Category Institutional Investors

CtW Engages Companies on Anti-Competitive Employment Practices

CtW Engages Companies on Anti-Competitive Employment Practices

On August 29, 2018, the activist investor, CtW Investment Group, kicked off a new initiative to engage 30 major companies (click HERE to see the list of companies) concerning their use of anti-competitive employment practices, including non-competes, no-poach agreements, non-disclosure agreements, and mandatory arbitration. CtW asked each company it contacted to:

  • Review its employment contracting practices, including the use of any of these provisions.
  • Report the board’s findings to shareholders before the next annual meeting.
  • Commit to increased human capital management disclosure going forward.

CtW was concerned about the potential liability and costs associated with such anti-competitive practices.  CtW also sees these anti-competitive practices as constraining the ability of individual workers to seek out new opportunities, causing an artificial limit the pool of potential matches available to employers. CtW sees the recruiting difficulties reported by many employers and attributed to “skills shortages” as more plausibly explained by the limits of workers mobility that employers themselves impose.

CtW made available several documents about its efforts (click for the source documents):

We will have to wait and see what impact CtW’s initiative has on these anti-competitive practices.  But, if my removing these impediments to worker mobility ultimately helps companies secure they need to grow their businesses, it should be a win for everyone.  However, it may take some time to get companies, management teams and Boards comfortable with the notion of forgoing these “protections” for their workforce. But, if CtW and other institutional shareholders take up this initiative, and large companies begin to comply, as with most things, it could eventually filter out to a broad swath of U.S. public companies.

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A Rose By Any Other Name?

My ears always perk up when I hear about a “new” compensation design, especially when it revolves around long-term incentives (LTI) and trying to structure them to bring better alignment with shareholders.  So I paid attention several weeks ago when I was at the Southeastern Chapter of the Society for Corporate Governance’s annual meeting and heard a director say that he had worked with a management team to revamp their LTI program to make it better aligned with shareholders for next year  The director was Daniel G. Beltzman, director of Regis Corporation, who is also General Partner, Birch Run Capital Advisors, LP, an investor in Regis Corporation.

Critical Points of Regis Corporation’s FY19 LTI Design

  • One LTI Grant equal to 3.5x FY2018 LTI grant in FY19
  • Covers 5 years of LTI grants for an initial grant in FY19 covering approximately 3.5x the 2018 annual LTI grant (about 70% of what a participant would have received as annual grants over the 5-year period)
  • No additional LTI grants until after the 5 year period
  • Participants can get additional shares if they elect to defer up to 50% of their net, earned annual cash incentive into shares of company stock, for which the company will make a grant of RSUs equal to 200%. These RSUs have 5-year cliff vesting.

Initial Thoughts

This design is rather unique and more closely aligned with how LTI is structured in a company that is owned/controlled by private equity. It requires executives to invest money in the business to maximize their potential rewards.  Theoretically, this should help ensure that the executives will remain focused on what will drive the company’s stock price higher.

This plan will work so long as executive believe there is an upside to the company’s stock price in the mid-term, 5-year period.  If they decide there isn’t, they may go looking for new challenges, especially if the company enters into a scenario where the annual cash incentive plan doesn’t pay out and there is no additional investment possible in company shares which will be matched.  As long as the future looks bright for the company (at least from an executive perspective), this plan should help drive focus on the company’s goals that will lead to an increased stock price.  But, if the company’s prospects dim, then this design could cause some serious issue with morale and retention and could lead the company to award some form of supplemental incentives. This might increase the cost of this design to be higher than a traditional annual LTI grant-focused design.

The good news is that one of the company’s shareholders has already backed this design (and even helped create it).  So the company should not face the issue of trying to effectively communicate this design to all of its shareholders to convince them it is a good thing. Having a significant shareholder represented on the board and taking an active part in developing this design should ease concerns of other shareholders and make their buy-in to the design less of an issue for the company.

The real test of this design will be what happens.  No one has a crystal ball. Sometimes you have to design the best plan you can at the time given everything you can see and predict. If the future is bright for the company and no significant headwinds come to press against it and throw a spanner wrench into the works, then this design could be quite useful.  We will have to wait and see how things look in FY 2025 to be able to gauge if this design is a winner.  Furthermore, we will have to wait to see this design tested against falling company and market fortunes to see how well it holds up.  But for companies that have significant owners that want a “better” alignment between executives and shareholders, this design might offer at least another alternative to consider.  Time will tell whether LTI designed in such a way will smell as sweet as the typical, annual LTI grant approach.

For more information, please see Regis Corporation’s proxy statement filed for 2019, the CD&A begins on page 19, and the new FY19 LTI program is detailed starting on page 21:

https://www.sec.gov/Archives/edgar/data/716643/000114036118037937/bp11671x1_def14a.htm#regis-def14a_102318a11

 

Related EC Minute Episode

Episode 28 of the EC Minute also covers Regis Corporation’s new LTI design for fiscal 2019.

http://www.ecminute.com/2018/10/31/episode-28-a-new-lti-design/

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MSCI Seeking Strategic Alternatives for ISS

This morning MSCI Inc. announced that it will be seeking strategic alternatives for its Institutional Shareholder Services, Inc. (ISS) business [you can read the press release here: http://www.issgovernance.com/pressISS103113] . This represents the start of a process that may eventually lead to a full separation of ISS from MSCI. However, as MSCI points out, it is not certain that any transaction will occur with respect to ISS.

MSCI joins a growing list of companies that controlled ISS only to find that it might not provide the right synergies with corporate-focused sales and services (since many corporate issuers have a big issue in buying anything from a company that controls ISS).

Frankly, depending on the outcome of this process, it could lead to some significant changes to ISS policies, both current and future, as well as to the policy development process.  It might be time for ISS and MSCI to consider what transpired when Glass Lewis & Co. put itself on the block a few years back and ended up being purchased by the Ontario Teachers’ Pension Plan Board (“OTPP”) and Alberta Investment Management Corp. (“AIMCo”).  It may make sense for a consortium of large institutional shareholders to acquire ISS and effectively use it as their “outsourced” research office. The research could then continue to be sold to other institutional shareholders and corporate issuers.  We’ll have to wait and see what alternatives get explored and where things come out and if it means any change for ISS.

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Proxy Advisors’ Influence Waning?

If you read the Wall Street Journal article, For Proxy Advisers, Influence Wanes (May 22, 2013), you might think that both Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) are on the ropes. There’s even a quote from Glass Lewis’ VP of proxy research, David Eaton, that seems to buttress that conclusion:

“Our power is probably shrinking a little bit.”

The article discusses how some of the larger mutual funds and money managers, like BlackRock and Vanguard Group Inc., have teams that handle more of the leg work that used to be in the proxy advisors’ wheelhouse. But these large institutional shareholders still subscribe to the ISS and/or Glass Lewis proxy reports. In many cases the ISS and Glass Lewis proxy report are viewed as background research on the company, which then may be supplemented by the institutional shareholders’ staff (which are generally too small for them to handle all the research themselves in a cost efficient manner).

The article cites a 2002 study that found that a negative ISS vote recommendation on management proposals influenced from 13.6% to 20.6% of the vote. Additionally, with the passage of the Dodd-Frank Act with its say-on-pay requirements, the influence of proxy advisors has grown. According to a 2012 study by the Conference Board, about 70% of 110 large and midsize companies indicated that their pay practices were influenced by proxy advisory firm policies.

Glass Lewis and ISS indicated that they are recommending against fewer say-on-pay votes this year and fewer have actually failed.  According to Broc Romanek’s blog today on CompensationStandards.com, there have been only 23 say on pay votes that failed so far in the 2013 proxy season.

The conclusion I reach?  A bit different than the article–proxy advisors’ influence is still going strong.

Why? Because at this point many large and midsize companies are either  incorporating the proxy advisors’ policies regarding pay practices into their pay designs up-front or at least considering them during the design phase.  Therefore, more companies are either complying with the proxy advisors’ policies or are aware of anything done outside the lines of those policies and can then do a better job of explaining the rationale for such compensation actions to their shareholders.

So while it might appear from a pure vote perspective that the influence of the proxy advisory firms is waning (which I question a bit given what I’ve seen in the context of equity plan proposals for some time, see the white paper Reid Pearson of Alliance Advisors and I published earlier this year on the topic which shows that failed equity plan proposals have stayed at about the same level over the past five years, Equity Plan Proposal Failures: 2007-2012), I believe their influence on executive compensation at public companies is actually growing.

WSJ article: http://online.wsj.com/article/SB10001424127887323336104578499554143793198.html#printMode

Equity Plan Propsal Failures: 2007-2012: https://www.exqty.com/Media/Publications/EP%20Proposal%20Failures%202007-2012_20130107.pdf

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