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Forum Report
Initial Open Meeting of the Options
Policies Forum
December 6, 2006
Thanks to all of you who attended the initial open meeting of
the Options Policies Forum, and also to everyone else who has been
participating in our development of marketplace processes to govern the
authorized use of shareholder capital for equity-based compensation.
A consensus definition of both the Forum’s direction and several
specific projects evolved from the informal exchanges of views among meeting
participants reflecting a marketplace range of decision-making perspectives,
including different sizes, styles and organizational types of investors as
well as similarly diverse corporate constituencies. The scope of the Forum
was effectively established at the start of the meeting by Gary Findlay,
executive director of the
Missouri State Employees Retirement System and past chairman of the
Council of Institutional Investors,
in statements emphasizing the need for transparency and urging us to “focus
on aligning interest without limiting the scope of the alternatives that are
available for achieving that goal.” In that context, continuing discussions
led to the development of consensus support for the Forum’s progress with
the following:
1.
Examples of
reasonable information requests: While there were significant
differences among meeting participants regarding what information would be
useful to investors, there was no disagreement at all about a shareholder’s
right to obtain the information relevant to investment decisions, assuming
provision of the information is reasonable in terms of costs,
confidentiality, and other practical considerations. It was also recognized
that well-meaning investors and managers might have legitimate disagreements
about what is reasonable, and that it would be desirable to minimize the
need for litigated resolutions of those disagreements. Responding to these
observations, a suggestion was made to develop a list of 5 or 10 questions
that could serve as examples of what an investor might reasonably ask.
After discussing means of assuring effective review and broad acceptance,
including the validation procedures addressed in paragraph #3 below, the
idea was supported as an effective marketplace guide that would benefit both
investors and managers.
If interested, please offer your suggestions of information that an
investor might reasonably request to fully understand a company’s policies
relating to options or other equity-based compensation.
2.
US adaptation of advisory voting on compensation policy: Meeting
participants were interested in reports of positive management reactions to
the new United Kingdom practice of presenting executive compensation
policies for “advisory” votes of shareholders. Discussions, which included
participants with extensive practical experience in the definition, approval
and monitoring of compensation plans, generated broad appreciation of the
opportunity to use an advisory vote process as a foundation for cooperative
communication in the development of policies as well as their presentation,
essentially following conventional product development procedures with which
most corporate managers are familiar. Meeting participants concluded that
the Forum should support the development of a model for a US marketplace
adaptation of the advisory voting practice in a form that would benefit both
investors and management, and a representative of
Hermes, the UK
pension manager, offered to provide an example of a proposal that was
prepared as a foundation for private discussions of its adaptation with a US
company. (See the
accompanying proposal, with the name of the subject company deleted.)
If interested, please offer your comments on how the advisory voting
process should be adapted to US conditions.
3.
Validation of
marketplace acceptance: For any principles to be credibly presented
as marketplace determinations of fair play, it was agreed that there should
be an actual vote of acceptance by representative groups of both investor
and management decision-makers. Discussions included suggestions of
membership organizations that would have the operational ability to poll
members and an interest in supporting marketplace alternatives to regulatory
processes. Meeting participants supported Forum efforts to develop
appropriate validation procedures that could be applied efficiently to both
the sample questions and the model for advisory voting, above, as well as to
other marketplace standards.
If interested, please offer your suggestions of organizations with
memberships whose polled views of fairness would be a meaningful reflection
of marketplace acceptance.
4.
Review of analytical
alternatives: Several meeting participants argued the advantages of
alternative analytical standards or methodologies in evaluations of options
and other equity-based compensation practices, as well as other aspects of
executive compensation. Note was made, for example, of certain mutual fund
reporting requirements that could be adapted to the reporting of operating
company executive compensation. While only some of the meeting participants
were familiar with the issues being debated by compensation analysts, there
was consensus support for encouraging rigorous professional examination and
definition of analytical alternatives as a foundation for healthy
marketplace competition. The Forum will therefore organize a special
workshop for qualified professionals to prepare a report on analytical
alternatives and associated information reporting requirements.
If interested, please provide a summary of your professional
qualifications and interests in the workshop’s objectives.
Having defined these directions, the Forum will now proceed with
the selection of several Corporate Participants based on their ability to
provide leadership and perspectives which are relevant to the issues we
expect to address. Suggestions of potentially suitable companies will of
course be welcomed.
GL – 12/12/06
Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
Tel: 212-605-0335
Fax: 212-605-0325
Email:
gl@shareholderforum.com
Hermes EOS
Form of Proposal for Advisory Vote
RESOLVED, on a motion of Britel Fund
Nominees Limited and Hermes Assured Limited (“Hermes”), that the
shareholders of [deleted: company name] urge the board of directors to adopt
a policy under which shareholders could vote at each annual meeting on an
advisory resolution, to be proposed by [deleted: company name]’s management,
to ratify the compensation of the named executive officers (“NEOs”) set
forth in the proxy statement’s Summary Compensation Table (the “SCT”) and
the accompanying narrative disclosure of material factors provided to
understand the SCT (but not the Compensation Discussion and Analysis). The
proposal submitted to shareholders should make clear that the vote is
non-binding and would not affect any compensation paid or awarded to any
NEO.
SUPPORTING STATEMENT
Investors are increasingly concerned about
executive compensation and lack of disclosure thereof that sometimes appears
to be insufficiently aligned with the creation of shareholder value. Recent
media attention on questionable dating of stock options grants by companies
has also raised investor concerns.
We believe that existing U.S. corporate
governance arrangements, including SEC rules and stock exchange listing
standards, do not give shareholders enough mechanisms to provide input to
boards on senior executive compensation. By contrast, public companies in
the United Kingdom allow shareholders to cast an advisory vote on the
“directors’ remuneration report,” which discloses executive compensation.
Such a vote is not binding, but gives shareholders a clear voice that could
help shape senior executive compensation.
Hermes’ experience with this type of vote as
UK shareholders has been positive. Since this rule was introduced in 2002,
it has successfully provided shareholders with a basis for dialogue with
remuneration committees and boards of companies where there are concerns
regarding compensation. While the resolution has been defeated in only a
handful of cases, we believe that it has dramatically increased the level
and quality of discussion between remuneration committees and investors, and
thereby has helped drive more effective remuneration structures.
U.S. stock exchange listing standards
require shareholder approval of equity-based compensation plans, but those
plans set only general parameters and accord the compensation committee
substantial discretion in making awards and establishing performance
thresholds for a particular year. Shareholders do not have a means to
provide ongoing feedback on the application of those general standards to
individual pay packages.
Withholding votes from compensation
committee members who are standing for reelection is a blunt and inadequate
instrument for registering dissatisfaction with the way in which the
committee has administered compensation plans and policies in the previous
year.
Accordingly, we urge [deleted: company
name]’s board to let shareholders express their opinion about senior
executive compensation by establishing an annual referendum process. The
results of such a vote would, we think, provide [deleted: company name] with
useful information about whether shareholders view the company’s senior
executive compensation, as reported each year, to be in shareholders’ best
interests.
We urge shareholders to vote for this
proposal.
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