NEW YORK There has never been a more critical time for shareholders to demand oversight of the boards of directors at advertising holding companies, which are navigating their industry’s transformation while trying to stay afloat during the worst economic downturn in modern times. Executive compensation may be the flash point amid soaring industry layoffs, but what are the other issues facing shareholders during this season of annual meetings? And who are the non-executive directors who represent the interests of those investors?
Outside of executive boardrooms, little is known about the current and retired corporate execs, academics, entrepreneurs and establishment figures who sit atop the industry’s management food chain.
While the advent of Sarbanes-Oxley in 2002 diminished the cronyism and token directors system that long characterized many publicly held companies, they still need to prove the credibility and independent decision making of board members who are supposed to bring an outside perspective to management.
With the exception of Robert Callander, the head of Omnicom’s audit committee, who resigned in 2002 after a disagreement, the board members of the three largest holding companies have, as a group or individually, never made waves or spoken out publicly, even during the Securities and Exchange Commission’s investigation of Interpublic Group. Omnicom Group, WPP Group and IPG have an average tenure per director of 11.6 years, nine years and seven years, respectively. Omnicom pays the highest compensation, an average of $191,633, and has the highest average age of director, 66. WPP pays the least of the top three holding companies, at $139,546, though its non-executive chairman, Philip Lader, took home a hefty $501,560 in cash last year for his service. (Unlike Omnicom and IPG, WPP does not include stock as part of its board members’ compensation.) IPG gave one board member, J. Philip Samper, a 15-year pension worth over $1 million when he retired last year.
For this story, Adweek, in conjunction with leading proxy and governance firm RiskMetrics Group, looks at issues facing shareholders of the big three. Compensation is a big topic. As a group, IPG’s top five executives, including CEO Michael Roth, were awarded pay equivalent to 7.8 percent of the holding company’s net income last year, according to RMG, which analyzes boards and corporate-governance practices of more than 8,000 public companies worldwide. At Omnicom, the top five, including CEO John Wren, received 2.3 percent of net income. Severance payouts are also an issue, whether it be those accorded to top Omnicom execs or the “at-will” notice terms in WPP CEO Martin Sorrell’s current contract.
The boilerplate of these annual meetings — the election and reelection of non-executive directors — is also under scrutiny, with questions about some board members’ actual independence from corporate management.
Omnicom’s proxy lists total 2008 compensation for CEO John Wren of $2.95 million. It notes, however, that Wren was also awarded 1 million standard time-vesting stock options on Dec. 29, 2008, with an exercise price of $25.48 per share-for a grant date fair value of $3.78 million, according to Omnicom. Including that $3.78 million puts Wren’s total 2008 compensation at $6.73 million, a decrease of 20 percent from $8.4 million in 2007. (The proxy lists the $2.95 million figure because it puts the options’ 2008 value at only $7,143-their pro-rated worth for the two days Wren held them last year, compared to their total three-year vesting time.)
At $6.73 million, Wren’s pay as a percentage of Omnicom’s net income in 2008 was 0.7 percent. The compensation of Omnicom’s top five executives-Wren, CFO Randy Weisenburger, Diversified Agency Services CEO Thomas Harrison, DDB Worldwide CEO Chuck Brymer and BBDO Worldwide CEO Andrew Robertson-was equal to 2.3 percent of the company’s net income last year.
In its proxy analysis, published May 6, RMG said it was concerned about the company’s Senior Executive Restrictive Covenant and Retention Plan (SERCRP), which RMG says creates “problematic compensation practices by providing excessive severance packages” for Wren and three other top execs. RMG cited the “magnitude of payments” to be paid out over 15 years, even if the executives were terminated for cause: Wren is entitled to nearly $18.7 million; Weisenburger, $17.6 million; Robertson, $6.8 million; and Brymer, $4.3 million.
An Omnicom representative said the company amended the plan within the last two weeks to drop the “termination with cause” terms.
According to IPG’s proxy, CEO Michael Roth saw his total 2008 compensation, including options, grow to $10.8 million, a 21 percent increase. That represented 3.43 percent of IPG’s net income last year. The total compensation of IPG’s top five execs — Roth, CFO Frank Mergenthaler, evp of strategy and corporate relations Philippe Krakowsky, evp and chief human resources officer Timothy Sompolski and McCann Worldgroup CEO John Dooner — amounted to 7.8 percent of the company’s net income in 2008.
“We believe our commitment to transparency and best practices in all areas of corporate governance, including compensation, is validated by consistently outstanding ratings from respected third-party experts such as RiskMetrics,” according to an IPG rep.
Effective April 1, 2008, IPG’s compensation committee increased Roth’s base salary to $1.4 million and awarded him a $2.5 million performance-based cash bonus for 2008. Roth’s target performance bonus was based three-quarters on IPG financial performance and one-quarter on high-priority objectives, according to RMG. IPG did not disclose its performance goals but did say the company achieved above-target performance and that Roth achieved 149 percent of his target in relation to his high-priority goals. (At last year’s IPG annual meeting, RMG recommended shareholders vote against IPG compensation board members Reginald K. Brack, H. John Greeniaus, William T. Kerr and Jill M. Considine for “failing to establish an adequate link between company performance and CEO pay.”)
Shareholders, however, had little to celebrate in 2008: IPG annualized shareholder returns were off 51 percent last year, compared to a 37 percent decline for the Standard & Poor’s 500 and a drop of 27 percent among a group of “peer companies,” as defined by the Global Industry Classified Standard, said RMG.
IPG also disclosed that outside director J. Philip Samper, who received $139,796 in 2008 ($79,796 in stock), retired as a board member on May 22, 2008. He and his family are now entitled to a 15-year annual cash payment pension of $80,000, or a total of $1.2 million, for his service. RMG says that since the advent of Sarbanes-Oxley, such lucrative pension payouts to board members have ended. Samper was the only sitting IPG board member eligible for such a payout, as the pension closed to new participants at the end of 1995.
IPG does not consider Frank J. Borelli an independent director, under NYSE rules, because his son is a principal of Deloitte & Touche, which IPG has used for internal audits.
At the annual meeting last week, after an extremely close vote, a resolution was rejected that had asked IPG’s board to amend the bylaws to give shareholders of 10 percent of IPG’s outstanding common stock the power to call a special meeting, which would include the topic of election of directors. IPG management had opposed the resolution; RMG had supported it. Last year, the board amended the bylaws so that shareholders representing 25 percent of the outstanding shares could call a special meeting, lowering the previous requirement of 50 percent.
In the walk-up to its June 2 annual meeting, much of the focus has been on the third round of WPP’s Leadership Equity Acquisition Plan (LEAP), which is set for a shareholder vote. CEO Martin Sorrell, who made about $5 million in total compensation last year, stands to earn around $96 million over five years, on an initial investment of $20 million, if WPP outperforms a group of nine companies in that period. Twenty other WPP senior execs participate in the LEAP plan, with this third phase more generous than the previous two.
RMG allows that “the renewed LEAP is one of the more contentious schemes in operation by FTSE 100 companies as invested shares are matched up to a generous five-for-one basis,” but says the plan is “unusual in two positive respects: First, the large commitment of personal resources, particularly by CEO Sir Martin Sorrell, and secondly, the four- to five-year investment periods over which performance is measured, linking awards to the long-term financial performance of the company and shareholder return. Therefore, although we continue to have reservations as to the quantum of the award, we are not making any adverse recommendations on this issue.”
The problems RMG has is with Sorrell’s notice period, which is on an “at-will” basis and raises uncertainty over any contractual termination payments. WPP responded to RMG that there is currently no prescribed termination payment payable under Sorrell’s service agreement. RMG says best practices call for contractual payments, upon termination, to be limited to one year’s basic salary and benefits. Bonuses or the acceleration of outstanding equity awards are not expected to be a part of a director’s termination payment for the period for which notice has been given. If they are paid, they are expected to be pro-rated for time and performance and also take into account the circumstances surrounding the termination. RMG encouraged WPP to adhere to market best practices and revise Sorrell’s contract accordingly over the next 12 months.
RMG also voices concern about the independence of some WPP non-executive directors. Ex-Merrill Lynch CEO David Komansky left WPP’s board earlier this year without giving any formal reason, and while WPP said it is looking for new board members, it has yet to put anyone forward for consideration. (The proxy analysts urged WPP to appoint at least one new non-executive director to the board prior to next year’s annual meeting. A WPP representatives tells Adweek, “We will when we find the right person.”) RMG says WPP’s compensation committee, which currently is made up of Philip Lader, Esther Dyson and Jeffrey Rosen, does not comply with the recommendation that it comprise at least three independent non-executive directors. One criterion in assessing independence is whether an outside director has served concurrently for nine years with any of WPP’s executive directors, as is the case with Dyson and Sorrell. “We regard these three as independent,” the WPP rep says.
RMG “strongly encourages” WPP to review Dyson’s membership on the board and has similar concerns about Bud Morten, a WPP board member of 18 years, who the company insists remains an independent board member, a designation RMG does not accept. (WPP has said it would appoint a new senior independent director over the next 12 months.) RMG considers another board member of 21 years, John Quelch, not to be independent because he also receives payment for consulting services rendered to WPP. “We have different points of view [than RMG] on this,” the WPP rep says of both Morten and Quelch.
Attendance at board meetings is also an issue for RMG: A number of members dropped below the 75 percent attendance threshold of responsible governance last year: Timothy Shriver was at 73 percent; Lubna Olayan at 60 percent. Koichiro Naganuma attended only one meeting for the third year in a row, for 7 percent attendance. Dyson missed three compensation committee meetings, putting her at 70 percent. “We strongly encourage the board and its chairman to address the absenteeism in its boardroom and we will review this situation prior to determining our vote recommendations at next year’s [annual general meeting],” RMG said. The WPP rep responds: “If members are unable to participate in person, they do by phone. They also contribute substantially between board meetings.”