Roughly 54 per cent of Beazer Homes USA’s shareholders gave the thumbs down to the company’s executive compensation plan at a February 2 annual meeting, marking the second defeat for an American company in as many weeks. The vote came to light in the company’s 8K filing, released publicly on February 8.
On January 27, shareholders of California-based Jacobs Engineering voted down an executive compensation plan with a 53.7 per cent negative vote.
The two votes came just days after the SEC adopted new rules requiring such advisory votes, as mandated under the Dodd-Frank Act. Though the votes are non-binding, they can serve as a signal to members of corporate boards that further trouble may lie ahead if shareholder concerns aren’t heeded, activist investors say.
Both companies performed poorly relative to competitors, yet wanted to significantly increase CEO pay, according to RiskMetrics Group’s ISS Governance Services unit (ISS), which reviewed both plans and recommended investors reject them.
Corporate governance professionals warned that these early ‘no’ votes could be a sign of things to come in the months ahead as more companies hold their annual meetings and are forced for the first time to put their compensation practices up for investor approval.
‘Companies have to understand how easy it is to lose the votes here and get out proactively and communicate with shareholders,’ says Patrick Quick, partner at Foley & Lardner, who has helped numerous companies prepare their proxy statements this year.
‘I don’t know if it’s a harbinger of things to come,’ says Patrick McGurn, special counsel at RiskMetrics’s ISS unit. ‘But I think it is a wake-up call for companies. They need to do a better job of communicating, in particular, because there is a possibility that their plans are going to fail.’
John Keenan, a corporate governance analyst at the public employees union AFSCME, which invests billions through its pension funds and has emerged as an activist investor, says companies should ‘take a quick survey in advance of putting out their proxy’.
According to Beazer Homes’ 8K, the vote totals were 20,172,993 shares for, 23,632,597 shares against, 142,674 share abstentions and 19,202,895 broker non-votes.
In its analysis of Beazer Homes’ proposal, ISS noted that president and CEO Ian McCarthy, had been CEO for 17 years, and had not received any equity awards since 2006, nor any cash bonus last year.
‘The committee wanted to recognise McCarthy’s role in leading the company through difficult financial, market and legal issues, and that he has not received any equity awards since 2006,’ it said.
ISS noted, however, that the company’s stock performance has lagged against comparable companies ‘over a sustained period. We also note that the value of a $100 investment in the company five years ago was worth only about $11 at the end of fiscal 2010.
‘The CEO’s most recent year-over-year pay increased considerably and was significantly higher than the median of a size-appropriate peer group. Importantly, the bulk of the CEO’s pay increase consisted of time-based equity awards, while shareholders benefit from long-term equity incentives that are strongly performance-based.’
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