SEC Finalizes Comp Committee Listing Standards
Compensation committees will soon feel the effects of the latest rule adopted in June by the Securities and Exchange Commission that aims to ensure the independence of directors who set executive compensation.
Under the new rule, securities exchanges must adopt listing standards that require compensation committee members to be independent; the criteria for independence include the source of a director’s compensation and whether he or she is affiliated with the company or any of its subsidiaries. Once the listing standards go into effect, companies must meet these standards in order to continue trading on the exchange.
The rule places the burden of responsibility for the appointment, compensation and work of any advisor hired squarely on the shoulders of the compensation committee, and lays out six factors directors must consider when hiring a compensation consultant:
■Whether the compensation consulting company employing the advisor is providing other services to the company
■ The percentage of the advisor’s total revenue that the company has paid in fees to the compensation consulting company employing the advisor
■ The conflict-of-interest policies adopted by the compensation consulting company
■Whether the compensation advisor has a business or personal relationship with a member of the compensation committee
■Whether the compensation advisor owns stock in the company
■Whether the compensation advisor or the person employing the advisor has any business or personal relationship with the executive officer of the issuer
Deborah Lifshey, managing director of Pearl Meyer & Partners, says the new rule is just another step along the path toward additional disclosure requirements about compensation firms that began in 2009. “Any firm that hasn’t already been thinking about these six points in practice when assessing whether they are independent or conflicted should be doing so,” she says.
The rule will go into effect 30 days after being published in the Federal Register, and each exchange will have 90 days to propose listing standards. The SEC must then approve these standards within one year.
—Cheryl Soltis Martel
Occupied, but Empty
Sirius XM Radio Director and Apollo Global Management Founder and CEO Leon Black missed all seven Sirius board meetings in 2011. Investors cast 955 million voting shares against Black, while only 512 million supported him, but he will retain his position on the satellite radio’s board because of Sirius’ plurality voting structure: Eight non-executive board seats were to be awarded to the eight directors with the highest number of votes, though only eight nominees were offered to shareholders. Black has been a member of the Sirius board since 2001; company filings state he has not attended more than three-quarters of board meetings annually from 2007 to 2011.
Buffett to Remain at Helm
Despite a stage 1 prostate cancer diagnosis, Berkshire Hathaway’s Warren Buffett has pledged to continue at the company’s helm throughout his upcoming treatment, slated to begin in mid-July. Though Buffett announced he has identified his successor and two backup candidates, he has not publicly disclosed who exactly would take the lead should he be unable to perform his duties. He noted in a statement that he would “let shareholders know immediately should my health situation change. Eventually, of course, it will, but I believe that day is a long way off.” A number of medical experts have expressed confidence in Buffett’s prognosis, says The Wall Street Journal, given the cancer’s early detection.
More CEO Pay Tied to Performance
CEO pay was more closely correlated with company stock performance in 2011, finds a Wall Street Journal/Hay Group analysis. For every additional 1 percent a company returned to shareholders, the CEO was paid 0.6 percent more, while 1 percent declines signaled 0.6 percent less pay.
Compensation of S&P 500 CEOs increased for a second consecutive year, with median total compensation increasing by 6.2 percent to $9.6 million from 2010 to 2011, according to the 2012 CEO Pay Study, published by Equilar, an executive compensation data firm. Health care CEOs were the most highly compensated, with $10.8 million in median total pay last year. The biggest pay raises were found in the financial services and industrial goods sectors, with increases of 13.2 percent and 8.5 percent, respectively.
The report, which analyzed proxy data for 323 CEOs at 322 companies who have held their position for at least two full years, found that revenue and net income also increased. Revenue was up 8.7 percent in 2011 over 2010, to a median of $8.5 billion, and median net income rose to $682 million, an increase of 10.2 percent over the previous year.
The Big Giveaway
Apple CEO Tim Cook has opted to distribute $75 million in dividends on restricted stock to company employees. Despite the gift, Cook remains one of America’s top paid CEOs, with his pay package valued at $378 million when he took the helm last August.
Tweet This: Social CEOs More Trustworthy
CEOs who utilize Twitter are more trustworthy than those who shun the social network, according to 77 percent of consumers and 83 percent of employees in a recent Brandfog survey. CEOs with a social media presence are better equipped to manage in today’s world, said 81 percent of respondents, with “better communication,” “improved brand image” and “more transparency” as the most-cited positive effects of social media engagement. Despite the high value consumers and employees place on CEOs’ communications, the recent IBM 2012 Global CEO Study found that only 16 percent of 1,709 executives surveyed participate in social media. That percentage is projected to increase to 57 over the next five years.
Accounting Class Actions on Rise
Securities class action filings involving accounting allegations increased in 2011, with 70 of the 188 securities class action filings involving accounting allegations, up from a recent-memory low in 2010 of 46, according to the new Cornerstone Research report Accounting Class Action Filings and Settlements—2011 Review and Analysis. The number of accounting case filings involving financial statement restatements ended a four-year decline, increasing to 20 in 2011 from 12 in 2010.
Walmart Names Global Compliance Officer
Following accusations that Walmart covered up the results of an internal probe finding that management at the retailer’s Mexican subsidiary orchestrated $24 million in bribes, the company has established a new “global compliance officer” post, to which it appointed former U.S. Attorney for the Western District of Arkansas Tom Gean. The scandal spurred CalSTRS to file its first-ever derivative suit against the board and current and former executives and directors for breach of fiduciary duty.
Lonely at the Top
Factoring a company’s potential leadership needs into the succession planning process is the top concern CEOs have when evaluating their replacements, finds the new RHR International biannual CEO Snapshot Survey, with 27 percent of executives citing future needs as a key issue.
“The top succession concern of CEOs reveals an important aspect of the executive mindset,” said RHR International Chairman and CEO Thomas J. Saporito. “CEOs are less effective than they think at reading talent. Most importantly, CEOs struggle to combine this gauge of talent with an understanding of their organization’s leadership requirements for the future. It is this combination of talent and fit that ultimately makes or breaks the succession process.”
Also front of mind with the executives, surveyed online in March and April by Harris Interactive Service Bureau, was passing on their power and prestige to the future leader, at 25 percent, and establishing their legacy, at 19 percent. Executives would recommend maintaining or establishing a joint CEO/chairman role at their companies after their tenure at a rate of 63 percent. Half of CEOs believe that increased scrutiny of their performance affects their perceived job security, while 41 percent reported feeling loneliness in their role. In contrast, 84 percent of CEOs reported having at least one person with whom they may confidently and openly discuss their decisions and subordinates’ perceptions. Fifty-two percent of CEOs used the lead director as their confidant. Outside CEO Hires More Likely To Spur CFO Exit Chief financial officers were almost three times as likely to leave a company between 2010 and 2011 if their company hired a new CEO from another firm, rather than promoting an executive from within the company’s ranks, according to data from Korn/Ferry International on 25 transitions at Fortune 500 companies. Within two years of a company hiring an external CEO 28 percent of CFOs left the firm. At the 72 Fortune 500 companies that tapped a new CEO from within, only seven CFOs left their positions within two years.
CEO Turnover Trends Shifting
Of the world’s largest 2,500 companies, 14.2 percent replaced their chief executive in 2011, up from 11.6 percent in 2010, finds Booz & Co.’s 12th annual CEO succession study. Within the ranks of newly appointed CEOs, those named to the combined CEO and chairman roles decreased to 18 percent, in contrast to the 40 percent seen in the study’s first year. The highest turnover rates were found within the largest 10 percent of companies. Remaining steady this year, as in the previous two years, was the percentage of CEOs being hired from outside the company, at 22 percent. CEOs recruited from within were found to outperform their regional market index by a median 4.4 percent, in contrast to 0.5 percent for outside chief executives, and were less likely to be forced from their role.
With Reserves Built, Companies Look to Spend
With nearly $8 trillion in emergency cash in companies’ pockets, 45 percent of CFOs and other executives plan to spend reserves in 2012, according to an American Express/CFO Research Global Business & Spending Monitor report. This year, 34 percent of those surveyed were preserving cash, down from 62 percent last year. In North America, 56 percent of executives planned to spend some of their reserves, in contrast to 33 percent in the Asia-Pacific region. Some spending plans may help reduce unemployment—53 percent of companies surveyed in North America said they hope to increase hiring.
NACD Exclusive Onboarding Manual
Before taking a seat at the board table, new directors may need to know the basics. NACD’s research team developed The Onboarding Book for this purpose.
The Onboarding Book provides a road map that boards—and governance/ nominating committees—can use for new director orientation. Prepared as an actual director orientation book for a hypothetical company, the publication contains numerous examples and templates, ranging from a code of ethics and committee charters to a director roster, meeting calendar and board agenda for the year ahead.
Using the Microsoft Word document provided with the hard-copy text, boards can customize the content to fit their situations. The book is available for purchase by NACD members at NACDonline.org.
Best Corporate Citizens
1. Bristol-Myers Squibb
5. Johnson Controls
7. Spectra Energy
8. Campbell Soup
10. Freeport-McMoran Copper & Gold
Source: CR magazine
Best/Worst States for Business Top 10
2. North Carolina
8. South Carolina
42. West Virginia
47. New Jersey
49. New York
Source: Chief Executive magazine