“Say on Pay” and Other Issues for the Upcoming Proxy Season

Exclusive Interview with

David M. Lynn, Morrison & Foerster LLP


Each proxy season seems to be getting more and more complicated in terms of the new requirements as to what both the SEC and shareholders expect and this year will be no exception.

According to David Lynn, Co-chair of Morrison & Foersters‘ Public Companies and Securities Practice and former Chief Counsel of the Securities and Exchange Commission, “this year’s proxy season is going to be very interesting for public companies because we’re gonna have a lot of shareholder activism –  there’s a lot of attention focused on executive compensation and corporate governance.”

“And now we have the Dodd Frank Act,” adds Lynn, “which was enacted over the summer and will require all public companies to submit to their shareholders an advisory vote on executive compensation as well as a vote on how often they should vote on their executive compensation.”

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This year the proxy season's gonna be very interesting for public companies because, as in prior, as in the last few years, we are going to have a lot of shareholder activism. There's a lot of attention focused on executive compensation and corporate governance.

Now we have
the Dodd-Frank act, which was enacted over the summer, which will require all public companies to submit to their shareholders an advisory vote on executive compensation, as well as a vote on how often they should vote on their executive compensation, and this is gonna be something new for many companies.

It's been tried out, sort of lab-tested for companies that received TARP assistance. But for the first time, it's going to be required for all public companies this year.

This new advisory vote on executive compensation, which people call Say on Pay, is effective beginning for meetings occurring on or after January 21, of 2011. And the SEC has now proposed some rules that will essentially implement the provisions of Dodd-Frank that talk about Say on Pay. Now even if those rules don't go effective companies still have to seek this shareholder vote.

Companies need to really think closely about their strategy
in preparing for the Say on Pay vote. The Say on Pay concept came to us from abroad in the United Kingdom. It was introduced in 2002 and the idea behind it was really to encourage shareholder engagement over executive compensation issues.

The fact that this vote was
going to happen was enough to prompt companies to go out and talk to their institutional investors and find out what concerns they might have with pay programs. This same level of engagement is expected to happen now in the United States as a result of the imposition of the Say on Pay requirement.

And that's one of
the first things companies need to know is identify their largest institutional investors, figure out what sort of concerns and policies they might have about compensation programs and go out and start talking to them.

In addition to that, companies are going
to have to focus on their disclosure because, before companies had largely been thinking about writing their disclosures for the SEC's benefit or for the public's benefit, but really they need to focus on convincing shareholders that they should support this and cast an affirmative vote for the executive compensation program.

One of the things the Dodd-Frank Act requires is that, not only do you have to get the Say on Pay vote, which happens to happen once every three years, but you also have to seek a vote once every six years on how often you're going to ask shareholders to vote on pay going forward.

And what the SEC has proposed is that
that would be cast essentially like a poll. You would ask the shareholders, "Do you want to vote on the Say on Pay resolution every one year, every two years, or every three years?"  And that's what companies are going to have to put in their proxy statements.

The SEC hasn't prescribed
exactly how you should write that resolution or whether the company needs to make a recommendation, but by and large, I've been advising people the company should make a recommendation as to what frequency they should use and a lot of factors go into deciding what's the best frequency.

Some companies have very long
term compensation programs that work on two or three year performance cycles and for them it might make more sense to have a vote every three years.

Contrast to that a
lot of institutional investors think that shareholders should have a voice every year, and as such, you should have a Say On Pay vote every year, so that the focus can be on the executive compensation, disclosure, and the pay decisions that are made by the compensation committee.

Another aspect of the Dodd-Frank
act was to require a separate vote on golden parachute arrangements, and golden parachute arrangements are essentially arrangements that are triggered by a merger, a disposition of major transaction. And what the Dodd-Frank act said is, when that merger is put up to a vote of shareholders, the shareholders also should give an advisory vote on the golden parachute compensation itself.

Now, they also said that you could put that golden
parachute compensation up for a vote under the regular Say on Pay vote that happens at the annual meeting, and thereby avoid having to put it up later at the time of the merger, or other extraordinary transaction. It seems unlikely that people would want to put the golden parachute votes up for a vote on an annual basis, and really just wait to see what happens if there is a merger or other transaction.

But this is something we'll have to see play out over time.
In terms of generating shareholder support for the Say on Pay vote, I think the keys are engagement with the shareholders, actually talking to them, understanding what they want. And that may not just be with the institutional shareholders, it may be going out and taking a poll of what the what the retail shareholders are very interested in.

It may also be going out and trying
to figure out are there elements of my pay program that when looked at from the outside, may be viewed adversely by proxy advisory surfaces such as ISS as well as shareholders. And, are there ways I can make adjustments now that will lead to support for the Say on Pay going forward.

And another major consideration
is really focusing on the disclosure itself, and trying to streamline the disclosure; make it a lot less hard to get through in the proxy statement, which has really been a problem writing in the last few years, because people keep adding more and more information, and so people put things like executive summaries in their compensation disclosure to try and really emphasize and ask for support of a Say on Pay resolution.

In terms of trying to interpret the vote on, the advisory vote on executive compensation that will happen at the company's annual meeting and then the vote in terms of how often they should vote on that advisory vote on compensation.  

It's a bit
of a blunt instrument and that's one of the problems, I think, with the Say on Pay vote that people struggle with. It's not a line item vote on each executive officer's compensation, nor or is it really specific to any elements of compensation, as well, whether it be equity awards, or cash awards, or the like.

So, when people
get a Say on Pay vote that may be adverse or not strong support, they're going to really have to figure out what was it that caused this problem. In terms of the frequency of the advisory vote on compensation, I think that will be something people will have to work out because it really is a poll.

It doesn't necessarily, because there's three choices, it doesn't mean one will get the clear majority. And people are struggling with what would be the best way to interpret that. Whether to apply sort of a plurality standard where whatever carries the most votes would indicate to the company what is the appropriate frequency.

One question, in terms of how
these votes will impact director elections, is, I think, what will the proxy advisory services like ISS do? And what they have done in the past proxy season is if a company has a Say on Pay vote on its ballot, that's the target it'll shoot at and if it has problems is what the company's compensation programs it will recommended a vote against the Say-on-Pay. And then if that problem isn't remedied the next proxy season, it will shift the focus to the compensation committee the members of the board that are served on the compensation committee and seek to withhold votes for those directors as a signal that we are still unhappy with the Say-on-Pay vote.

So as a result of all this, I think in some ways Say on Pay will take the pressure off the Compensation Committee elections, because there will be some other mechanism in which shareholders can express concern and displeasure with executive compensation programs.

Each proxy season seems to be getting more and more complicated in terms of the new requirements in terms of what the SEC expects and what shareholders are expect.

In addition to compensation, people are very
much focused on corporate governance and whether a company has implemented majority voting or whether it still has a classified board or whether the Chairman and CEO are in separate positions, or the same individual serving as both and those situations continue to be hot button issues for shareholders that affect the outcome of votes for many idfferent kinds of proposals.

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David M. Lynn
Partner, Morrison & Foerster LLP

David Lynn is a co-chair of the firm’s Public Companies and Securities Practice.  Mr. Lynn’s practice is focused on advising a wide range of clients on SEC matters, securities transactions and corporate governance. Mr. Lynn is well known in the area of executive compensation disclosure, having co-authored, “The Executive Compensation Disclosure Treatise and Reporting Guide.” While serving as Chief Counsel of the Securities and Exchange Commission’s Division of Corporation Finance, Mr. Lynn led the rulemaking team that drafted sweeping revisions to the SEC’s executive compensation and related party disclosure rules.

Mr. Lynn re-joined the SEC as Chief Counsel shortly after adoption of the Sarbanes-Oxley Act of 2002, and served in that position until 2007. As a result, he was intimately involved in implementing and interpreting the record amount of SEC rulemaking that occurred in the wake of SOX. Mr. Lynn initially served on the SEC staff from 1995-2000 as an Attorney-Advisor and subsequently a Special Counsel in the Division of Corporation Finance. While in private practice from 2000-2003, he advised clients on SEC investigations, securities transactions, mergers and acquisitions and corporate governance.

Mr. Lynn serves as co-editor of TheCorporateCounsel.net, where he co-authors one of the most widely-read blogs on securities, governance and corporate law matters, and regularly contributes to publications such as The Corporate Counsel, The Corporate Executive, and Borges & Lynn’s Proxy Disclosure Updates.

Mr. Lynn currently serves as the Chair of the Subcommittee on Securities Registration of the ABA Business Law Section’s Federal Regulation of Securities Committee. Mr. Lynn was also an adjunct Professor of Law at the Georgetown University Law Center, where he taught a course in corporate governance.


District of Columbia


Loyola College In Maryland (B.B.A., 1989)
Loyola College In Maryland (MSF, 1991)
University of Maryland School of Law (J.D., 1995)


2000 Pennsylvania Avenue, NW
Washington, DC 20006-1888
(202) 887-1563
[email protected]

To see a full bio, visit: http://www.mofo.com/david-lynn/


A Boost Over the Wall,” Corporate Financing Week, January 25, 2010
XBRL is Now Mandatory – A Primer for Security Lawyers,” The Review of Securities & Commodities Regulation, October 2009
Impact of Recent Events on Mark-to-Market Accounting,” BNA Accounting Policy and Practice Report, June 26, 2009
Section 3(a)(9) Exchange Offers,” INSIGHTS, June 2009
Timely ‘Best Practice’ Disclosures for Your Compensation Discussion & Analysis,” The Corporate Counsel, Vol XXIII Issue 1, January/February 2009


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“Say on Pay” and Other Issues for the Upcoming Proxy Season
David M. Lynn, Partner and Chair of Public Companies and Securities Practice, Morrison & Foerster LLP

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