Co-authored by Michelle Griswold.

On November 17, Institutional Shareholder Services (ISS) published updates to its proxy voting policies, which will be effective for meetings held on or after February 1, 2012.

ISS’ policy updates include the following:

Board and Proxy Access

  • ISS will determine its recommendations for shareholder votes on election of compensation committee members and management say-on-pay proposals where the company’s previous say-on-pay proposal received less than a 70% vote on a case-by-case basis. It will take into account the company’s response to investor input (including disclosure regarding efforts to engage institutional investors regarding compensation issues, actions taken to address issues and other compensation-related actions), whether the issues raised are recurring, the company’s ownership structure, and whether the level of support for the proposal was below 50%.
  • ISS will recommend that shareholders vote against or withhold votes for incumbent directors if a board implements say-on-pay votes on a less frequent basis than the frequency that received the majority vote at the most recent shareholder meeting. ISS will determine its voting recommendations on a case-by-case basis if the board implements say-on-pay votes on a less frequent basis than the frequency receiving a plurality, but not a majority, of votes at the most recent shareholder meeting. ISS will take into account the board’s rationale for selecting a different frequency, the company’s ownership structure and vote results, ISS’ analysis of compensation concerns and related issues, and the previous year’s support of the company’s say-on-pay proposal. ISS does not consider implementation of say-on-pay votes on a more frequent basis than the frequency that received a majority or plurality of votes to be problematic.
  • ISS will continue to analyze shareholder proposals seeking proxy access on a case-by-case basis, and will take into account factors specific to both the company and the proposal, including the proposed ownership thresholds, the maximum proportion of directors shareholders may nominate each year, and the method of determining which nominations should appear in the ballot in the event of nominations from multiple shareholders.
  • ISS updated its policy on recommending that shareholders vote against or withhold votes from directors due to governance or fiduciary responsibility failures, failures to replace management when appropriate and other egregious actions to explicitly include material failures relating to risk oversight.

Executive Compensation

  • ISS refined its methodology for evaluating pay-for-performance alignment, which will identify companies that have demonstrated strong or satisfactory alignment between pay and performance over an extended period of time. For companies in the Russell 3000 index, ISS will consider “peer group alignment,” the degree of alignment between a company’s total shareholder return (TSR) rank and its CEO’s total pay rank within its peer group, measured over one and three-year periods, and the CEO’s total pay relative to the median for the company’s peer group, and “absolute alignment” between the trend in CEO pay and company TSR over the last five years. If the ISS’ analysis demonstrates pay-for-performance alignment that is unsatisfactory, or for non-Russell 3000 index companies is misaligned, ISS will analyze various other factors to determine how pay elements may encourage or undermine value-creation and alignment with shareholder interests.
  • ISS will generally recommend a vote in favor of proposals to approve or amend executive incentive bonus plan proposals if they include only administrative features, place a cap on annual grants to individual participants to comply with Section 162(m), add appropriate performance goals to comply with Section 162(m), or cover cash or cash and stock bonus plans submitted to shareholders for the purpose of exempting compensation from taxes under Section 162(m). ISS will recommend a vote against proposals if the compensation committee is not made up of independent outsiders or the plan is problematic. ISS will analyze proposals on a case-by-case basis if the plan amendment could transfer additional shareholder value to employees (i.e. adding shares, extending the term, etc.) or the company is presenting the plan to shareholders for the first time after its initial public offering, in which case ISS will perform a full equity plan analysis.

Environmental and Social

  • ISS amended its policy on disclosure of a company’s political spending to generally recommend votes in favor of greater disclosure, and will analyze proposals requesting information on a company’s lobbying activities on a case-by-case basis.
  • ISS updated and created specific policies to address environmental and other matters, including recommending votes in favor of shareholder proposals relating to greater disclosure of hydraulic fracturing operations under certain circumstances and case-by-case analysis of proposals to report on or adopt recycling programs or water-related concerns and requests for workplace safety reports.

Other Corporate Matters

  • ISS also addressed other corporate matters, including implementing a case-by-case analysis on exclusive venue proposals and recommending votes against proposals to create new classes of common stock unless the company discloses a compelling rationale for a dual-class structure and certain other conditions are met.

To view the complete text of ISS’ U.S. Corporate Governance Policy 2012 Updates, click here.