New research by the law firm has revealed that whilst companies are more satisfied with the executive compensation peer groups which proxy advisory firms are using to make their voting recommendations, companies must ensure their legal departments are  involved in the executive compensation process as a new wave of litigation challenging compensation has begun. The report by Skaddens noted that whilst it was still early in the proxy season, current trends indicate that companies are receiving higher levels of support than last year.  Of the first 279 companies of the Russell  3000 to report the results of say-on-pay proposals, 72 per cent passed with over 90 per cent support whilst 22 per cent passed with between 70 and 90 per cent support.

Reasons to vote against

The proxy voting companies, which monitor corporate governance in a range of areas, are advocating shareholders to vote ‘against’ recommendations for a ‘pay for performance disconnect’ or equity award grants that are time-based rather than performance based. There is also negativity towards retention or “mega” equity grants or bonuses or performance goals which are not sufficiently challenging. Insufficient shareholder outreach was also a factor which caused proxy voting companies to recommend against.

Lawsuits on the rise

The law firm also warned about a recent wave of lawsuits alleging breaches of fiduciary duties by management and directors in connection with compensation-related decisions. These related to generic allegations of inadequate proxy disclosure with respect to compensation-related proxy proposals such as say-on-pay proposals and proposals to increase the number of shares reserved under equity compensation plans.The lawsuits seek to enjoin the company’s annual meeting until supplemental disclosures are made. 

Skaddens pointed out that more than 20 such lawsuits were filed in 2012 with a potential further 60 companies under scrutiny by the plaintiffs’ law firm. The law firm reported  that some companies had settled the claims as they were concerned about potential disruption to their annual general meetings whilst others had chosen to litigate.

A third wave

And it warned companies about the arrival of a “third wave “ of lawsuits in 2013 which did not seek  to enjoin a shareholder vote but rather to challenge compensation decisions that have already been made. 
It strongly urged companies to monitor their equity award granting processes carefully and ensure that  in- house and outside counsel review executive compensation actions.