Comp & Benefits Alert | May.10.2018
1. Having a shareholder-approved director compensation limit may not be enough to avoid a director compensation suit
As we discussed in a prior alert, in Re Investors Bancorp, Inc. Stockholder Litigation, a case involving allegations of excessive director compensation, the Delaware Supreme Court held that discretionary awards granted to non-employee directors are not entitled to the protection of the business judgment rule at the pleading stage even if such awards are within a shareholder approved limit. The court also held that the business judgment rule is only available where shareholders approved such awards or such awards were automatically granted or paid pursuant to a shareholder-approved formula.
While Bancorp involved egregious facts, the upshot is that a shareholder-approved limit, even if narrowly tailored, may not be enough to dissuade a plaintiff from filing suit against a public company, particularly in cases where director compensation is high. Accordingly, compensation committees should work with their compensation consultants to annually assess director compensation. If director compensation is substantially higher than peers, or the company believes it is otherwise a target for litigation, the board should consider seeking shareholder approval of its director compensation program or a formula plan.
2. Proxy advisors have begun to focus on director compensation
Institutional Shareholder Services ("ISS") and Glass Lewis have adopted guidelines for approving director compensation proposals
In response to more public companies seeking shareholder approval of their non-employee director compensation programs, ISS and Glass Lewis have adopted guidelines for evaluating director compensation proposals. Their assessment will, among other things, consider the following:
ISS and Glass Lewis have also formulated guidelines for evaluating proposals seeking shareholder approval of stand-alone director equity plans. In general, these institutional advisors focus on the costs of such plans and whether such plans include egregious features such as option repricing. ISS will also evaluate the burn rate in rare cases, and will consider the qualitative factors described above when the cost of the plan and burn rate are excessive.
ISS will recommend voting against directors who approve excess director compensation
In 2018, ISS implemented a policy under which ISS may issue adverse vote recommendations for the reelection of those directors responsible for approving excessive director compensation for two or more consecutive years without a compelling rationale. In its assessment, ISS will compare individual non-employee director compensation totals to the median of all non-employee directors at companies in the same index and industry to identify companies with directors whose compensation is among the top 5 percent of all comparable directors.
3. Providing enhanced director compensation disclosure is becoming more important
In light of the foregoing litigation and governance concerns, public companies should consider providing enhanced director compensation disclosure in their proxy statements to show that their director compensation practices are reasonable. Such disclosure should describe: