(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
Bloomberg reported on Wednesday that General Electric Company received a positive Say-on-Pay vote at its annual shareholders meeting. As disclosed in GE’s proxy statement filings, the company achieved this result, or at least increased the likelihood of an affirmative vote, through its recent restructuring of an existing equity award originally granted to the CEO in 2010. This may be a preview of things to come in the shifting balance of power between boards and shareholders, facilitated by the reforms under the Dodd-Frank Act of 2010. Here’s the time line:
- On March 14, 2011, GE filed its annual meeting proxy statement. As required under the Dodd-Frank Act, the proxy statement included a non-binding shareholder advisory vote on executive compensation (Say-on-Pay).
- On April 7, GE filed additional soliciting materials. The company disclosed that ISS, the shareholder advisory service, had issued a report recommending a “no” vote in GE’s Say-on-Pay vote. GE challenged ISS’s conclusions, including ISS’s valuation of the grant of 2 million stock options to CEO Jeffrey Immelt in March 2010. GE had valued the options at $7.4 million, while ISS valued the same options at $14.5 million. GE also challenged other aspects of ISS’s negative report.
- On April 18, GE made an additional proxy filing reporting that the compensation committee, “with Mr. Immelt’s full support,” had modified the 2010 options to add performance-based vesting. Half of the options will now vest based on GE’s industrial cash flow, and the other half will vest based on the company’s total shareholder return compared to that of the S&P 500. GE reported that the change in the option award was based on “a number of constructive conversations with our shareowners.” In her Bloomberg article, “GE Ties CEO Options to Performance as Investor Meeting Nears,” Rachel Layne reported that, after the change in the options, ISS changed its negative recommendation and advised shareholders to support a positive Say-on-Pay vote.
- On April 27, GE’s shareholders voted to approve the Say-on-Pay resolution, with 85 percent of the shares voted in favor of the resolution.
GE joined a number of companies this year that filed supplemental proxy materials challenging a negative recommendation by shareholder advisory services, as reported by Broc Romanek in TheCorporateCounsel.net Blog. At least one other company has made changes to its compensation programs in response to a negative recommendation. The Walt Disney Company eliminated tax gross-ups for golden parachute payments, which caused ISS to change its recommendation, as reported by Janine Sagar in Business Insider, and enabled a positive Say-on-Pay vote.
However, the GE saga marks a new era in direct communications about specific compensation terms that may be acceptable or unacceptable. It’s one thing for Disney to eliminate gross-ups, which are high on shareholders’ lists of unacceptable pay practices. It is another thing for GE to adjust, as part of a dialogue with shareholders, specific terms of a past award to base the payout on different performance metrics (i.e., industrial cash flow and relative shareholder return, rather than simple stock appreciation inherent in a stock option). This negotiation appeared to tip the balance in favor of a positive Say-on-Pay vote.
This back-and-forth dialog is the most obvious example yet of the increased power of shareholders, and shareholder advisory services, to limit or even define executive compensation under the Dodd-Frank Act regime.