors who are also NEOs receive compensation increases.
  6. A majority of shareholders voted in the Say on Pay vote.
  7. The board fails to rescind the pay increases after the Say on Pay vote.
As for the impact on the companies of the directors being sued? Well, even though it has been widely reported that the suits won’t stand up in court because the SOP votes are advisory there are some substantial financial and reputation costs. “At a minimum, the lawsuits will costs companies some time and money because they are burdensome,” Miller said. Drinker Biddle also addresses the financial impact of such lawsuits. “Even if lawsuits following negative Say on Pay votes lack merit, they are nonetheless expensive for companies to defend,” the law firm states. “And some may settle the cases merely to control or limit expenses, exposure and negative publicity.” In fact, the law firm points out that three of the aforementioned cases have been already settled for amounts that have not been disclosed. So just what are compensation consultants and law firms telling their corporate clients regarding such lawsuits? “We are telling them that the primary focus [for boards] is to make compensation decisions as the business needs with an eye on the long-term success of the company,” Miller said. “Then, [the board] should look at how it discloses that in its CD&A [Compensation Discussion and Analysis], as well as how the external market will view those decisions.” As for limiting litigation risk related to Say on Pay votes, Drinker Biddle advises directors to do the following when approving compensation plans:
  • Engage in healthy discussions with compensation consultants when presenting the compensation package.
  • Ensure that the board or committee meeting minutes document there was a robust discussion in which questions were asked.
  • Continue to vote for the compensation directors believe in good faith will be needed to attract, retain and incentivize executives, but be prepared to explain the basis for those decisions.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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