With calendar year companies currently in the midst of drafting their proxy statements, it is time to consider the often overlooked director compensation disclosures.
Changes in director compensation arrangements.
Director compensation continues to increase in amount and complexity as companies strive to keep up with directors’ increasingly burdensome duties. For example, boards are now taking a more active role in overseeing risk management, which is particularly challenging in this era of unrelenting cyber intrusions. And the role of the compensation committee continues to expand as executive compensation becomes even more highly regulated by the recent spate of SEC rulemaking.
Companies have responded with variations on, and additions to, the traditional arrangement: cash retainer and meeting fees. It is now common to see equity awards of various descriptions, deferred fee arrangements, fee differentials between committees and between regular members and chairpersons, and minimum stock ownership requirements, just to name a few alternatives. These changes warrant careful and thorough disclosure regarding the reasons for the changes, how the new arrangements work and how they mesh with the company’s overall policies and goals.
The Calma decision.
In addition, it is now common knowledge that in 2015 the Delaware Court of Chancery held in Calma v. Templeton that the decision by the Citrix Systems, Inc. board of directors to grant equity compensation to its non-employee directors was subject to the entire fairness standard of review, rather than the lesser business judgment rule. At issue was the Citrix board’s compensation committee grant of restricted stock units to the non-employee directors under its equity incentive plan, which covered several classes of participants, including non-employee directors, and which had been previously approved by the company’s shareholders. Though the plan provided that no participant could receive more than one million shares (or RSUs) in a calendar year, it had no separate sub-limits for non-employee directors.
The Court found that the absence of “meaningful limits” on the amount of equity compensation payable to non-employee directors subjected the board’s grant decision to an entire fairness standard of review despite the fact that the company’s shareholders had previously approved the plan. (See this Doug’s Note.) (An entire fairness standard of review requires boards of directors to bear the burden of establishing that the grants are the product of both fair dealing and fair price.) As expected, following the Calma decision, shareholders have brought a number of similar suits challenging equity grants to non-employee directors.
As a result, many companies have reviewed their equity plans and concluded either that the plan already contained appropriate limits on non-employee director grants or required modification. In either case, companies now should consider adding language to proxy statement disclosures that addresses the existence of these meaningful limits. Doing so will provide clarity for investors and shareholder advisory services regarding this recent, widely followed development.
None of this is to say that director compensation disclosure must become CD&A-like. Rather, in light of the attention now being paid to director compensation, it is appropriate to give these disclosures a fresh look and to consider whether a few well-placed sentences might head off problems down the road.