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Learning From the Past

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On April 18th, slightly more than 52% of the FirstMerit shareholders rejected the bank’s say-on-pay proposal. This was the fifth pay plan voted down by shareholders this year. The reason for this rejection is not new: Shareholders claim a misalignment between pay and performance for the senior executives.

FirstMerit stated that the company’s “compensation policies and procedures…are imperative to align the compensation of the company’s named executive officers with [its] business goals and long-term success and that such compensation and incentives are designed to attract, retain and motivate the Company’s key executives.” This statement is identical to the one made in their proxy last year, which received majority shareholder support.

An article in the Wall Street Journal indicated that FirstMerit awarded $6.4 million in total compensation to its CEO in 2011, although its stock trended downward from early 2010 to late 2011. Last year, several companies that lost a say-on-pay vote also faced complaints of a pay for performance disconnect. For example, Jacobs Engineering raised executive compensation nearly 34 percent despite its one- and three-year shareholder returns being below the median of its peer group.

In response to a failed advisory vote, Jacobs Engineering chose to engage directly with shareholders and discuss the rationale for its compensation policies. In 2012, the effort paid off and Jacobs received majority support for its pay plans.

Beazer Homes also approached shareholders after they rejected the 2011 say-on-pay vote. According to the company’s 2012 proxy statement, the compensation committee directed management to “contact several major stockholders in order to better understand the reasons behind the [say-on-pay] vote outcome.” Additionally, the proxy lists the significant changes made to the compensation plan. In February 2012, Beazer Homes reported that the shareholders had overwhelmingly approved the revised compensation plan.

Failing a say-on-pay vote presents a challenge for boards. In some cases, shareholder outreach can provide valuable insights into investor concerns. Over the past year, Jacobs Engineering, Beazer Homes, and others have proved that this type of engagement can succeed.

The Surprisingly Weak March Jobs Report

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Last Monday, directors opened their email inboxes to find a disappointing employment report in NACD Directors Daily. In March, the U.S. economy added 120,000 jobs, far below economists’ projection of 210,000. This marks the first month since December that job increases failed to meet the mark of 200,000. While the unemployment rate dropped from 8.3 percent to 8.2 percent, it is speculated that this was largely the result of more people choosing to stop actively searching for jobs. While slightly more positive, NACD’s Board Confidence Index (BCI) also shows slow growth in employment.

Surveying directors on their confidence in the first quarter of 2012, the overall BCI score rose nearly six points to 60.6. Although an improvement over its Q3 2011 low of 47.5, the BCI is yet to reach its peak—achieved in Q1 2011—of 64.9. This growth is achieved through a consistently improved outlook for the long-term future of the economy, as well as progress made in the past year. Directors tend to be less confident in short-term economic conditions.

The boardroom is not unfounded in its hesitancy to predict the state of the economy in the coming months. The JOBS Act was recently signed into law, the future of the health care reform legislation is under debate, and most companies are in the midst of proxy season. Not to mention the list of proposed and final rules expected to come from the Securities and Exchange Commission and Public Company Accounting Oversight Board.

Thirty-six percent of directors responded that their company’s hiring practices resulted in a net gain in the last quarter. This is a 5 percent increase over Q4 2011. However, the amount of directors who plan to expand their workforce in the next quarter declined by nearly 15 percent.

Produced in conjunction with Pearl Meyer & Partners, this quarter the BCI introduced two questions that will provide significant benchmarks in the coming months. When asked if their CEO is on track to meet incentive plan performance objectives for this fiscal year, 74 percent of directors said their CEO was on schedule. Twenty-two percent noted their CEO was behind schedule. Furthermore, 60 percent of directors are confident their CEO will meet these incentive plan goals.

To read more about the BCI, click here.

New Leadership Structure on Goldman Board

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This week, Goldman Sachs Group Inc. named James J. Schiro to be independent lead director in response to shareholder calls to split the roles of chairman and CEO. Schiro, who has been a member of the board since 2009 and chaired the audit committee, effectively replaces John H. Bryan. Bryan had served as presiding director and will not seek re-election. The difference between lead and presiding directors can be substantial, as lead directors have greater influence over the governance of the board.

The prevalence of independent lead directors has increased in recent years. According to the 2011 NACD Public Company Governance Survey, 65 percent of public companies have an independent lead director, which is the highest rate since NACD began surveying the director community on this question in 1995. Additionally, 88 percent of companies with lead directors said that the position enhanced the board’s effectiveness.

Increased boardroom independence has been in the spotlight recently—for investors and legislators. In 2011, there were 24 shareholder proposals for establishing an independent board chairman (data collected from Jan. 1, 2011 to Jun. 21, 2011). Additionally, shareholders offered up 39 proposals in both 2010 and 2009. In 2010, the Dodd-Frank Act implemented a mandate requiring companies to disclose the rationale behind their current leadership structure—whether the chairman/CEO positions are combined or separated.  

The role of the independent lead director has also grown in importance. In 2011, the Report of the NACD Blue Ribbon Commission on the Effective Lead Director found that “the lead director has the ability to give the board a competitive advantage.” The Blue Ribbon Commission identified several areas enhanced by lead directors, including: identifying emerging issues and ensuring they are addressed; maximizing board effectiveness; fostering complete board discussion; and providing leadership in times of crisis.

Regardless of leadership structure, an independent voice leading the work of the board enhances any company. Goldman Chairman and CEO Lloyd Blankfein echoed this sentiment, stating, “I know our people and our shareholders will benefit greatly from [Schiro’s] deep experience in his new role on our board.”