At H&R Block, Richard Breeden has put his governance policies where his mouth is.
Block, for which the former Securities and Exchange Commission chairman now serves as company chairman, announced sweeping changes to corporate policies at the tax preparation company. Breeden, now a hedge fund activist investor, won three board seats last September in a proxy fight.
Block announced that it has adopted a so-called say-on-pay provision to give shareholders an annual, nonbinding vote on the company’s pay and performance compensation policies. This vote will begin with the 2008 annual meeting. It also said it would allow the company’s shareholder rights plan — poison pill — to expire. These provisions typically make it harder for unwanted suitors to buy a company. In addition, the company said it will place in its articles of incorporation a policy to separate the chairman and CEO positions.
Also, the company promised that its board would meet with significant shareholders on an annual basis, an unusual pledge. The first such meeting is expected to be held in October, allowing direct input from larger shareholders on issues such as the company’s strategy and direction, levels of cash returned to investors, cost reduction efforts, and any other matter of concern.
Other new provisions include a 12-year term limit for directors; reduction of the board’s size range from between 9 and 15 members to between 7 and 12; a limit for independent directors to four board seats, including their Block seat; and director equity awards to be withheld and distributed six months after conclusion of board service.
“These changes are intended to give our shareowners a greater voice in decision making at H&R Block without weakening the role of the board in setting overall policies, or management in making operational decisions,” said Breeden. “By giving our shareholders a ‘Say on Pay’ vote each year, the board subjected itself to the discipline of direct shareholder input on compensation policies for directors and management. We hope this will reinforce H&R Block’s historic efforts to link pay and performance for executives.”
Most of the changes are effective immediately through amendments to corporate governance guidelines or by-laws.
Say-on-pay has become a hot topic at annual meetings over the past two years. The policy is popular in Europe but only a handful of companies have adopted this practice so far in the US. And at this year’s annual meeting, most of the non-binding resolutions calling on companies to adopt this policy failed to receive majority support.
Annual advisory votes will allow H&R Block shareholders to indicate general approval or disapproval of policies linking pay and performance, and the overall compensation decisions made by the board, the company explained. “While the annual shareholder vote concerning compensation decisions will be purely advisory, it will nonetheless provide direct feedback from shareholders to the board that is not available today on the Company’s decisions balancing pay and performance,” it further explained.
In announcing the term limits, the company asserted it is important to have “a periodic infusion of fresh thinking” by adding new board members. “Adopting a term limit will avoid any implication of performance issues when a director goes off the board due to the term limits, and will promote an adequate level of board turnover to help keep the board active and alert to marketplace concerns,” it added.
It explained that a smaller board will be both less costly and more effective due to the unwieldy nature of larger boards.
The board also approved changes in the company’s board-compensation structure. Aggregate director compensation is currently about $120,000 a year, of which roughly $75,000, or 63 percent, is paid in cash. The board approved decreasing the annual cash retainer from $50,000 to $40,000, and capping the maximum number of meetings for which meeting fees will be paid.
The board also eliminated differential meeting fees, under which committee chairs received higher meeting fees than other directors. The board approved an increase in the annual retainer of the audit committee chair from $7,500 to $15,000, and established annual retainers of $10,000 for the chairs of the nominating, compensation and finance committees.