The NASPP Blog

Today we feature another guest blog entry, this time by Doreen Lilienfeld of Shearman & Sterling.  Doreen will present the session, “A Sensible Approach to Stock Ownership Guidelines,” along with John Cannon and Kenneth Laverriere, also of Shearman & Sterling, at the 19th Annual NASPP Conference.

A Sensible Approach to Stock Ownership Guidelines
By Doreen Lilienfeld of Shearman and Sterling

In recent years, there has been significant discussion concerning the terms of stock ownership guidelines and stock retention requirements for directors and executive officers. Shareholders want to know that directors and executive officers adhere to a philosophy of investing in the company for the long-term.

With the passage of mandatory say-on-pay, companies have become even more attuned to the views of shareholder activists on these issues. ISS considers three categories relating to stock options guidelines and stock retention requirements in its Governance Risk Indicators (“GRId”) score. Up to three points can be added and five points can be subtracted from a company’s GRId score in each category. These points can make the difference between a positive or negative vote on say-on-pay, director elections and other proposals.

There is standard approach to ownership and retention guidelines. For boards that are designing or revising director and executive stock ownership programs, the myriad of possible design structures can be daunting. It is not always clear what is the most effective means to ensure that the company’s decision makers build and retain a substantial stake in the company at a level sufficient to properly align their interests with those shareholders.

With preparations for the 2012 proxy season underway at many companies, now is the time to begin thinking about your guidelines and retention requirements. In our panel, we will walk you through the decision process analyzing the important design features and let you know what other companies are doing now. Drilling down, we will explore the questions:

• Should you adopt ownership guidelines, retention requirements or both? How will they interact with each other?
• How deep in the ranks should these programs go?
• What will be the consequences for noncompliance?

For Ownership Guidelines

• What are the ownership requirements? A percentage of base salary/annual retainer? A fixed dollar amount? A fixed number of shares?
• How high should you set the ownership requirements? Do they differ by position?
• How much time should directors and executives be given to reach the guidelines?
• Which holdings should count towards satisfying the guidelines–vested vs. unvested awards, stock options, 401(k) and deferred compensation holdings?
• What happens if there is a change in the stock price leading to falling out of compliance with the guidelines?

For Retention Requirements

• How many shares should be retained–50% or more of “net shares”, all equity awards?
• How long should they last? Until ownership guidelines are satisfied? A specified number of years following vesting or exercise? Until retirement? Following retirement?

For answers to these questions and more, please Doreen Lilienfeld, John Cannon, and Kenneth Laverriere of Shearman & Sterling for their session, “A Sensible Approach to Stock Ownership Guidelines,” at the 19th Annual NASPP Conference.