WarnerBros. Discovery’s decision to exclude the impact of 2023 strikes from bonus awards comes just as the impact of those work stoppages is showing at the box office – and raises questions about what executives should and shouldn’t be held responsible for, as well as how much of an explanation investors should expect.
With thousands of companies holding AGMs during proxy season, it’s hard to know where to start. Glass Lewis’ Controversy Alert service can help, identifying the most crucial meetings globally and allowing investors to make better informed voting decisions with the latest information in hand.
In this post, we provide a roundup of the AGMs taking place this week that were previously highlighted by Controversy Alerts, and look deeper into the situation at WarnerBros Discovery. To get alerted ahead of time, get in touch and sign up for Glass Lewis’ Controversy Alert service.
Controversy Alerts June 3 — June 7, 2024
June 3 UnitedHealth Group Incorporated; Controversy Alert issued May 22
June 3 Warner Bros. Discovery, Inc.; issued May 17
June 6 Xiaomi Corporation; issued May 20
Deep Dive: WarnerBros. Discovery, Inc.
It’s common for boards to adjust their financial and operational results when determining how much executives should receive for their bonus and other incentive awards. Typically, these adjustments reflect the impact of factors that are out of executive control, such as regulatory fines relating to something that happened years ago, a writedown on the value of an asset acquired by a prior management regime, or currency exchange fluctuations. Additionally, the impact of certain items, even when in management’s control, are removed because they are one-time, unusual events that do not reflect normal operation going forward. On the one hand, insulating executives in this way risks undermining their alignment with investors, whose returns aren’t afforded such protections. On the other hand, companies say that punishing executives by leaving negative impacts in disincentivizes executives from taking risks that may be beneficial to shareholders.
Investors are typically understanding of the necessity for good faith adjustments, so long as it’s clear that executives weren’t responsible for whatever is being excluded (or have already been penalized) and the resulting pay outcomes are aligned with overall performance. However, it’s not entirely clear this is the case at media giant Warner Bros. Discovery, Inc., which decided to remove the impact of the “unexpected and unprecedented 2023 WGA and SAG-AFTRA” strikes when determining executives’ 2023 bonus and long-term incentive payouts.
Anyone who did not expect last year’s round of strikes would be advised to read the trades, or any number of podcasts and newsletters covering Tinseltown. And while their duration was indeed unprecedented, it seems relevant that numerous news sources reported Warner CEO David Zaslav’s personal role in negotiations (or lack thereof). Given that the company and its executives were so closely involved in the process leading up to the contract negotiations, work stoppages and ultimately the contract agreements, investors may question whether the exclusion is appropriate.
It’s worth noting that the effect of the adjustments on the results weren’t wholly positive, leading to increases in revenue and adjusted EBITDA, which influence short-term bonuses, but reductions to free cash flow outcomes, which are used to determine long-term equity awards. However, the FCF reduction didn’t lead to a decrease in award vesting, since the adjusted result was still above the maximum target.
Moreover, it’s difficult for investors to determine exactly what impact these discretionary adjustments had, since the company did not provide a reconciliation of the actual and adjusted figures in its proxy statement. That could prove to be a sticking point – in Glass Lewis’ 2023 Client Policy Survey, a majority of investors stated that the failure to provide a reconciliation where incentive outcomes are materially impacted by the use of non-GAAP results should be a “strong factor” in Say on Pay voting.
One thing is clear: Zaslav did not benefit from the adjustments. He received an at-target bonus, the minimum guaranteed under his contract due to completion of the Warner/Discovery merger in 2022.
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