By Matt Orsagh, CFA, CIPM
To me, one of the most interesting things about following developments in the governance world is that there are always interesting stories out there full of the kind of human drama you don’t find in most corners of finance. In the past few months we’ve seen intrigue at Best Buy (BBY), Duke Energy (DUK), and Chesapeake Energy (CHK), to name a few.
Recently, developments at Simon Property Group (SPG) have caught my eye for similar reasons. A recent shareholder lawsuit brought by the Louisiana Municipal Police Employees Retirement System (Louisiana System) claims that Simon Property Group directors improperly increased CEO David Simon’s compensation last year without seeking shareholder approval.
Here are the highlights; can you guess what has shareholders most worked up?
- $1.25 million in annual salary -- seems OK.
- $4 million bonus -- nothing crazy here, the company has done well recently.
- $120 million in special stock awards as long as the CEO sticks around for seven years -- bingo.
The Louisiana System complains that the company’s board illegally amended the company’s stock-incentive plan without shareowner approval. The company’s stock plan allowed the board to change its terms unilaterally unless shareholder approval was "required by law, regulation, or listing requirement," the pension fund said.
According to the lawsuit, because amendments allowing service-based awards (meaning essentially you just have to show up to work) are material and should be approved by shareholders under NYSE requirements and that such changes further implicate tax laws, the board was required to have investors vote on them. The lawsuit aims to overturn the pay package pending shareholder approval and return any recovery from insurance covering the company’s officers and directors to the company’s coffers.
The Louisiana System is concerned with awarding mega-compensation with no company performance requirement. In this case, to "retain" a person whose name is on the door. This is commonly referred to in corporate governance circles as being "paid for pulse," or as our old friend and long-time compensation consultant Bud Crystal called these types of compensation metrics -- the ability of a CEO to "fog a mirror" when placed directly under said CEO's nose. Meanwhile, Simon Property Group claims that the suit is meritless and that it will vigorously defend the matter.
Interestingly, the lawsuit follows in the wake of a 73% vote against the company's pay package for executives (say on pay), with most of the negativity of the vote focused on the $120 million bonus. The dissatisfaction with pay certainly wasn’t about past performance as the company has enjoyed a good run over the past few years, with the stock price rising from less than $100 per share two years ago to more than $150 per share as of this writing.
The Delaware Court of Chancery is due to take up the case in the coming months, so stay tuned for developments.
Where Would He Go, Anyway?
The supersized retention bonus brings up questions: Is such a payment necessary? Where would the current CEO namesake of Simon properties go?
As noted in our latest corporate governance roundup, a recent study from the University of Delaware noted that such retention bonuses are flawed because there is no natural "market" for CEOs to jump from one company to the next, as expertise in one firm does not easily translate at another. CEOs, therefore, typically cannot get jobs at firms in different industries very easily.
Add to that the fact that David Simon is the son of the late Simon Property Group founder Melvin Simon and helps control a special class of stock (Class B shares), which solely elects three board members. And you begin to wonder whether he could find a better gig than the one he has now.
According to the company’s most recent proxy statement, Simon served as the CEO or its predecessor for the past 17 years, but before that he worked on Wall Street. Perhaps the board is concerned he will jump ship and go back to high finance. A $120 million dollar payday should do the trick -- for at least seven years and a day.
Disclaimer: Please note that the content of this article should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.