We have previously summarized the motions and responses filed in the Churchill v. CU case. Churchill has a motion for reinstatement that CU objects to on the basis, primarily, that litigation has irreparably damaged the relationship between the parties. CU has a motion for judgment as a matter of law (overriding the jury’s decision) arguing that quasi-judicial immunity protects the Regents from suit for their adjudicative decision to fire Churchill. Churchill’s objections are that quasi-judicial immunity only applies to individuals, not to entities and that CU waived its 11^th Amendment immunity, which applies to state entities. Each side has now replied to the responses of the other side’s motion.

 

Churchill’s Reply re Motion to Reinstate:

· There is no case law to support CU’s assertion that when only nominal damages are awarded, the plaintiff is precluded from additionally seeking the equitable remedy of reinstatement.

· Equity requires courts to take remedial action to make the plaintiff whole from the defendant’s wrongdoing, in this case, to give Churchill back his job.

· “[A]cademic discourse involving controversial issues engenders strong passions among all parties, however because this is precisely what the market place of ideas envisions, it is therefore essential that this Court keep the market place open for business through reinstatement.”

· CU’s speculation about what would happen if Churchill returned does not justify legal findings.

· CU continues to be in denial about the fact that a jury found they had acted illegally and they lost the case. The court has an obligation to remedy this misconduct.

 

CU’s Reply re Motion for Quasi-Judicial Immunity:

• Quasi-judicial immunity is not the same as 11^th Amendment immunity, which applies only to the states themselves. Quasi-judicial immunity is a matter of state law and protects individuals from suit if they are performing a judicial function.
• A pre-trial agreement between the parties allows CU to raise defenses on behalf of CU and the Board of Regents that would have been available to the Regents as individuals, opening the door to the defense of quasi-judicial immunity that would otherwise not be available to CU as an entity.
• Quasi-judicial immunity applies to both the $1 nominal damage award and the request for reinstatement because the key statute in the case Churchill relies on, Pulliam v. Allen, 466 U.S. 522 (1984), was amended in 1996. The amendment requires prospective relief in Constitutional violation cases be granted only if “a declaratory decree was violated or declaratory relief was unavailable.” Since Churchill never claimed CU violated a declaratory decree, he cannot now claim that. Churchill would have had to ask a district court to establish that no further declaratory relief was available, and has not done so.
• Quasi-judicial immunity exists because a) they type of proceeding the Regents had was investigative (examining evidence gathered by prior committees) and administrative (dismissal of employee); (b) elected officials (such as Governors acting as final reviewers of parole requests) can claim the immunity; (c) if freedom from political pressure was the requirement for judicial immunity, elected judges would be denied that immunity; (d) “quasi-judicial immunity protects all types of officials who perform judicial functions, not just appellate functions.”

 

The hearing for arguments on these motions is at 8:30 on July 1. The Replies are posted on the DU Corporate Governance site.

We are discussing In re Intech Investment Management, a recent administrative proceeding brought by the Commission against an adviser with pro-shareholder voting practices.

Intech put in place a system of voting that tracked an approach apparently developed by ISS in consultation with the AFL-CIO. 

One can imagine, therefore, that the standard more completely tracked the interests of shareholders rather than management.  The release indicated that this was done to attract more union pension business.  Perhaps, but it was an approach to voting that favored shareholders and, presumably, beneficiaries of pension plans.  It was apparently this motivation that caused Intech to be sanctioned.  See In re Intech Investment Management ("INTECH chose an AFL-CIO-based voting platform for all clients without addressing and describing its potential effect on INTECH’s ability to retain and obtain business from existing and prospective union-affiliated clients.")

Intech did disclose the actual voting results to its clients and a significant number (27%) were switched back to the more pro-management platform.  Ultimately, Intech opted to not use the AFL-CIO inspired platform as a default but instead to select as a default platform the approach that "best represent[ed] the client type."  In short, unions were voted in accordance with the union supported platform and company pension plans voted in accordance with the pro-management platform. 

There are several notable things about this case.

First, one suspects that advisers often vote in a manner that is designed to assuage clients and attract additional business.  Thus, having to say that a voting policy can have this effect is in some ways redundant.

Second, one further suspects that the majority of advisers who do this are voting in a pro-management fashion.  In other words, advisers know that in order to attract additional pension plan business from corporations they must vote in a management friendly fashion. Yet the Commission happened to sanction an adviser voting pro-shareholder, remaining silent on what is probably a far more common practice.

Third, the Commission did not in fact establish that the policy implemented by Intech was not in the best interests of the beneficiaries of the pension plans.  The approach clearly was not favored by some of Intech's clients.  These were presumably corporate pension plans, with management of the various companies unhappy with the pro-shareholder voting platform.  The Commission made no attempt to ascertain whether the clients insisting on a change in the voting platform were actually operating in the best interests of their beneficiaries.

This case in the end sanctioned an adviser for voting in a pro-shareholder fashion.  It essentially required advisers wishing to do so to disclose that they are doing so in order to attract additional business, something few are likely to do.  As a practical matter, therefore, advisers are less likely to opt for the pro-shareholder platform. 

On the other hand, the Commission did not impose a similar requirement on those voting in a pro-management fashion.  As a result, advisers can employ a pro-management platform without any revealing disclosure.  It is what most are likely to do.  In short, this case was designed to discourage pro-shareholder voting by advisers.  It is a legacy of the Cox Commission.

We are discussing In re Intech Investment Management, a recent administrative proceeding brought by the Commission against an adviser with pro-shareholder voting practices.

According to the release, Intech had responsibility for voting shares of an assortment of clients, some connected to public companies (pension plans and the like) and others connected to unions. In deciding how to vote the shares, Intech relied on the recommendations of the Institutional Investors Service (IIS), a practice specifically approved by the SEC in its adopting release.  See Investment Company Act Release No. 2106 (Jan. 31, 2003)("Similarly, an adviser could demonstrate that the vote was not a product of a conflict of interest if it voted client securities, in accordance with a pre-determined policy, based upon the recommendations of an independent third party.")

IIS had in place a variety of approaches, at least one of which was pro-management.  Another, developed with the apparent assistance of the AFL-CIO, was more pro-shareholder in the approach to voting.

Intech originally opted for the pro-management approach with respect to all votes.  According to the release, however, Intech switched from a pro-management to pro-shareholder approach to “please its union-affiliated clients” and potentially attract additional union business.  Apparently at the time of the change, Intech did not inform clients that the new policy tracked the voting recommendations of the AFL-CIO.

Intech did, however, send to clients on a quarterly basis a report showing how it voted a client’s shares, apparently causing some expressions of concern.  Ultimately, clients were given an option to choose between a pro-management (called "management friendly" in the SEC release) or pro-shareholder style of voting. Approximately 27% of the clients chose pro-management. Eventually, Intech disclosed to clients that the default system for voting shares was developed by ISS in conjunction with the AFL-CIO and that this could result in the Adviser retaining and obtaining union clients.

The Commission sanctioned Infotech for willfully violating Section 206 and Rule 206(4)-6, apparently for failing to have in place policies designed to vote shares in the best interest of their clients.  According to the release:

• This case involves a registered investment adviser, INTECH, which, from at least 2003 through 2006 (the “relevant time period”), exercised voting authority over client securities without having written policies and procedures that were reasonably designed to ensure it voted its clients’ securities in the best interests of its clients because those policies and procedures did not include how the adviser would address material potential conflicts of interests that may arise between its interests and those of its clients.

The Commission sanctioned the Adviser $300,000 and the responsible official inside the adviser $50,000 (for aiding and abetting). We will give some thoughts on this case in the next post.

We are discussing In re Intech Investment Management, a recent administrative proceeding brought by the Commission against an advser with pro-shareholder voting practices.

The case involved the first apparent enforcement action under Rule 206(4)-6 (adopted back in 2003).  The rule was a response to problems of voting by pension plans and mutual funds (at the same time the Commission imposed disclosure obligations on voting behavior of mutual funds; see Investment Company Act Release No. 25922 (Jan. 31, 2003). 

Pension plans own a large portion of equity shares in the United States.  According to the GAO:  "In 2001, pension plans, as a whole, owned about 20 percent of the total corporate equity issued by U.S. companies, with private pension funds owning about 59 percent of that amount."  This reflects, therefore, a substantial percentage of voting shares and can easily sway votes by shareholders in one director or another.

In voting shares, advisors may have a conflict of interest.  Most noticeably, corporate run pension plans might expect advisors to take a pro-management stance when voting shares.  As a GAO Study noted:

• Business associations between a proxy voter and any entity that may influence their vote presents a conflict of interest. Some experts we interviewed explained that these associations may form whether proxies are internally or externally managed because company management has direct access to the proxy voter who is either an employee, in the case of internally voted proxies, or is a service provider, in the case of externally voted proxies.

The Commission intervened in the area when it adopted Rule 206(4)-6.  The rule required that advisors:

1. Adopt and implement written policies and procedures that are reasonably designed to ensure that you vote client securities in the best interest of clients, which procedures must include how you address material conflicts that may arise between your interests and those of your clients;
2. Disclose to clients how they may obtain information from you about how you voted with respect to their securities; and
3. Describe to clients your proxy voting policies and procedures and, upon request, furnish a copy of the policies and procedures to the requesting client

In short, the approach was limited to disclosure.  There needed to be policies designed to ensure that policies are voted "in the best interests of clients" and provide information to clients on how they voted.  It contained no substantive obligations.  Nonetheless, exposure of the voting process was likely to lead to substantive changes in behavior (see Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure).

In adopting the rule, the Commission recognized the concern over conflicts of interest.  In noting the conflict, the Commission specifically mentioned the problems associated with the management of private pension plans operated by companies.  In other words, the concern was over management's ability to influence the adviser.  As the adopting release noted:

• An adviser may have a number of conflicts that can affect how it votes proxies. For example, an adviser (or its affiliate) may manage a pension plan, administer employee benefit plans, or provide brokerage, underwriting, insurance, or banking services to a company whose management is soliciting proxies. Failure to vote in favor of management may harm the adviser's relationship with the company. The adviser may also have business or personal relationships with participants in proxy contests, corporate directors or candidates for directorships. For example, an executive of the adviser may have a spouse or other close relative who serves as a director or executive of a company.

Given these views and obvious concerns, one would expect the early enforcement efforts to center around attempts to address conflicts between advisers and management.  In fact, this was not the case, as In re Intech Investment Management demonstrated.

By now it is clear that the Commission under the prior Chairman tied the hands of enforcement, interfering with the Division's ability to perform its function.  Certainly this was the point of an article in the Washington Post (In Cox Years at the SEC, Policies Undercut Action).

But perhaps the most damaging legacy was the prior Commission's record when it came to corporate governance.  The Agency sat on reforms of NYSE Rule 452 (broker votes in director elections) and affirmatively denied shareholders access to the company's proxy statement for their nominees (the short sightedness of which will become increasingly clear as the Commission moves forward on that issue). 

A residual of that approach could be seen in a recent case brought by the Commission against an investment advisor.  Although finished under Schapiro, the case was almost certainly initiatied under Cox. In In re Intech, Investment Advisers Act Release No. 2872 (admin proc May 7, 2009), the Commission opted to penalize an investment adviser that maintained a pro-shareholder voting record. 

The voting patterns for advisors are a problem.  Many simply back management irrespective of the merits.  This is particularly true where the pension plan is controlled by management, irrespective of whether the voting pattern is in the best interests of the plan beneficiaries.  Despite these concerns, the Commission under Cox managed to single out an advisor who happened to vote in a pro-shareholder manner.  As with the former Chairman's demonization of "off shore hedge funds," the case reflects an anti-shareholder approach of the prior Commission.  With that in mind we turn to the case over the next several posts.

We will spend a couple of posts examining the case.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009's Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

 

One can see some of the effects of these rules when looking at the director compensation table from Verizon (VZ-NYSE) 2009 Proxy Statement. According to the proxy statement, the company paid the directors the following amounts:

Name*	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	Change in Pension Value** ($)	Total ($)
Richard L. Carrion	93,000	26,709	0	4,773	124,482
M. Frances Keeth	101,000	69,363	0	0	170,363
Robert W. Lane	101,000	26,709	0	1,467	129,176
Sandra O. Moose	110,000	26,709	0	5,137	141,846
Joseph Neubauer	108,000	26,709	0	0	134,709
Donald T. Nicolaisen	101,000	30,491	0	0	131,491
Thomas H. O’Brien	126,000	26,709	0	1,015	153,724
Clarence Otis Jr.	101,000	33,836	0	2,258	137,094
Hugh B. Price	93,000	26,709	0	67	119,776
John W. Snow	93,000	72,169	0	0	165,169
John R. Stafford	93,000	26,709	0	11,371	131,080
Robert D. Storey***	46,5000	26,709	0	0	73,209

* Chairman and CEO Ivan Seidenberg is not entitled to director compensation as an employee-director

**Verizon does not give its directors “other compensation,” with the exception of directors who were elected before 1992. Those directors are eligible for a charitable giving program where Verizon will contribute an aggregate of $500,000 to charities designated by the director.

*** Mr. Storey resigned in May, 2008, and his fees were prorated for services rendered.

 

Director Compensation. The board met eleven times in 2008 with an average attendance of 96%, with no individual director attending less than 75% of the meetings. All non-employee directors received an annual $85,000 cash retainer along with a grant of Verizon shares equivalent to $130,000. Verizon requires directors to credit their share equivalents to their deferred compensation account, then invest in a hypothetical Verizon stock fund which is paid in a lump-sum after the director leaves. Stock awards and options exercised from the annual share equivalents range from $26,709 to $72,169 for former Treasury Secretary John Snow, who serves on Verizon’s board. When combining stock awards and deferred pension compensation, director earnings ranged from a low of $119,776 to a high of $170,363.

 

Director Tenure. The tenure of Verizon’s board is diverse. Board tenure ranges from two years to twenty-two years of service, with four directors serving at least twelve years. Eleven directors serve on multiple boards, with five of the twelve directors simultaneously serving on the boards of three or more corporations. Primary among these are Dr. Sandra O. Moose, who also serves as a director of Rohm and Haas Company, The AES Corporation, Natixis Advisor Funds, and Loomis Sayles Funds.

 

CEO Compensation. Ivan Seidenberg serves as Chairman and CEO. In 2008, Mr. Seidenberg’s total compensation was $18,573,638, down from the $26,553,576 earned in 2007. Total compensation for 2008 included a $2,100,000 salary, more than $11,000,000 in stock awards, and $3,740,625 in a non-equity incentive plan. In total, $946,754 of Mr. Seidenberg’s compensation is classified as “all other.” These included the personal use of company aircraft and company vehicle together totaling $158,000.

 

William Barr was Executive Vice-President until his retirement on December 31, 2008. In 2008, Mr. Barr’s total compensation was $15,911,560. Mr. Barr also served as Verizon’s general counsel until November 6, 2008. Mr. Barr’s compensation included $863,077 in salary, $3,000,000 in stock awards, and $10,380,000 in his retirement agreement and bonus structure.

 

Without Mr. Barr’s retirement, Dennis Strigl, the President and COO, would be second in total compensation earning $11,062,661. The lion’s share of Mr. Strigl’s compensation was a $1,319,231 salary coupled with $7,075,305 in stock awards. Mr. Strigl also received $657,410 in company perquisites including $138,182 in personal use of company aircraft and $14,496 for personal use of a company vehicle.

This case contains several lessons.  It shows the resolute refusal of the Delaware courts to make the obligations of the board meaningful.

Under the rational of the opinion, boards can approve transactions that have serious adverse consequences on the voting rights of shareholders without being aware of these consequences.  The court could easily have imposed a duty on boards to be made aware of these types of provisions.  In the future, boards would have to receive reports on the transactions that included any significant limits on the shareholder franchise.  Instead, the court merely admonished outside counsel to be more forthcoming but otherwise imposed no obligation on the board to be aware of the information. 

In addition, the court took contractual provisions and affirmatively declined to interpret them in a manner that coincided with the board's fiduciary obligations.  Thus, where the board approves the insurgent directors under the poison puts, debt holders will always have an argument that the approval was inconsistent with the meaning of the language in the contract.  Had the court simply concluded that the language was meant to allow boards to approve directors whenever deemed appropriate under the board's fiduciary obligations, boards would have been able to waive the poison put whenever beneficial to shareholders.  Instead, the court developed an entirely different standard that promised to give debt holders room to litigate whenever they disagreed with the board's approval of insurgent directors (which would likely be anytime they preferred to put the debt back to the company).

The case provides a mechanism for contractual limitations on voting rights and entirely exonerates the board from any responsibility.  In an era of shareholder access, when dissidents will have greater opportunity to elect their candidates to the board, the case illustrates that the Delaware courts will nonetheless continue to permit road blocks and interfere with process where ever possibe.

The opinion and assorted documents have been posted on the DU Corporate Governance web site.

We are discussing San Antonio Fire & Policy v. Amylin Pharmaceuticals, a Delaware court that upheld the use of coercive contractual terms that effectively denied shareholders their voting rights.

Management of the company negotiated an indenture in 2007.  The indenture essentially provided that the loan would be accelerated in the event that shareholders nominated and elected a majority of the board.  Only if the board "approved" the shareholder candidates would the debt not be accelerated. 

The plaintiffs rightfully challenged the provision, asking the court to declare the poison put a violation of the duty of care. The analysis demonstrates the emasculated nature of the duty of care.  One can imagine a situation where the board needs to borrow funds for the survival of the company but can only do so where the lender insists on terms that are detrimental to shareholders.  Alternatively, one can imagine a situation where management encourages the inclusion of terms that are detrimental to shareholders because it benefits management.

The court undertook none of this type of analysis.  Instead, the court concluded that since the provisions were common, they were valid, notwithstanding the impact on shareholders.

• The board retained highly-qualified counsel. It sought advice from Amylin’s management and investment bankers as to the terms of the agreement. It asked its counsel if there was anything “unusual or not customary” in the terms of the Notes, and it was told there was not. Only then did the board approve the issuance of the Notes under the Indenture. This is not the sort of conduct generally imagined when considering the concept of gross negligence, typically defined as a substantial deviation from the standard of care.

That the provisions could deny shareholders their voting rights had no impact on the analysis.  Moreover, even if the provision was demanded by the creditors (there was nothing in the opinion that suggested this had been the case), they could have been paid in the form of slightly more favorable terms to give up on the requirement.  The court effectively took the position that the board need not have any role or responsibility for terms in a contract that severely constrained shareholder voting rights. 

The court acknowledged the harmful nature of the poison puts, but rather than put any responsibility on the board, admonished outside counsel to be more forthcoming.

• Outside counsel advising a board in such circumstances should be especially mindful of the board’s continuing duties to the stockholders to protect their interests. Specifically, terms which may affect the stockholders’ range of discretion in exercising the franchise should, even if considered customary, be highlighted to the board. In this way, the board will be able to exercise its fully informed business judgment.

In other words, the board had no responsibility.  It was up to outside counsel to be "especially mindful" of the matter.  But unfortunately for shareholders, outside counsel doesn't have fiduciary obligations to shareholders.  It is the board that does and this case eliminates any responsibility by the board for the resulting diminution of the shareholder franchise.

The plaintiff was not seeking monetary damages against the board.  Plaintiff only wanted to enjoin application of the provision in order to allow the election to go forward without the specter of economic coercion.  In those circumstances, the court had an opportunity to impose on the board an obligation to inquire about, and consider, contractual provisions that affected voting rights.  This would not mean that all such provisions were invalid but would require the board to weigh the benefits (in the form of any lower interest rates) against the consequences to shareholders.  Instead, the court eliminated any responsibility of the board even to consider the interests of shareholders.

The opinion and assorted documents have been posted on the DU Corporate Governance web site.

We are discussing San Antonio Fire & Policy v. Amylin Pharmaceuticals, a Delaware court that upheld the use of coercive contractual terms that effectively denied shareholders their voting rights.

The Chancellor concluded that the inclusion of a poison put in an indenture did not implicate the duty of care because the board had outside counsel and the provision was common place.  As is the case with the duty of care, the terms did not matter.  The fact that the provision imposed coercive pressure on the shareholder franchise earned some lecturing language but was otherwise irrelevant to the analysis.

The provision, however, contained an out.  It allowed the board to "approve" the insurgent directors.  Approved directors would not result in acceleration of the notes.  Indeed, the board agreed to approve the insurgent directors as part of a settlement.  The court merely had to approve the settlement.

Because the court viewed the matter as one of contract interpretation, it limited the analysis to whether approval comported with the duty of good faith and fair dealing.  Approval would only be consistent with this duty if "the board determines in good faith that the election of one or more of the dissident nominees would not be materially adverse to the interests of the corporation or its stockholders." 

The court could have interpreted the provision to impose the duty of care and the business judgment rule.  In other words, debt holders could not successfully challenge the decision unless showing that it was inconsistent with the elements of the business judgment rule.  Instead, the court developed an entirely new and untested standard.  Moreover, the court gave plenty of room for debt holders to challenge the board's decision.  Shareholders voting for "approved" directors would know that debt holders might challenge the board's decision (as breach of contract) and, if successfully, would cause the poison put to be triggered.  In other words, the court's interpretation effectively left the coercion in place.

Even more extraordinary, the court in fact overturned the settlement among the parties, including the board's approval of the insurgent directors.

• The application of this rule here is problematic. The court has been presented with no evidence regarding the board’s deliberation with respect to the decision to approve the stockholder-nominated slate. No party has placed into the record any board minutes, resolutions, or other evidence that would indicate how the board came to its decision. Rather, before the court are two less than helpful sets of circumstances. First are the negative public statements made by the board in various fight letters with respect to the dissident nominees. . . Second is the posture in which the board appears to have made its decisionto approve. . . The board did not do so until April 13, 2009, and then only in exchange for a partial settlement with the plaintiff in which the plaintiff agreed to amend its complaint to remove any allegations of breach of the duty of loyalty by the individual defendants, and not to seek money damages against them. These circumstances at least raise a question whether the board’s decision to approve was made in a good faith exercise of its considered business judgment, or instead taken simply to avoid facing a suit for money damages against themselves personally.

In other words, the court effectively upheld a challenge to the board's decision.  Moreover, the court made it clear that opposition to the insurgent slate (a universal reaction) would provide evidence that the board had not met the standard for approval.  This reaffirmed the uncertainty of the approval requirement and made it abundantly clear to shareholders that voting for insurgent directors who had been approved by the board nonetheless posed a real risk that the approval would later be overturned and the poison put triggered.

The opinion and assorted documents have been posted on the DU Corporate Governance web site.

On Thursday, Alan Blinder, an economics professor and former vice chairman of the Fed, published an editorial in the WSJ titled "Crazy Compensation and the Crisis."  In the course of his challenge to the system of executive compensation, he rhetorically asked, "Whoever dreamed up this crazy compensation system?"  In later characterizing the problem, he describes the system this way:  "The source of the problem is really quite simple: Give smart people go-for-broke incentives and they will go for broke."

True enough.  From an economist, the system is centered around perverse incentives that encourage top officers to take excessive risk in order to maximize their compensation.  These sorts of base instincts have always existed yet the problem seems today more severe and more recent.  What is the explanation?

The answer is the evisceration of the legal protections for shareholders.  While top officers may have an economic incentive to role the dice, the legal system imposes a countervailing obligation:  To act in the best interests of shareholders.  There is little question that the rolling of the dice will not be in the best interests of shareholders yet the legal system has, in the hands of the Delaware legislature and courts, become an anemic guarantor of the rights of shareholders.  It is this absence of meaningful protection for shareholders that has allowed the excessive compensation problem to reach its latest heights.

The examples in this area are legion.  Waiver of liability provisions have all but eliminated the duty of care (see Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom ).  The duty of loyalty (particularly the approval of executive compensation) had largely been reduced to a procedural standard, without consideration of the substance of the transaction at issue (or the terms of the executive compensation package) (see Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty).  As we have noted time and time again, the Delaware courts have declined to make the standards meaningful and have provided firm economic (yes economic) incentives on the part of directors to back the demands of management (in other words, to support their "perverse incentives"). 

Finally, we note the resolute refusal of the Delaware courts to impose specific responsibilities on the board with respect to corporate oversight.  In Citigroup, the Chancery Court could have defined the responsibilities of the board with respect to the oversight of excessive risk taking.  Instead, the decision merely repeated that the board has no such responsibility.  In San Antonio Fire & Policy v. Amylin Pharmaceuticals the Delaware Chancery Court held that a board did not even have an obligation to be told about provisions in agreements that effectively restrict in a substantial way the voting rights of shareholders. 

It is, in short, a legal system that provides for capture of the board by top officers and provides little incentive for boards to be informed.  In other words, it is a system that imposes few if any limits on the natural instincts of top executives to enhance their own compensation by taking excessive risks at the expense of shareholders.  Isn't the system of "crazy compensation" a predictable consequence?  Isn't federal preemption an obvious solution?

We are doing a series on San Antonio Fire & Policy v. Amylin Pharmaceuticals, a decision by the Delaware Chancery Court approving poison puts. 

Nonetheless, we couldn't help but notice the editorial in the WSJ yesterday by Alan Blinder on "Crazy Compensation and the Crisis."  The piece notes that "the ruckus has been over the generous levels of compensation, or the fact that bonuses were paid at all, not over the dysfunctional incentives that inhere in the way many compensation plans are structured."  In other words, nothing has been done to eliminate the perverse incentives to take excessive risk built into the current system of executive compensation.

• Amazingly, despite the devastating losses, these perverse pay incentives remain the rule on Wall Street today, though exceptions are growing. For now, excessive risk-taking is being held in check by rampant fear. But when fear once again gives way to greed, most traders and CEOs will have the bad old incentives they had before -- unless we reform the system.

So what is the solution? 

• Rather, fixing compensation should be the responsibility of corporate boards of directors and, in particular, of their compensation committees. These boards, I'll remind you (and please remind the board members), are supposed to represent the interests of stockholders, not those of managers. Quite plainly, many were asleep at the switch, with disastrous consequences. The unhappy (but common) combination of coziness and drowsiness in corporate boardrooms must end. As one concrete manifestation, boards should abolish go-for-broke incentives and change compensation practices to align the interests of shareholders and employees better. For example, top executives could be paid mainly in restricted stock that vests at a later date, and traders could have their winnings deposited into an account from which subsequent losses would be deducted.

The emphasis on fixing the process in the board room is right but look at the solutions at the bottom of the paragraph.  They have nothing to do with the board or fixing the process.  In other words, Blinder correctly puts his finger on the problem but recedes when it comes to suggesting the proper response.

The answer is straight forward.  Rather than try to regulate every aspect of the compensation process, Congress needs to strip away from Delaware the right to set to standards.  Instead, there needs to be federal legislation that quite simply prohibits excessive executive compensation and provides a private right of action for violations.  The provision could likewise contain a provision that defines excessive as the inclusion of compensation incentives that encourage excessive risk taking.

This problem will not fix itself and Blinder is right to say that matters will drift back to the way they were.  The efforts by financial institutions to pay off TARP funds is, at least in some cases, no doubt motivated by a desire to get out from under even the modest compensation limits imposed on these companies.  In other words, they want to go back to the way it was.  And, absent some type of federal intervention, that's exactly what will happen.

We are discussing San Antonio Fire & Policy v. Amylin Pharmaceuticals, a Delaware court that upheld the use of coercive contractual terms that effectively denied shareholders their voting rights.

In 2007, the Amylin board assigned to members of senior management to negotiate the terms and conditions for the 2007 Notes (terms ultimately approved by the Finance Committee of the board).  Section 11.01 of the Indenture provided that the notes could be redeemed at face value following a Fundamental Change.  Fundamental Change included anytime "the Continuing Directors do not constitute a majority" of the board.  Continuing Director, in turn, was defined as the existing directors and any new directors "whose election to the Board . . . or whose nomination for election by the stockholders . . was approved by at least a majority of the directors then still in office."  In other words, if shareholders elected an unapproved majority to the board, either all at once or gradually over time, it would acclerate the notes. 

In early 2009, two large shareholders each announced that they would run a dissident slate of five directors.  Thus, ten total dissident directors would be running for positions in the 12 person board.  Because the number constituted a majority, their election would, absent approval of the incumbents, trigger the redemption of the notes under the Indenture (an amount somewhere around $575 million).  As even the Chancellor noted:  "as a matter of course, there are few events which have the potential to be more catastrophic for a corporation than the triggering of an event of default under one of its debt agreements."

Plaintiff challenged the provision.  In the course of the litigation, the insurgents reduced the number of candidates to five and the incumbent board agreed to approve them under the terms of the Indenture, thereby allowing the candidates to qualify as "Continuing Directors" and not implicate the change of control provision of the Indenture.  The matter more or less seemed resolved, with the election allowed to go forward devoid of any problem under the agreement.

The Chancery Court, however, opted to do otherwise.  The court upheld the poison put under the duty of care.  Effectively the court held that the board had no obligation with respect to the provisions, despite their pernicious effect on shareholder voting rights.  Moreover, the board had no olbigation to be informed about contractual provisions that limited voting rights.

Even more astounding, the court went on the hold that a board could only approve the insurgent directors and avoid the acceleration provision in the Indenture, where "the board determines in good faith that the election of one or more of the dissident nominees would not be materially adverse to the interests of the corporation or its stockholders." The court concluded that the board had not made a sufficient showing of this standard, essentially upending the settlement. 

As a result, the election which is scheduled for May 27 will take place with shareholders aware that their votes may well contribute to the possibility of an acceleration of the 2007 Notes.  In other words, the coercion remains. We will look at these arguments in greater detail in the next few posts.

The opinion and assorted documents have been posted on the DU Corporate Governance web site.

We have been writing about the Shareholder Bill of Rights, legislation soon to be introduced by Senator Schumer.  As we have noted, the legislation would largely preempt large segments of Delaware corporate law.  Among other things, it constitutes a recognition that Delaware and its courts have put in place a system of corporate governance that does not protect shareholders and results in excessive risk taking designed to maximize short term executive compensation. 

The bill will be controversial and, of course, will engender serious resistance (as it already has from Wachtell Lipton).  While the merits favor the legislation, support will apparently emanate from an unlikely source:  The Delaware courts.  It won't take very many decidedly anti-shareholder cases to push Congress to adopt the legislation.  This week, the courts provided the first piece of supporting evidence with the decision in San Antonio Fire & Policy v. Amylin Pharmaceuticals. 

In effect, the decision upheld poison puts. 

These are contractual provisions in debt agreements and indentures that provide for the acceleration of the debt whenever there is some type of change of control.  Change of control can have a myriad of definitions.  It turns out that in many agreements, the provisions apply to the election of a majority of shareholder nominated directors.  In other words, if shareholders have the temerity to run a competing slate and vote them into office, they will accelerate outstanding debt, potentially destroying the business (particularly when the debt is not trading at face value and replacement credit is tight). 

We will devote several posts to the case.  Suffice it to say that as long as the case remains good law, it provides yet another reason for federal preemption and expansion of the Shareholder Bill of Rights.  The Delaware Chancery Court effectively held that fiduciary obligations do not apply to the insertion of contract provisions that severely restrict voting rights of shareholders.   It did so remarkably by concluding that common terms in contracts were not subject to fiduciary oversight, irrespective of their impact on shareholder voting rights.  The case provides management with a mechanism for deterring and/or winning any proxy contest. 

We have posted the opinion and many of the supporting documents on the DU Corporate Governance web site.

Last week, when Commissioner Paredes voted against submitting an access proposal for comment, he gave as one of the reasons the raft of majority vote provisions that have been put in place by a majority of the largest companies.  Likewise, in opposing The Shareholder Bill of Rights, the memorandum issued by Wachtell Lipton pointed to the same development. 

In fact, the development is anything but.  Their widespread adoption reflects an attempt by management to head off a majority vote movement and ensure that majority voting is as weak as possible. 

What is the evidence to date?

First, they rarely work in practice.  According to RiskMetrics, only 32 directors at 17 companies in the Russell 3000 index did not receive a majority.  Assuming each company has on average 8 directors, that means that 1/10th of a percent of directors did not receive a majority.

Second, the board retains the right to refuse to accept the resignations and often does.  I haven't seen stats on the issue but anecdotal evidence suggests that it happens often.  This is particularly true since directors are most likely to lose either because they were too supportive of management (perhaps with respect to executive compensation) or because of the company's performance (which is a criticism also of the job done by the CEO).  In other words, these are the very types of directors that the CEO will want to keep in office.

In the article on the three directors of Pulte who did not receive a majority, the CEO more or less made a public case for justifying the board's refusal to accept their letter of resignation.  As the WSJ reported:

• But Pulte chief executive Richard Dugas said in an interview that he thinks the withheld votes were driven primarily by the board's voting structure. "We strongly refute that this had to do with performance of the company," he said. He added that the company was one of the few builders with positive share performance in 2008.

We have other examples, some of which are winding their way through the courts.  Suffice it to say, as we will describe, the Delaware courts are likely to make it very difficulty for shareholders to examine the reasons why boards decline to approve director resignations.

Third, for all of the crowing about widespread adoption, the trend is largely limited to the large companies where efforts to defeat a director are the most expensive and the least likely to succeed.  According to Directorship:

• However, while this dramatic shift at large U.S. companies has garnered much attention, the straight plurality voting standard is still very common among the smaller companies included in the Russell 1000 and 3000 indices. Over half (54.5 percent) of the companies in the Russell 1000, and nearly three-quarters (74.9 percent) of the companies in the Russell 3000, still use a straight plurality voting standard for director elections.

Finally, implementation by management allows some companies to include majority vote provisions in their corporate governance policies, something that can be easily changed by the board and probably not changed by shareholders. 

This type of "majority" voting is better than the reigning system of plurality voting.  It gives a withheld vote by shareholders more meaning (in a plurality system the withheld vote has no meaning).  But in the end, even directors not receiving a majority of the votes (a difficult proposition) will likely remain on the board.  Why?  Because the decision about whether to accept the letter of resignation becomes a matter of the board's fiduciary obligation. 

But as anyone following this area knows, with board capture and the lack of true independence, fiduciary obligations are often exercised in the best interests of management rather than shareholders.  In other words, letters of resignation will not be accepted when the CEO doesn't want them accepted.  It is, after all, the Delaware model.

As we debate access, it seems like every time shareholders turn around they find another design flaw in the system that, oddly, favors management.  The latest is blank votes.

It seems that when a shareholder executes a proxy and decides not to cast a vote for a particular matter, the proxy tabulator apparently fills it in in a pro-management manner (or, more accurately, in conformity with the recommendations of the soliciting committees).  According to a petitioned filed with the Commission by James McRitchie and a group of co-filers:  "When a retail shareowner using Broadridge's proxyvote.com platform votes for or against at least one item on a proxy but fails to vote on other items, each item they fail to vote is cast in favor of the company's recommended position." 

In other words, the practice goes well beyond the practice of brokers voting uninstructed shares.  In those circumstances, brokers cannot vote on any substantive matter deemed controversial.  Blank votes, on the other hand, are in fact voted on substantive matters, controversial or otherwise.  They affirmatively assist in passing management proposals. 

This will be another matter that requires administrative action.  Comments encouraging the Commission to act in this area can be sent to rule-comments@sec.gov with File 4-583 included in the subject line.  

As part of this Blog’s student created Director Compensation Project, we have created a series tables on corporate compensation. Below is a table compiling some of the more infamous CEO perquisites. The chart covers the 2009 Fortune 100’s top 20 companies, Wells Fargo, Goldman Sachs, and Chesapeake Energy Company. The notation “NP” (Not Provided) means the corporation either does not provide its CEO with that perquisite, the company compensates for that service but does not disclose the exact amount, or has bundled that amount with a total “other compensation” figure. The figures provided are for exact amounts to show how much corporations are compensating CEOs for these services.

 

 

Company	Personal Use of Company Aircraft ($)	Personal Use of Company Automobiles ($)	Personal Security ($)
Exxon Mobil	45,251	NP	222,985
Wal-Mart Stores	149,093	NP	NP
Chevron	93,876	2,237	987
Conoco Philips	54,975	NP	NP
General Electric	189,449	22,844	NP
General Motors*	-	-	-
Ford Motor Company	344,109	NP	112,114
AT&T+	83,022	26,834	4,269
Hewlett-Packard	135,734	NP	255,872
Valero Energy**	NP	NP	NP
Bank of America Corp.	220,267	NP	13,791
Citigroup	NP	2,393	NP
Berkshire Hathaway	NP	NP	315,709
International Business Machines	493,881	NP	NP
McKesson	48,844	5,089	514,528
J.P. Morgan Chase & Co.	53,856	89,020	NP
Verizon Communications	158,000	15,462	NP
Cardinal Health	196,095	NP	NP
CVS Caremark	110,845	2,885	5,798
Procter & Gamble	225,404	NP	NP
Goldman Sachs Group	NP	124,593	NP
Wells Fargo Company	NP	NP	NP
Chesapeake Energy Company++	648,096	NP	NP

* General Motors has not filed its 2008 proxy statement

**Valero paid its CEO's club membership worth $5,000

⁺ AT&T paid $19,565 in Club Membership fees for its CEO

⁺⁺ Chesapeake paid $12.1 million for a collection of historical maps of the American southwest, which it gave to its CEO

Attorneys for CU and Churchill have filed responses to each other’s motions, which we will summarize briefly:

 

Plaintiff’s Response to Defendant’s Motion for Judgment as a Matter of Law:

• Motion must be denied as quasi-judicial immunity only applies to individuals sued in their individual capacities and not governmental defendants. In the earlier procedure of this case, the parties agreed to exchange the University of Colorado as a corporate entity as defendants in place of the Regents individually and in their official capacities. In doing so, CU waived 11^th Amendment immunity, the only immunity which would have applied.
• Even if quasi-judicial immunity is applied, it only goes to the $1.00 damage award and not to the reinstatement sought by plaintiff.
• Even if quasi-judicial immunity applied to entities, it would not apply in this case as the quasi-judicial entity would need to be truly independent and immune from political pressures in order to qualify, which the Regents were not (as per testimony).

 

Brief in Opposition to Motion for Reinstatement:

• The jury’s verdict precludes equitable relief since a) Churchill did not ask the Court to set aside the jury’s verdict of only $1.00 in damages; and b) That even though the pleadings and other court documents did seek every measure of damages, the jury’s award of only $1.00 in damages indicates that the jury found that there was no damage from the violation of his constitutional rights.
• If equitable relief is not precluded, then reinstatement is not the appropriate remedy because a) the litigation has irreparably damaged the relationship between the parties (citing in court and out of court statements by Churchill and Attorney Lane), and; b) reinstating Churchill will harm others in that Churchill will be in position to retaliate against faculty members who did not support him and will continue to make “bogus claims” that damage Native American studies.
• If equitable relief is granted it should only be reasonable front pay because a) Churchill made little effort to mitigate his damage by getting another position; b) the average work life of public employees is 58 years, and Churchill is already 61; c) Churchill is already drawing PERA benefits of $68,409 annually.

 

Both responses are available in the Churchill section of the DU Corporate Governance site.

Over the last several weeks, The Race to the Bottom has covered corporate compensation through its Director Compensation Project. In an effort to compile the mass of information, we are providing a series of charts to compare how these corporations are compensating their executives and directors. In the following table, we have paired average director compensation, executive total compensation, and if the corporation has separation between its CEO and Chairman of the Board. The companies are Fortune 100’s top 20, Wells Fargo, Goldman Sachs, and Chesapeake Energy Company, a company with extraordinarily high compensation. 

 

Company	Average Director Compensation ($)+	Chief Executive Officer Total Compensation ($)	Separation of CEO and Chairman of the Board
Exxon Mobil	398,400	22,414,602	N
Wal-Mart Stores	225,628	30,156,490	Y
Chevron	246,684	19,271,249	N
Conoco Philips	409,831	29,391,987	N
General Electric	280,798	14,096,603	N
General Motors*	N/A	N/A	N/A
Ford Motor Company	155,713	13,565,378	N
AT&T	275,604	11,565,255	N
Hewlett-Packard	285,899	42,514,524	N
Valero Energy	262,833	10,471,795	N
Bank of America Corp.	153,018	9,959,076	N**
Citigroup	206,472	10,815,263	Y
Berkshire Hathaway	4,033	175,000	N
International Business Machines	263,014	28,524,392	N
McKesson	240,456	39,942,625	N
J.P. Morgan Chase & Co.	255,691	1,000,000	N
Verizon Communications	139,901	18,573,638	N
Cardinal Health	191,258	11,060,176	N
CVS Caremark	445,407	24,102,648	N
Procter & Gamble	181,648	23,532,410	N
Goldman Sachs Group	313,923	1,113,771	N
Wells Fargo Company	252,860	13,782,433	Y
Chesapeake Energy Company	669,516	100,069,201	N

 

 

 

⁺To give a more accurate depiction of average director compensation, we limited the directors included in the formula. We excluded directors who did not serve on the board for all of fiscal year 2008 (because of retirement or mid-year appointment) and executives who served on the board. Additionally, Citigroup’s average does not include director Hernández Ramirez

because his compensation was only for “other compensation” including security and perquisites.

* General Motors has not filed its 2009 proxy statement.

** On April 29, 2009, Bank of America’s shareholders stripped its CEO of his chairmanship; however, he will continue to serve as the company’s Chief Executive Officer.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009’s Fortune 500 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

 

One can see some of the effects of these rules when looking at the director compensation table from the Chesapeake Energy Corporation (CHK-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Richard K. Davidson	150,500	415,552	-	173,621	739,673
V. Burns Hargis	57,750	383,700	-	38,107	479,557
Frank Keating	147,500	466,040	-	149,318	762,858
Breene M. Kerr	135,000	466,040	-	183,647	784,687
Charles T. Maxwell	141,000	466,040	-	13,486	620,526
Merrill A. Miller, Jr.	143,500	287,235	-	111,289	542,024
Don Nickles	144,000	466,040	-	143,339	753,379
Frederick B. Whittemore	150,500	466,040	-	56,881	673,421

Director Compensation. The Chesapeake board met four times in person and thirteen times by teleconference. Directors averaged of 80% of all board and committee meetings. Other than director Kerr who earned $57,750 in cash, fees paid in cash ranged from $135,000 to a high of $150,500. Total compensation for directors averaged $669,516, while stock awards were over 63% of that total.

Director Tenure. Half of the board has served only since 2005. Director Whittemore has the longest tenure on the board, serving since 1993. None of Chesapeake’s board members are up for reelection in 2009; terms of directors Keating, Miller, and Whittemore will expire in 2010. Several directors serve on other boards. Mr. Maxwell serves on the boards of American DG Energy Inc. and Daleco Resources. Director Miller is also on the boards of the Offshore Energy Center, Petroleum Equipment Suppliers Association, Spindletop International, and is a member of the National Petroleum Council. Mr. Keating is a former Governor of Oklahoma, who served two terms beginning in 1994.

CEO Compensation. Mr. Aubrey K. McClendon serves as Chairman of the Board and CEO of Chesapeake Energy. Mr. McClendon earned an impressive $100,069,201 in total compensation for 2008, substantially up from his 2007 compensation of $18,764,484. His fees comprise of a $975,000 salary, bonus amounting to $79,951,000, stock awards of $20,342,384, and other compensation of $1,800,817. Chesapeake paid $648,096 for Mr. McClendon’s personal use of the company aircraft and $12.1 million for a collection of historical maps of the American Southwest. Chesapeake’s second highest paid executive was Mr. Jacobson, Executive Vice President of Acquisitions and Divestitures, who earned $12,089,727, which includes $168,417 for personal use of the company aircraft. Additionally, CFO Marcus Rowland’s compensation included $809,744 for personal use of the company aircraft

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2009’s Fortune 100 and using information found in their 2009 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.

 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

 One can see some of the effects of these rules when looking at the director compensation table from Wells Fargo & Company (WFC-NYSE) 2009 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

 

Name*	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
John D. Baker II**	-	-	-	-	-
John S. Chen	111,000	70,009	45,422	-	226,431
Lloyd H. Dean	135,000	70,009	45,422	-	250,431
Susan E. Engel	133,000	70,009	45,422	-	248,431
Enrique Hernandez, Jr.	154,250	70,009	45,422	-	269,681
Donald M. James**	-	-	-	-	-
Robert L. Joss	158,000	70,009	45,422	-	273,431
Richard D. McCormick	130,750	70,009	45,422	-	246,181
Mackey J. McDonald**	-	-	-	-	-
Cynthia H. Milligan	137,000	70,009	45,422	-	252,431
Nicholas G. Moore	139,000	70,009	45,422	-	245,431
Philip G. Quigley	167,000	70,009	45,422	-	282,431
Donald B. Rice	134,000	70,009	45,422	-	249,431
Judith M. Runstad	123,000	70,009	45,422	-	238,431
Stephen W. Sanger	149,000	70,009	45,422	-	264,431
Robert K. Steel**	-	-	-	-	-
Susan G. Swenson	137,000	70,009	45,422	-	252,431
Michael W. Wright	125,000	70,009	45,422	-	240,431

* Management-directors do not receive separate compensation for their board service.

**Directors who joined the Board effective January 1, 2009, following the completion of the Wachovia merger.

Director Compensation. Wells Fargo & Company’s (“WFC”) board met fifteen times in 2008. There were seven regular and eight special meetings. All directors attended at least 75% of the board meetings and the meetings of the committees on which he or she served. All non-employee directors received between $111,000 and $167,000 in direct cash compensation. Non-management directors averaged $252,860 in total compensation for 2008. Directors Baker, James, McDonald, and Steel are former directors of Wachovia, which various members of the WFC board recommended to serve as directors for WFC in connection with the Wachovia merger. Their service on the WFC Board began January 1, 2009, and thus they did not receive compensation from WFC for the 2008 year.

In 2008, stating an initiative to enhance corporate governance practices, WFC created the new position of Lead Director. Independent, non-management directors elected Mr. Quigley to serve as the board’s first Lead Director, for which he will receive an annual cash fee of $30,000. Lead director duties include working with the Chairman and CEO to approve board agendas, preside at executive sessions or special meetings of non-management and independent directors, and to facilitate greater communication between directors and senior management.

 Director Tenure. Discounting the four directors recently added to the board, directors of Wells Fargo & Company have served on the Board for an average of over ten years. Mr. Kovacevich has served on the Board since 1986. Seven other directors have served for at least ten years. WFC CEO, Mr. Stumpf, and Mr. Chen are the newest directors, each having joined the board in 2006. At least fourteen directors hold directorships in public companies other than WFC. Mr. Hernandez sits on the board of Chevron Corp., McDonalds Corp., and Nordstroms, Inc. Mr. Kovacevich and Mr. Sanger sit on the board at Target Corporation. Mr. Baker and Mr. Rice hold directorships at Vulcan Materials Company. Mr. White is set to retire from the Board at this year’s annual meeting.

 CEO Compensation. Mr. John G. Stumpf, who serves as CEO and President, earned $13,782,433 in total compensation for 2008. Mr. Stumpf received a base salary of $878,920. In 2008, Mr. Stumpf did not receive any cash incentive compensation awards (bonuses), nor did he receive any stock awards. By comparison, Mr. Stumpf received bonuses of $4,200,000 in 2007 and $5,500,000 in 2006, as well as receiving at least $21,000 in stock awards for each of those years. In 2008, Mr. Stumpf’s deferred compensation-pension value decreased by $272,152. Despite these decreases, Mr. Stumpf earned $12,933,498 in “Options Awards,” an amount greater than four times his “Options Awards” compensation in either 2007 or 2006.