August 9, 2016
Please see below for key trends and themes in executive compensation, corporate governance and shareholder engagement, detailing five of the top storylines from the second half of July. Highlights include the Commonsense Corporate Governance Principles compiled by some of the top names in Corporate America, the SEC’s move to remove outdated disclosures, and several studies showing pay and performance misalignments based on peer selection.
1. Commonsense Corporate Governance
Corporate governance leaders such as Warren Buffett of Berkshire Hathaway, Jeff Immelt of GE and Jamie Dimon of JP Morgan joined together with large institutional investors such as BlackRock and Vanguard to publish “Commonsense Corporate Governance Principles.” These principles attempt to find a common ground on corporate governance where conversations between shareholders, management and boards can begin. They highlight the importance of board independence, diversity, leadership, accounting transparency, effective shareholder engagement and minimizing attention around quarterly earnings forecasts compared to long-term outlook.
2. Determining Executive Pay
Yale University’s Cowles Foundation for Research in Economics found that determining executive pay often relies more on the performance of competing industry peers rather than an executive’s own performance when large institutional investors own many parts of the entire industry. These investors benefit from their common ownership and discourage each company from outcompeting each other because it would negatively affect their aggregate assets, the report found. Consequently, even when an executive performs poorly, if their peers perform well, their compensation increases with their industry’s growth.
Along the same lines, a different study by MSCI found that over the last 10 years the CEOs at 429 large-cap U.S. companies earned higher equity awards while returning below-median results compared to their sector peers. This finding undermines the purported effects of equity compensation that bases executive pay because there is no clear link between these awards’ value and long-term company growth, the report said. The authors suggest that this misalignment revolves around SEC disclosure rules that focus on annual performance rather than long-term performance. Instead, the authors propose including additional cumulative figures that compare total compensation over an executive’s entire tenure.
3. SEC regulations
The SEC recently found that companies were manipulating earnings figures to appear stronger to shareholders using inconsistent non-GAAP reporting methods. Consequently, the SEC reviewed these standards to ensure clarity and consistency in companies’ financial statements; PwC detailed these differences. According to MarketWatch, Microsoft specifically supplemented their latest earnings reports to accommodate these changes, adding information that elucidates their adjusted reports, and EA will cease using these adjusted measures.
Additionally, the SEC proposed a rule that would remove redundant and duplicative disclosure requirements, and created a side-by-side “ demonstration version” to clarify their planned changes. The SEC intends these adjustments to simplify compliance efforts while maintaining or improving present disclosure levels. Deloitte organized these changes into a table with their types, goals and examples.
4. Modernizing Boards
CMO Australia interviewed Director Institute CEO Kylie Hammond on incorporating marketing professionals into the boardroom. Next to growth in board diversity through gender, age and background, she highlights the recent appearance of marketing professionals joining the table. They mediate between the board and the general public, using their broad skillset understanding the consumer perspective to enhance and supplement strategic decisions.
Despite the continuing growth of cyber risk, board cybersecurity education continues to lag. Navex Global’s survey studied 644 ethics and compliance professionals and found that only 22% of companies have board cybersecurity training, according to the Wall Street Journal. Equilar also recently examined these types of risks in a cybersecurity blog series that analyzed 35 S&P 500 companies who disclosed cybersecurity oversight in 2015. Retail, business services and software industries most often discussed this topic with shareholders, constituting 37.1% of the affected companies.
5. The U.K. and Theresa May
Post Brexit, Theresa May became the U.K.’s new Prime Minister and quickly began planning corporate governance reforms. The Globe and Mail reports that she intends to require companies to add employee representatives to boards and to make Say on Pay votes fully binding. Other experts push her reformations even further, suggesting publishing pay ratios, looking beyond shareholder value, raising board qualifications and addressing economic insecurity and living situations, according to The Guardian. Opponents approach her modifications hesitantly, especially criticizing political involvement in financial markets and evidence supporting explanations for her planned changes.
For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content & Marketing Communications at email@example.com. Ryan Villard, research analyst, compiled this post.