With the 2016 proxy season well under way, director compensation is firmly in the spotlight. A recent report issued by Willis Towers Watson indicates the recent rash of litigation over director compensation is having an impact on director compensation at Fortune 500 companies. According to the report, 28% of the Fortune 500 boards have capped equity pay for directors, with 82% of these award limits adopted since 2013.
The Willis Towers Watson report noted several trends in director equity compensation:
- 131 of the Fortune 500 boards currently include a director-specific annual award limit within their stock plan compared to 31 companies in 2013. The median limit was 20,000 shares at companies that base limits on a number of shares and $500,000 at companies with dollar-based limits.
- Director equity limits are considerations when companies set the total number of authorized shares in stock plans.
- The most common limit remains a single limit on annual awards to directors, although a few companies have adopted additional limits on cash or total director compensation.
The driver of this activity is increased shareholder litigation, including several high-profile shareholder lawsuits alleging that director pay was “excessive”. Two recent lawsuits including claims of breach of fiduciary duty in connection with director stock plans survived motions to dismiss in Delaware:
- Calma vs. Templeton et al., in which shareholders sued software company Citrix Systems, alleging that in decisions about director pay, just five of the 14 companies cited as peers were actually peers.
- Binning v. Ogunlesi, in which shareholders sued Goldman Sachs, saying that company’s board needed to prove the entire fairness of their compensation because they did not seek shareholder approval of limits on director compensation.
An another recent lawsuit, Espinoza v. Zuckerberg, shareholders challenged equity awards to directors as excessive and called into question Facebook founder and controlling stockholder Mark Zuckerberg’s ability to solely ratify director compensation without formally holding a vote at a shareholder meeting or by receiving written consent from shareholders. As reported by Agenda, the preliminary settlement of this case in January 2016 included an agreement to grant Facebook shareholders a “say on pay” vote on director compensation.
Analysis of 2016 proxy data suggests that this trend towards adoption of equity limits is continuing to grow. In addition, several large-cap boards have adopted either caps on cash compensation or caps on total director compensation as well, including Anadarko, Kimberly-Clark, PepsiCo, and Stryker. Companies are also seeking shareholder approval of director equity limits whenever existing stock plans are amended to approve additional shares, which is thought to provide greater protection against shareholder litigation.