ADR and Governance News from Jim Reiman
Let me begin this issue of the Newsletter with a couple of announcements:
- I will not be publishing a Newsletter during the summer, hence the next issue of the Newsletter will be in September.
- I’m pleased to relate that the audio version of my book, Negotiation Simplified, is now available for download or streaming on Amazon.com, Audible and iTunes. Narrator Dean T. Moody does a terrific job narrating the text, striking that difficult to find balance between a too dramatic, energetic reading and one that is a flat monotone and just plain boring. It’s great for commuting or road trips, or those who prefer audio books to reading.
- I was honored in May to deliver one of two keynote addresses to the Warsaw Negotiation Conference and to serve as a judge in the Warsaw Negotiation Round International Tournament, a truly international competition comprising 12 teams from 9 countries selected from a large pool of international applicants. My address’ title: “Since A Negotiation Is A Dialogue, How Do You Keep The Dialogue Going? And, How Do You Conduct The Dialogue?” Congratulations to all participants, and thanks to my fellow judges.
With this issue of the Newsletter, as in the past, I’ll focus on two areas: corporate governance and alternative dispute resolution (“ADR”). Additionally, I’ll also include an article or two concerning matters of general interest in my “Interesting Cases/Articles of the Month” section. I provide a brief summary of each article and a link for you to access and read the article in its entirety if you wish. My hope is that you’ll find one or more of the articles I’ve selected of interest and this Newsletter worthy of your time and in-box.
This month, for my dispute resolution and lawyer readers, I present a 2021 case out of the District Court of Appeals of Florida concerning when courts in that state will enforce an arbitration agreement in the parties’ contract. I thought the case worthy in light of the mid-May US Supreme Court ruling that “The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.”
For my corporate governance readers, I present two recent studies concerning CEO pay and incentive compensation plans. I thought these studies especially relevant given May’s news that JP Morgan’s shareholders rejected Jamie Dimon’s bonus and Intel’s shareholders rejected that company’s compensation plan for its top executives.
Finally, for my articles of general interest, I present a piece appearing in Popular Mechanics describing for non-physicists an article appearing in Communications Physics which suggests that time can actually flow backwards, not just forward. Like quantum mechanics, it’s a bit mind-bending and stands our perceived understanding of the world on its ear. For those who don’t wish to have their minds bent, I relate a study conducted in 2014 that I just learned of exploring a subject near and dear to my heart: the affect of egocentrism on one’s negotiations.
This Month’s Articles
- Early Filers: Performance Bounced Back. CEO Pay Up. Researchers/analysts at Compensation Advisory Partners analyzed the CEO pay reports of 50 companies who filed early. Results: median CEO total pay increased 19%.
- Long-term Incentive Plans – Payouts and Performance Alignment. In another study published by Compensation Advisory partners, researchers studied the long term incentive compensation plans of 120 companies from ten industries with median revenue of $36B. Conclusion: executives had a 95% chance of achieving at least minimum threshold performance targets and a 70% chance of achieving at Target performance.
Alternative Dispute Resolution
- Leder v. Imburgia Construction Services, Inc., 325 So.3d 256 (2021) In this case the Florida Appellate Court refused to enforce a contract’s arbitration requirement finding that both parties waived their right to arbitration.
Articles of General Interest
- Time Can Actually Flow Backward, PhysicistsSay; Yes, you really can turn back time—with a catch. In this “written for the masses” article describing a proper physics paper, the mind-bending notion that time can (and if I understand the article correcly, likely does) flow backwards is explored.
- Egocentrism Drives Misunderstanding In Conflict And Negotiation. A 2014 study exploring the impact of eroticism on negotiation results is presented. While the study’s conclusion that eroticism negatively affects negotiation results is unsurprising, the study is worthy as well for its conclusion that “negotiators who take another’s perspective and try to place themselves in other’s shoes fare better in reaching mutually beneficial solutions.”
I hope you find one or more these articles of interest and this Newsletter worthy of your in-box.
Articles / Corporate Governance
“Early Filers: Performance Bounced Back. CEO Pay Up,” Lauren Peek and Joanna Czyzewski, Compensation Advisory Partners (CAP) Thinking, April 2, 2022
Compensation Advisory Partners recently reported that, among a group of 50 companies with fiscal years ending between August and October 2021, median CEO total pay increased 19% in the past year. This result was driven by “a substantial year over year increase in bonus payouts (+73% at median) and is reflective of strong financial performance.”
This increase in bonus payouts is likely related to a strong overall performance in 2021. “Median revenue growth (+17.1%), pre-tax income (+62.5%), and EPS growth (+71.0%) were all up significantly from 2020 levels, with EPS seeing the most improvement. Median TSR was also up +35.8% from 2020 levels.”
“Companies generally did not increase base salaries for the CEO in 2021,” and instead opted to increase long-term-incentives, which “were generally granted to recognize prior year company and/or individual performance.”
Despite the significant raise in CEO compensation, the companies’ say on pay findings received a median support of around 95%, though distribution varied. 35% of companies included in the report received less than 90% support on their say on pay resolutions.
Looking ahead, it appears likely that companies with fiscal years ending later than those included in the report are likely to match the results found here for 2021. Expect CEO compensation to continue this trend as overall performance continues to rise.
“Long-term Incentive Plans – Payouts and Performance Alignment. Melissa Burek, Michael Bonner,” Compensation Advisory Partners (CAP) Thinking, April 12, 2022
A Compensation Advisory Partners (“CAP”) report shows that CEOs that are compensated at least in part with long-term incentive plans are almost universally likely to reach at least threshold performance, and very likely to reach at least target performance. “CAP analyzed payouts under long-term incentive plan performance cycles that ended in 2015 through 2020. Th[e] analysis includes 120 companies from ten industries with median revenue of $36B. [CAP] selected these companies to provide a broad representation of market practice across large US public companies.”
The plans generally include three levels of benchmarks: threshold, target, and maximum. CAP’s Key Takeaways’:
“Based on [CAP’s] analysis of long-term incentive payouts from 2015-2020, the degree of difficulty, or “stretch”, embedded in long-term performance goals translates to:
- A 95% chance of achieving at least Threshold performance
- A 70% chance of achieving at least Target performance
- A 20% chance of achieving Maximum performance”
The CAP study “found that select industries have payout distributions that fall outside the norms of the broader group. Companies in the health care, pharmaceutical and insurance industries paid at target or above 80-85 percent of the time versus 70 percent for the full sample. Conversely, companies in the consumer goods and retail industries, where Revenue growth has lagged that of other industries in recent years, achieved target performance slightly more than 50 percent of the time. Several factors may contribute to such differences in payout distributions, including metric selection, goal-setting, and economic influences.”
“Average payouts for each industry are distributed as indicated in the following chart:”
CAP concludes that “the impact of COVID-19 on certain industries and the resulting disruption to pay programs may cause payout patterns to be outside the normal range for the 2019-2021 and 2020-2022 performance cycles. For future performance periods, we expect payout patterns to return to the norms identified in our research.” Additionally, CAP concludes: ‘Over time, however, we may see these patterns change as companies continue to consider how longer term non-financial priorities, such as ESG objectives, digital transformation, and market share, best fit in their compensation program.”
Articles / Alternative Dispute Resolution
Leder v. Imburgia Construction Services, Inc., District Court of Appeal of Florida, Third District, 325 So.3d 256 (2021)
In Leder v. Imburgia Construction Services, Inc., a homeowner entered into contract with a construction company for renovations to their home. Their contract stipulated that, prior to arbitration, any disputes related to the contract must be submitted as a claim to the Initial Decision Maker, which was agreed to be the Miami Shores Village Building Department Official. The parties were required to initiate claims within twenty-one days of the occurrence of the dispute. Importantly, the contract also provided that “the parties’ right to proceed to binding dispute resolution—arbitration—is waived if a certain condition precedent to arbitration is not followed.”
Leder, the plaintiff/homeowner, filed a complaint in Florida State court without pursuing the dispute resolution procedure set forth in the contract, and the contractor moved to dismiss arguing that the matter must be arbitrated. Leder argued that the Contractor had presented a change order which Leder refused to execute, questioning both the necessity and the price. Leder further alleged that “the Contractor then abandoned the job and failed to file a claim with the Initial Decision Maker, thereby waiving any right to proceed under the contract’s dispute resolution procedures.”
The Contractor moved to dismiss Leder’s lawsuit and compel arbitration pursuant to the contract’s dispute resolution provisions. The Contractor “cited to section 682.181(1) of the Florida Statutes, which provides that ‘[a] court of this state having jurisdiction over the controversy and the parties may enforce an agreement to arbitrate.’ Further, the Contractor set forth the factors a court is to consider when ruling on a motion to compel arbitration—(1) whether a valid agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived, and asserted that “there is a valid written agreement with arbitrable issues and the Defendant has not waived its right to arbitrate.’”
The trial court agreed with the contractor and granted the motion to dismiss. The Appellate Court disagreed and reversed. First, the Appellate Court held “”[T]he question of whether there has been waiver in the arbitration agreement context should be analyzed in much the same way as in any other contractual context. The essential question is whether, under the totality of the circumstances, the defaulting party has acted inconsistently with the arbitration right.” The Court further opined: “Waiver of an arbitration clause “may be predicated on both pre- and post-suit actions in tandem.” [citation omitted] and “[t]he ‘prosecution or defense of a lawsuit on issues subject to arbitration may constitute a waiver.’” Finally, the Court held: “a party may waive his or her right to arbitration by filing a lawsuit without seeking arbitration; by filing an answer to a pleading seeking relief without raising the right to arbitration; and by moving for summary judgment.” On that analysis, the Court concluded:
“In the instant case, the Contractor waived its right to arbitrate based on its pre-litigation action and the language in the parties’ contract. As stated above, prior to binding arbitration, there are other steps that the parties to the contract must take to preserve its contractual right to arbitrate—submitting a claim to the Initial Decision Maker, and thereafter, pursuing mediation. Neither party utilized this procedure to resolve their dispute relating to the fifth change order, including taking the first step—initiating a claim with the Initial Decision Maker. As such, we conclude that the parties waived their right to arbitrate under the terms of their contract.”
Take away lesson: when seeking to enforce an arbitration agreement when one party ignores the agreement and goes to court, take care to review the applicable state’s waiver laws before filing an a response to the suit. While arbitration may have been favored by courts in the past, given the May 23, 2022 unanimous decision by the Supreme Court in Morgan v. Sundance, Inc. (p.6) that “The federal policy is about treating arbitration contracts like all others, not about fostering arbitration” and multiple lower and State court rulings refusing to enforce arbitration agreements, arbitration may have lost is preferential status.
Articles / General Interest
Time Can Actually Flow Backward, PhysicistsSay; Yes, you really can turn back time—with a catch. Stav Dimitropoulos, Popular Mechanics, April 22, 2022
Time clearly moves forward—this is how we experience and understand time as it relates to our daily lives. But is it possible that time moves backwards as well? It has long been suggested that time is more complex than it appears—Albert Einstein’s 1905 theory of special relativity posited that time moves relative to the observer. A new paper suggests that time does indeed move both forwards and backwards.
The second law of thermodynamics informs the conventional understanding that time only moves forward. The law states that entropy in a closed system either remains constant or decreases. “If our universe is a closed loop, curled up like a ball, its entropy can never decrease, meaning the universe will never return to an earlier point.” However, it may be possible that entropy changes are too small to perceive.
“Take the case of gas in a vessel,” says Giulia Rubino, a postdoctoral research fellow that the University of Bristol, and lead author of the new paper that appears in Communications Physics. “Let’s suppose that at the beginning, the gas occupies only half of the vessel. Then imagine that we remove the valve that confined it within half of the vessel, so that the gas is now free to expand throughout the vessel.””
“The particles will start to move freely through the whole volume of the vessel. Over time, the gas will occupy the whole vessel. “In principle, there is a non-zero probability that at some point the gas will naturally return to occupy half of the vessel, only this probability gets smaller the larger the number of particles that make up the gas get,” Rubino says. If there were only three gas particles instead of a humongous quantity of gas (comprising billions of particles), it would be possible that these few particles ended up sitting once again in the part of the vessel from where they originally started. “The second law of thermodynamics is a statistical law,” says Rubino. “It is true on average in a macroscopic system. In a microscopic system, we may see the system naturally evolving toward situations of lower entropy.””
Rubino and her colleagues applied this theory to the quantum realm, where individual units can exist in two states at once. The team looked at a state that evolved both backward and forward in time and they found that the system generally ended up moving forward in time, but the system could move backward and forward in time for small entropy changes.
Rubino theorizes that humans, as macroscopic systems, cannot perceive these changes. We perceive time as moving forward. But the world around us could very well be moving in two directions.
For those with a far better understanding of physics than me who wish to take a proper dive into this theory, the paper Popular Mechanics relates and simplifies for those with non-technical backgrounds appeared in Communications Physics, and is titled: Quantum Superposition Of Thermodynamic Evolutions With Opposing Time’s Arrows. Here’s a link to the Communications Physics article
Egocentrism Drives Misunderstanding In Conflict And Negotiation, John R. Chambers and Carsten K.W. de Dreu, Journal of Experimental Social Psychology, Volume 51, March 2014, Pages 15-26
As many of you know, I’m a student of negotiation and have recently published a book on the subject. Thus, I was thrilled to see an article by Donald L Swanson, an attorney in Omaha, Nebraska, describing a study published by the Journal of Experimental Social Psychology examining the consequences of egocentrism in negotiations. I pulled the article, and while it was published in 2014 it remains as relevant today as when published.
The researchers conducted three experiments to explore the impact of egocentrism in negotiations. Their premise: “parties rely on their own interests and priorities when estimating those of the other side, and ignore the other side’s true interests and priorities.” Their three experiments comprised multi-issue negotiations, and confirmed their premise:
“Participants judged their own important issues to be more important to their negotiation opponent, regardless of their opponent’s actual interests (Experiment 1). Furthermore, accuracy increased when attention was experimentally focused on the opponent’s interests rather than their own (Experiment 2), and perceptions of opponent’s interests were more closely related to own interests than to the opponent’s actual interests (Experiment 3).
Per the researchers:
“Our findings suggest that having vested interests creates a psychological barrier preventing people from understanding the true interests of those on the other side of the conflict, and in particular, they are inclined to see the other party’s interests as being opposed to their own regarding anything they value and are motivated to defend. This finding fits nicely with a large literature showing that individuals have a stronger tendency to develop and maintain positive in-group regard than to develop and maintain outgroup disregard. [citations omitted] People are thus “egocentric” thinkers, having considerable difficulty casting aside their own unique perspective when attempting to take the perspective of another.” [citations omitted] “The current findings point to the possibility that such positive–negative asymmetry emerges in particular on issues that are more rather than less important to the individual and his or her in-group.”
* * *
Another important implication of our findings is that parties will often fail to identify opportunities for trade offs (i.e., compromising on one issue for the sake of obtaining greater rewards on other more important issues) even when such opportunities clearly exist. Because parties assume that their own important issues are also important to the other party, and see greater conflict about these issues, they may be reluctant to make concessions on these issues because they assume that the other party will be unwilling to make any concessions of their own and will fight equally hard to protect their interests.
From this author’s perspective, here’s the most important take-away:
[W]e also uncovered that a simple focusing manipulation undermined biased conflict perceptions—when negotiators were instructed to focus on their partner (rather than themselves) they had more accurate estimates of the amount of conflict between their own and their partner’s interests. The debiasing effect of this other-focusing manipulation resonates with extant work on perspective-taking and role reversal, showing that negotiators who take another’s perspective and try to place themselves in other’s shoes fare better in reaching mutually beneficial solutions.