RiskMetrics Updates On Takeover Defenses And Compensation

Tuesday, January 5, 2010 - 01:00

Editor: I understand that RiskMetrics Group has recently issued its 2010 corporate governance updates and frequently asked compensation questions which affect several areas, including takeover defenses and compensation. What are some of the key changes relating to these two areas?

Newsome: With regard to takeover defenses, a key change is the treatment of poison pills adopted, renewed or materially adversely modified without stockholder approval. RiskMetrics now distinguishes between long-term poison pills, those having a term of more than one year, and short-term poison pills, those having a term of one year or less. For companies with long-term poison pills that have not been approved by stockholders and where the entire board of directors is elected on an annual basis, RiskMetrics will now recommend a vote against or to withhold authority against directors every three years, and for companies with classified boards of directors, every year. For non-stockholder-approved short-term poison pills, RiskMetrics will determine on a case by case basis whether to recommend a vote against or to withhold authority taking into account specific factors.

Editor: In addition to poison pills, for what other takeover defenses has RiskMetrics issued updates?

Newsome: RiskMetrics now provides that it will generally recommend a vote in favor of proposals that provide stockholders with the ability to call a stockholder meeting or to act by written consent so long as the proposals will provide substantive rights to the stockholders. Regarding proposals to reduce the super-majority stockholder vote required to approve an action, RiskMetrics will generally recommend a vote in favor of such proposals unless the company has a significant stockholder, since in such a case, minority stockholders could benefit from the existing super-majority vote requirements.

Editor: As RiskMetrics evaluated its "pay-for-performance" updates, it seems they considered a new factor. Can you explain this factor?

Newsome: In evaluating "pay-for-performance," RiskMetrics added a new factor in recommending whether to vote for or against a management "say-on-pay" proposal or an equity-plan proposal or to vote for or against or to withhold authority on the election of directors, with the key focus being on compensation committee members, which is the alignment of the CEO's total direct compensation and total stockholder return over at least a five-year period, especially for companies that have under-performed their peers over a significant period. RiskMetrics' under-performance factors include a company rating in the bottom half of an industry group in one-year and three-year total stockholder return, and if a CEO's total compensation for two straight years is not aligned with the company's total stockholder return over both short-term and long-term periods.

Editor: What are the types of problematic pay practices that RiskMetrics identified?

Newsome: RiskMetrics included a number of problematic pay practices, including multi-year guarantees of salary increases, non-performance-based bonuses, and equity compensation; change of control payments that are in excess of three times base salary and target bonus, that are based on single triggers or modified single triggers or that include excise tax gross-ups; and repricing of underwater stock options without stockholder approval. If a company has problematic pay practices, RiskMetrics generally will recommend voting against a management "say-on-pay" proposal or an equity plan if non-performance-based equity awards are a major cause of the misalignment of "pay-for-performance" or against or withhold authority on the election of directors, especially compensation committee members.

Editor: What could be the general impact on companies from the RiskMetrics updates?

Newsome: Directors, especially compensation committee members, will be receiving increased scrutiny for their actions, especially regarding takeover defenses and compensation practices. Directors should realize that the updated policies will likely result in RiskMetrics issuing more against or withhold authority recommendations for the election of directors and more against recommendations for management compensation proposals.

Please email the interviewee at bruce.newsome@haynesboone.com with questions about this interview.