Update on the current board issues: February 2013

Issues in brief


Proxy vote injunction lawsuits

Going into the 2013 proxy season, some institutional and individual investors have found a new way to try to force changes in executive compensation plans: class action injunction lawsuits.

These lawsuits, which are filed before the annual shareholder vote on a company’s executive compensation proposals, allege that a company’s disclosures about those proposals are materially deficient and thus do not promote a fully informed shareholder vote.  The suits ask a court to enjoin, or delay, the vote until the court decides on the adequacy of the proxy disclosures on executive compensation and equity plans. They are meant to force companies to issue further disclosure before the shareholders vote.

As of January, more than 20 such lawsuits have been filed in the past year mostly by one law firm, according to a recent client memo from Latham & Watkins. Of those, 11 have been dismissed, six were settled and two were decided in the plaintiffs’ favor, according to research from Laurel Hill Advisory Group and Latham & Watkins. The cases that resulted in settlements and the two successful cases in which the courts forced the companies to delay shareholder votes led to enhanced compensation-related disclosures for shareholders.

Some of the additional information those shareholders seek in their lawsuits include:

  • Explaining why a company selected its compensation consultant
  • Stating what consulting services the compensation consultant provided to the company
  • Giving a “fair summary” of the compensation consultant’s economic analysis that was provided to the board.
  • Explaining how the board determined the number of additional shares to be authorized
  • Explaining how the equity or compensation plan is in the best interests of the shareholders.

“Every public company with a shareholder vote in 2013 should consider itself to be a possible target and should act and disclose accordingly in order to be positioned to defend a suit as expeditiously as possible if one hits,” James Barrall, global co-chair of Latham & Watkins Benefits and Compensation Practice, wrote in a recent blog post for The Conference Board Governance Center.

In his February 5 post, he explains that boards and compensation committees should build a careful record in the minutes regarding matters considered and any recommendations they relied on from compensation consultants or other advisors. They should make sure their proxies reflect such actions “tightly and accurately.”

For more information on the injunction lawsuit trend, directors may want to read the following:


ISS QuickScore: Third generation of governance ratings

The proxy advisory firm Institutional Shareholder Services (ISS) has launched its third generation of governance ratings called ISS Governance QuickScore. It intends to offer the service to institutional investors to identify and monitor governance risk in their portfolios while marketing it to companies as a way to determine concerns investors have with their governance practices.

The new rating service replaced ISS’s second generation Governance Risk Indicators (GRId) on February 25. The Corporate Governance Quotient (CGQ) preceded GRId

The new methodology, which will initially apply to about 4,100 companies in 25 markets, will closely align with ISS’ voting policy, and will use qualitative research to drive the quantitative scores. While it will include the four governance attribute categories that are in GRId (board structure, shareholder rights, compensation, and audit), Governance QuickScore will replace the GRId color-coded levels of concern with a scoring system that ranks companies from 1-10, with 1 indicating lower governance risk and 10 indicating higher governance risk.

Each company included in the ISS Governance QuickScore database will receive scores for each category. ISS plans to tailor the scores to local governance dynamics. Those scores will be highlighted by a red flag if there is a negative score and a green star for a positive score.

For more information on the new methodology, directors may want to read the following:

Morrow & Co.: Proxy Update – ISS Governance QuickScore: The Third Generation of ISS Governance Ratings


Investor engagement effort

As part of an effort to better inform investors about markets, industries, and corporate governance and learn more about shareholders’ viewpoints, PwC has created the Investor Resource Institute. It is led by Kayla J. Gillan, former SEC deputy chief of staff and general counsel for the California Public Employees Retirement System (CalPERS).

"Investor confidence is the bedrock of our nation's capital markets,” PwC US Chairman and Senior Partner Bob Moritz said.”The goal of our program is to strengthen this confidence by helping investors better understand companies’ reporting and other publicly available information."

Gillan, who was also a founding member of the Public Company Accounting Oversight Board (PCAOB), sees the PwC Investor Resource Institute as a way to better educate both investors and companies.

"PwC has a vast reservoir of expertise that can be tapped for the benefit of investors," Gillan said. "From supporting a deeper understanding of how to read financial statements, to taxation, data security, and a myriad of other issues, there are many, many opportunities for us to work with investors in areas of mutual interest."

PwC’s Investor Resource Institute has a website that offers insights for the investment community (e.g., PwC thought leadership on industries, reporting and accounting, governance, and sustainability) and insights from the investment community (PwC survey results and reports).