2016 Corporate Governance & Executive Compensation Survey

Richard Alsop and John Cannon III are partners at Shearman & Sterling LLP. This post is based on a Shearman & Sterling publication by Mr. Alsop, Mr. Cannon, Stephen Giove, Doreen Lilienfeld, and Rory O’Halloran.

We are pleased to share Shearman & Sterling’s 2016 Corporate Governance & Executive Compensation Survey of the 100 largest US public companies. This year’s Survey, the 14th in our series, examines some of the most important governance and executive compensation practices facing boards today and identifies best practices and emerging trends. Our analysis will provide you with insights into how companies approach governance issues and will allow you to benchmark your company’s corporate governance practices against the best practices we have identified.

Special Committees

Special committees of independent directors are an important tool for boards that can facilitate the discharge of their fiduciary duties in connection with evaluating change of control transactions, shareholder derivative litigation, as well as investigations into potential misconduct at the company.

When special committees are properly formed and functioning, they can lead to more favorable outcomes for the company and its board of directors. A recent example is the decision of the New York Court of Appeals dismissing a legal challenge to the 2012 Kenneth Cole Productions “going-private” transaction, based in part on the transaction having been approved by a fully functioning special committee of independent directors.

Shareholder Activism

Shareholder activism continued to gain momentum, with seven of the Top 100 Companies being faced with activist campaigns over the past year. Activist investors continued to target an increasing number of large, established corporations that may have thought they were relatively immune from such approaches until recently. However, certain recent activist situations have highlighted the reality that activist campaigns, even where initially successful, can leave the targeted company (or companies) in a meaningfully weaker position. For example, if an announced transaction or other initiative sought by an activist is ultimately not consummated, the costs to the company and its shareholders can be very high. This past year, a number of large, high-profile M&A transactions involving activist investors ultimately faced significant opposition from antitrust regulators. Among these was Halliburton Co.’s proposed $28 billion acquisition of Baker Hughes, Inc., which was terminated in May 2016 after being challenged on antitrust grounds. In this instance, the fallout extended beyond the impact of the terminated transaction on the merger parties, as the lead activist—ValueAct Capital Partners LP—was ultimately fined $11 million by the US Department of Justice when its stake-building in both Halliburton and Baker Hughes was found to have violated the Hart-Scott-Rodino Act’s “investment-only” exemption.

Shareholder Engagement

Shareholder engagement has become a much broader topic and a focus of many more shareholders in recent years. The Survey delves into the broad variety of engagement methods employed by public companies, including those required by regulatory bodies, expected by shareholders and additional activities companies have begun to pursue in an effort to connect directly with their shareholders. Eighty-one of the Top 100 Companies made shareholder engagement disclosures in their annual proxy statements, and 60% of those companies also disclosed their reasons for engaging.

Proxy Access

The adoption of proxy access has increased dramatically over the past year, and as of August 31, 2016 includes 69% of the Top 100 Companies, 40% of the S&P 500 and 34% of Fortune 500 companies. The Survey presents our findings with respect to proxy access proposals received, and proxy access bylaws adopted, by the Top 100 Companies as well as the broader universe of US public companies. We expect shareholders to continue to pressure companies to adopt proxy access in the years to come, but some level of uncertainty will remain with respect to how proxy access is implemented.

IPO Governance

New to this year’s Survey is an analysis of the governance practices adopted at companies formed through an IPO. Newly formed public companies differ from well-established companies, and their governance policies are often developed with this in mind. However, in its Executive Summary of 2016 Global Benchmark Policy Updates, ISS Governance outlines its intention to generally recommend voting against governance practices it believes diminish shareholder rights. Our Survey reviews the governance practices adopted by new public companies and how the market thinks about IPO companies versus established companies. Spin-off companies are similar in many respects, and we explore the factors that impact their choices of day-one governance policies as well.

Proposed Clawback Rules

Financial clawbacks—the ability of an employer to recoup incentive-based compensation under certain scenarios—is viewed by the US government as a mechanism that can help curtail the types of behavior that contribute to financial crises and scandals. The SEC proposed its long-awaited rules to implement Section 954 of the Dodd-Frank Act in July 2015 (Proposed Rule 10D-1), and final rules are expected shortly. While 90 of the Top 100 Companies surveyed have voluntarily implemented clawback policies, only 15 require mandatory clawbacks. It remains to be seen whether Proposed Rule 10D-1 will provide relief in response to comment letters submitted to the SEC, but in its current form the proposed rule does not generally allow for discretions. Depending on the constructs of the final rule, many companies may have to amend their clawback policies in order to be compliant with the new regulation. This year’s survey discusses several obstacles to complying with Proposed Rule 10D-1.

Privacy & Data Protection

Understanding the risks related to data breaches has become an increasing area of focus for boards of directors. The implications of such an incident are far-reaching and include the financial cost of investigating and responding to the breach, the impact on customers whose data was compromised, reputational risk that can affect stock prices and overall confidence in the business, as well as potential litigation.

Our survey explores examples of recent data breaches, industry trends and best practices to help minimize the harm caused by data breaches.

Given the estimated 26% probability that an organization will suffer from a material data breach in the next 24 months, coupled with the $4 million average cost of a data breach incident, it is imperative that boards of directors recognize cybersecurity risks within the broader context of risk management practices.

Board Leadership

Separation of the chair and CEO roles, and independence of the chairperson more broadly, have remained topics of intense focus across corporate America. In this year’s survey, the number of CEOs who also serve as board chair at the Top 100 Companies has held steady at 63. However, we have seen a slight increase in the number of independent board chairs, from 21 in 2015 to 24 in 2016.

Women in Leadership

Board diversity is important across a variety of dimensions, and gender diversity is only one aspect of this important topic. This year’s survey reveals that 23% of board seats at the Top 100 Companies are held by women. Within executive leadership roles, women serve as CEO and / or CFO at 24 of these companies and as General Counsel at 32 of these companies. Only one company has a woman in all three of these senior executive positions.

Board Refreshment

Board composition remains an important topic for nominating and governance committees, and we have seen a continuation of the complex debate weighing the benefits of director continuity against the needs for fresh perspectives, diverse viewpoints and specialized experience on corporate boards.

While mechanisms such as mandatory retirement ages and term limits provide straightforward ways to encourage the addition of new board members, they do not necessarily take into account whether a director is an effective member of the board regardless of tenure. Our Survey looks at issues related to average tenure, including the extent to which retirement ages and term limits are utilized by the Top 100 Companies.

Compensation Disclosure and Practice

In many ways, the compensation disclosures and practices of the Top 100 Companies reflect a “follow the pack” mentality. With the advent of say-on-pay and increased shareholder activism, our review of these companies’ proxies reveals compensation disclosures that are growing in size and incorporating flashier graphics, but in some cases are becoming less distinguishable from company to company. This extends not only to policies but also presentation styles. For instance, many companies present disclosures through a straightforward “what we do” and “what we don’t do” chart that looks very similar from company to company. Among the results of the 2016 Survey, we see that the compensation mix has been rather stable across the components of cash, stock and executive perks. This year’s Survey also saw a continuation of a trend that has been apparent over the past several years, with 84 Top 100 Companies maintaining pledging policies, the majority of which apply to directors as well as employees.


2016 represented the seventh proxy season under Dodd-Frank’s mandatory say-on-pay regime. 94 of the 95 Top 100 Companies that held a 2016 say-on-pay vote received approval (the other five companies have triennial voting and therefore did not hold a say-on-pay vote this year). The approval rates in say-on-pay votes have generally been quite strong, which may be the result of successful shareholder engagement efforts.

The complete publication is available for download here.

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