Co-authored by Jonathan D. Weiner.
On October 16, Institutional Shareholder Services (ISS) published for comment proposed changes to its proxy voting policies for 2013.
ISS’ proposed policy updates for 2013 applicable to US issuers relate to board responsiveness to majority-supported shareholder proposals, management “say on pay” proposals, say on “golden parachute” proposals, and the use of environmental and social metrics in determining executive compensation:
Board Responses to Majority-Supported Shareholder Proposals. ISS proposed a policy to recommend that shareholders vote against the election of, or withhold votes from, an entire board of directors if the board failed to act on a shareholder proposal that received the support of a majority of votes cast in the previous year. Under its current policy, ISS recommends that shareholders vote against (or withhold votes from) directors if the board failed to act on a shareholder proposal that received support of (i) a majority of shares outstanding in the previous year or (ii) a majority of the votes cast in the last year and one of the two previous years. According to ISS, the proposed change is intended to reflect institutional investors’ growing expectation that issuers will implement shareholder proposals that receive support from a majority of votes cast, as well as increased issuer responsiveness to shareholder proposals, based on the results of ISS’ 2012-2013 Policy Survey (the ISS Policy Survey).
Management Say on Pay Proposals. With respect to management “say on pay” advisory votes, ISS proposed to modify its methodology for selecting peer groups as part of its quantitative analysis, incorporate comparisons of “realizable” compensation to grant date pay as part of its qualitative analysis of pay for performance alignment, and add pledging of shares as a factor that may lead to a negative recommendation under ISS’ existing problematic pay practices evaluation.
- Peer Group Selection. Currently, ISS’ pay for performance evaluation begins with a quantitative comparison of a company’s performance to that of a peer group selected by ISS based on the company’s Global Industry Classification Standard (GICS) classification. According to ISS, its current methodology may omit competitors of the target company and/or include firms that are not properly considered “peers” for a number of reasons, including the fact that many companies (or their competitors) may engage in multiple lines of business that are not reflected in the GICS classification. Under the proposed policy revisions, ISS would give increased deference to company-selected peers as an input in ISS’ peer group methodology, while maintaining an approach that includes company size and market capitalization constraints.
- Realizable Pay. ISS is also considering adding realizable pay to its qualitative analysis of say on pay proposals for large companies. The revised policy would take into account not only the grant date value of compensation paid to executives, but also the change in value of performance-based awards based on the actual performance of a company’s stock.
- Pledging Company Stock. ISS proposed to add pledging of shares as a factor that may lead to a negative recommendation under ISS’ existing pay practices evaluation. ISS noted that pledging company stock by a named executive officer could be detrimental to shareholders if the executive is required to sell a large amount of stock, and may be utilized as part of a hedging strategy that could immunize an executive from the negative performance of the stock.
Say on Golden Parachute Proposals. ISS proposed to update its current policy on proposals to approve compensation payable to named executive officers in connection with a change in control of an issuer (i.e., “golden parachute” proposals). Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, issuers are required to hold separate shareholder votes on potential golden parachute payments when they seek approval of mergers and similar transactions. ISS proposed to update its policy with respect to votes on golden parachute payments (i) to consider existing change-in-control arrangements maintained with named executive officers rather than focusing only on new or extended arrangements and (ii) to place additional scrutiny on multiple problematic features in change-in-control arrangements that will result in a negative recommendation (such as single trigger cash severance or option acceleration or excessive severance). Under the proposed policy, ISS would make voting recommendations on a case-by-case basis with respect to golden parachute proposals, taking into account existing change-in-control arrangements maintained with named executive officers (in addition to considering new or extended arrangements). ISS also noted that it would evaluate golden parachute compensation in assessing broader say on pay proposals in accordance with the above guidelines.
Environmental and Social Non-Performance Compensation Proposals. ISS proposed to modify its existing policy of recommending that shareholders vote against proposals to link executive compensation to environmental or social (non-financial) metrics (Sustainability Metrics). Under the proposed policy, ISS would consider proposals to link executive compensation to Sustainability Metrics on a case-by-case basis. According to ISS, the proposal is intended to provide ISS with greater flexibility, particularly in light of the increased use of Sustainability Metrics in determining executive compensation and the results of the ISS Policy Survey, wherein approximately two thirds of investor respondents indicated either that the use of Sustainability Metrics in executive compensation would be beneficial or that a case-by-case approach is appropriate.
The comment period for ISS’ 2013 proxy voting policies ends on October 31.
To view the complete text of ISS’ draft policy updates for 2013, including those applicable to non-USissuers and specific aspects of the policy updates for which ISS is seeking comments, click here.