Institutional Shareholder Services (ISS) issued new U.S. voting policies and an updated Equity Plan Scorecard FAQ, both effective for annual shareholder meetings occurring on or after February 1, 2016.  This alert provides a brief summary of the key U.S. policy changes and the updates to the Equity Plan Scorecard that will be in effect for the 2016 proxy season.

Director Overboarding

ISS has lowered the acceptable number of public company board seats a non-CEO director may occupy from six to five (the board under consideration plus four others).  However, ISS will not recommend withhold votes against directors sitting on more than five public company boards until 2017.  Instead, ISS will issue cautionary language in proxy advisory research reports for those directors considered “overboarded” under the new policy (but not the former policy).  This will allow overboarded directors a one-year grace period to plan for an orderly transition in reducing their board commitments.

ISS has not changed its policy threshold at which a public company CEO will be considered overboarded—currently set at no more than two outside board seats—though it did express that it may reconsider this threshold in the future as policy surveys indicate that many investors believe only one outside board commitment is an appropriate threshold for CEOs.

Compensation of Externally-Managed Issuers

Externally-managed issuers (EMIs) are companies that do not directly compensate their executives; rather, they leave compensation matters to an external manager who is reimbursed by the EMI through a management fee. The insufficient disclosure of compensation arrangements for executives at an EMI has not been considered a problematic pay practice.  Under the revised policies, an EMI’s failure to provide sufficient disclosure for shareholders to reasonably assess compensation for the NEOs will be deemed to be a problematic pay practice, which will warrant a recommendation against the EMI’s say-on-pay proposal.

Unilateral Governance Changes Adversely Affecting Shareholder Rights

ISS issued two new policies relating to unilateral board actions (i.e., those without shareholder approval) that adversely affect shareholder rights:  one for established public companies and another for newly public companies that have taken actions (e.g., amending bylaw or charter provisions) to diminish shareholder rights prior to or in connection with an initial public offering (IPO).  This bifurcation was made to reflect the differing expectations investors may have for established public companies versus newly public companies.  These two policies are as follows:

  • For established public companies, ISS will generally continue to withhold votes from directors who unilaterally adopted a classified board structure or implemented a supermajority vote requirement to amend the bylaws or charter.
  • For newly public companies, ISS will take a case-by-case approach and give significant weight to shareholders’ ability to change the governance structure in the future through a simple majority vote and their ability to hold directors accountable through annual director elections.  If the company publicly commits to putting the adverse provisions to a shareholder vote within three years of the IPO, that can be a mitigating factor. Query whether this policy will have any impact since most companies obtain shareholder approval of their governing documents as part of the IPO process.

Unless these adverse actions are reversed or submitted to a binding shareholder vote, in subsequent years, ISS will vote case-by-case on director nominees.

Proxy Access

ISS has not changed its fundamental approach to management and shareholder proxy access proposals, but it is planning to release an FAQ next month to provide more information on which additional provisions ISS considers overly restrictive. This FAQ will also clarify the framework ISS will use to analyze proxy access nominations, which is expected to be conceptually similar to that used for proxy contests.

Updated Equity Plan Scorecard Changes for 2016

ISS’s updated Equity Plan Scorecard FAQ contains a new “Special Cases” model (formerly the IPO model) that analyzes companies with less than three years of disclosed equity grant data (generally, IPOs and bankruptcy-emergent companies) and includes Grant Practice factors other than Burn Rate and Duration for companies in the Russell 3000/S&P 500.  The maximum pillar scores for this model are as follows:

  • Plan Cost: 50
  • Plan Features: 35
  • Grant Practices: 15

The Plan Features factor known as “Automatic Single-Trigger Vesting” is renamed as “CIC Vesting,”  with the following scoring levels:

  • Full points if the plan provides: (i) for outstanding time-based awards, either no accelerated vesting or accelerated vesting only if awards are not assumed/converted; AND (ii) for performance-based awards, either forfeiture or termination of outstanding awards or vesting based on actual performance as of the CIC and/or on a pro-rata basis for time elapsed in ongoing performance period(s).
  • No points if the plan provides for automatic accelerated vesting of time-based awards OR payout of performance-based awards above target level.
  • Half points if the plan provides for any other vesting terms related to a CIC.

ISS has increased the threshold requirement for full points under the Post-Vesting/Exercise Holding Period Plan Feature to 36 months (up from 12 months) or until employment termination.  Holding periods of 12 months will only accrue half of the points.