New York attorney Jeremy Goldstein recently published important and timely information about executive compensation issues for public companies to consider in the Harvard Law School Forum on Corporate Governance and Financial Regulation. His post was derived from one of his more extensive publications on executive compensation and shareholder activism within publicly traded companies. The post was intended for directors and management teams of public companies so that they can stay on top of executive compensation issues that could cause major waves for their companies.
Why Directors of Public Companies Need to Pay Attention to Shareholder Activism
Activist investors are shareholders who purchase equity stakes in public companies with the intention of eventually joining the company’s board of directors. They seek to influence the company’s decisions to increase the value of their equity stake in the company. Activist shareholders find issues to confront at annual shareholders’ meetings and can present a serious challenge for the current board of directors to contend with. Some high profile companies choose to settle with activist shareholders by offering them a seat on the board of directors in exchange for them discontinuing their public outcry over particular issues within the company. This is seen as a win-win because the company’s stock value could suffer almost instantly with the release of negative information about operational or compensation issues.
Activist Shareholders Making an Issue of Executive Compensation
Today’s corporate environment is full of examples of shareholders taking on an activist role in spreading information and generating discussion about operational issues of public companies. Some directors refer to them as “agitators” because of their penchant for drumming up support for issues that become sticking points. Issues like executive compensation are ripe for activist investors to raise at an annual shareholders’ meeting. In fact, executive compensation has recently become a flashpoint issue for showdowns between shareholders and directors of public companies. It is more important than ever before for directors of public companies to understand the finer points of the company’s executive compensation plan so that they can anticipate potential attacks from activist shareholders and respond to any concerns about unpopular compensation plans.
Communicating Regularly with Shareholders
Before a board of directors gets to the point of an uncomfortable confrontation with activist shareholders, they can take the pulse of how shareholders perceive the company’s performance. It is helpful for directors to communicate with shareholders frequently throughout the year and provide updates on changes and monitoring of executive pay structures. They should also actively solicit feedback from shareholders at regular intervals so that investors feel engaged in the strategic direction of the company, including how its executives are compensated for their performance. This helps alleviate any potential concerns that shareholders have been blindsided by how the company is tracking executive performance and compensating for it. Directors will be better informed about any potential problems that shareholders may have with the way that executives are paid and can adjust pay structures before any activist investors have a chance to disparage the board of directors at an annual meeting.
Recognizing the Early Warning Signs of Shareholder Discontent
Goldstein points out that a failed “say on pay” vote, a non-binding advisory vote on the company’s executive pay structure, is one of the clearest warning signs that shareholders are not completely on board with how the company’s management team is performing. It could also be a sign that shareholders are not satisfied with the board’s oversight. If an activist is particularly engaged, this could create an opening for sparks of conflict to fly between the board of directors and the company’s management team. Goldstein advises that the most proactive way that a company can react to this situation is to engage directly with shareholders and pay attention to the issues that they are taking with the executive compensation structure.
Anticipating Executive Compensation Plans that Shareholder Activists Favor
There is not one general type of executive pay structure that activist shareholders tend to agree with. Most of the discussions about executive compensation involving activist investors center upon what they perceive to be failed performance-based pay programs for executives. Their general position is that problematic executive pay programs focus too heavily on compensation for short-term revenue increases. They would prefer to see pay structures that encourage long-term, sustainable growth for the company that aligns with its strategic and operational goals. In addition, many activist investors are concerned that misguided pay structures fail to prioritize successful returns on invested capital and returns on equity. In sum, emphasizing sales growth without an eye towards capital management and equity is a common complaint among frustrated investors.
Measuring Executive Performance Against Goals
Directors should be sure to communicate the company’s performance goals and how the executives will be responsible for leading the company to achieve them. An executive compensation program that ties their responsibilities to compensation benchmarks is more likely to be received favorably by activist investors. However, it is imperative that shareholders are armed with information to understand how the company’s performance goals were established and what metrics are being used to track progress towards those goals.
Reviewing Change of Control Provisions
Goldstein further recommends that companies review their change of control provisions to ensure that they can be easily implemented in the event of an activist attack. This will help make sure that their employees will still be protected when the company is faced with an activist shareholder attack. Activist shareholders have regularly been demanding the replacement of the CEO and senior management in addition to changes in the compensation structure. It may be necessary for the company to engage outside counsel to assist with these transitions because the general counsel could be inextricably connected to the CEO and senior management officials.
About Jeremy Goldstein
Jeremy Goldstein is a renowned executive compensation attorney and the founding partner of Jeremy L. Goldstein & Associates, LLC. His firm actively engages with corporate clients on executive compensation issues, especially during times of major corporate changes. The fact that this boutique firm is almost exclusively focused on advising clients on executive compensation concerns means that Goldstein and his legal team have in-depth knowledge of this particular practice area and are a trusted source of guidance on how executive pay structures can affect other legal and corporate governance issues within a company.
Although Goldstein and his firm provide targeted legal advice in the field of executive compensation, he has always done so with the ability to take a holistic approach to evaluate a company’s position. He is widely known for his track record of anticipating legal issues that a company may face related to its executive compensation plan. CEOs, executive compensation committees and boards of directors trust Goldstein and his legal team to stay on top of the many issues that affect executive compensation and provide relevant legal advice.
His extensive experience and stellar reputation for providing useful legal advice on executive compensation issues have served Goldstein and his corporate clients well in a long list of major corporate transactions.
Goldstein’s Education and Early Career
Goldstein graduated cum laude from Cornell University and then earned an M.A. from the University of Chicago. He graduated from the New York University School of Law and began his legal career as an associate at Shearman and Sterling LLP. Goldstein became a partner within the executive compensation practice group at Wachtell, Lipton, Rosen & Katz.
Involvement in the American Bar Association Business Section
Even though Goldstein is busy managing his firm and serving a long list of corporate clients, he still finds time to give back to the legal profession through the American Bar Association. He is an active member of the Executive Compensation Committee and currently serves as the chair of its Mergers & Acquisition Subcommittee. In recognition of his contributions to the bar and his frequent speaking engagements on the topic of executive compensation, Goldstein was named as a top lawyer in Chambers USA Guide to America’s Leading Lawyers for Business. He was also named as a leader in the field of executive compensation law by The Legal 500.
Community Work and Volunteerism
Goldstein is passionate about raising awareness and increasing the resources available for those suffering from mental illness. As such, he is a member of the Board of Directors of Fountain House, which supports patients in recovery from mental illness. He has been active with Fountain House for almost 12 years.
Above all, Goldstein is a trusted and competent legal adviser in the field of executive compensation law. Given that he has consulted for some of the world’s largest corporations and has played a major role in advising on a long list of corporate transactions over his legal career, Goldstein remains one of the most sought-after attorneys for guidance on executive compensation issues. His approach to advising corporate clients in a proactive way means that no stone is left unturned when it comes to considering all of the angles of a new executive compensation plan or adjustments to an existing one. Goldstein continues to be in high demand as the issue of executive compensation is increasingly thrust into the public spotlight.
Read our previous Jeremy Goldstein feature: https://thenewsversion.com/2017/09/attorney-jeremy-goldstein-gives-expert-input-on-employment-contracts
