ISS has announced its 2017 policy changes. Some key changes for the U.S. are discussed below.

Restrictions on Binding Shareholder Proposals. ISS has adopted a new policy when shareholders do not have the ability to amend bylaws. ISS will generally vote against or withhold from members of the governance committee if the company’s charter imposes undue restrictions on shareholders’ ability to amend the bylaws. Such restrictions include, but are not limited to: outright prohibition on the submission of binding shareholder proposals, or share ownership requirements or time holding requirements in excess of SEC Rule 14a-8. ISS will recommend a vote against on an ongoing basis.

Overboarded Directors: ISS will recommend a vote against or withhold from individual directors who sit on more than five public company boards. This isn’t a new policy per se; the one-year transition period from six to five public company boards is ending.

Stock Distributions: Splits and Dividends: Where there is a management proposal to increase capitalization in connection with a stock distribution or split, ISS will look to the “effective” increase.

Equity-Based and Other Incentive Plans. ISS will consider dividends payable prior to vesting as a planned feature. According to ISS, from an incentive and retention perspective, dividends on unvested awards should be paid only after the underlying awards have been earned and not during the performance/service vesting period. Under this new factor, full points will be earned if the equity plan expressly prohibits, for all award types, the payment of dividends before the vesting of the underlying award (however, accrual of dividends payable upon vesting is acceptable). No points will be earned if this prohibition is absent or incomplete (i.e. not applicable to all award types). A company’s general practice (not enumerated in the plan document) of not paying dividends until vesting will not suffice.

ISS also made modifications to the minimum vesting factor. First, an equity plan must specify a minimum vesting period of one year for all award types under the plan in order to receive full points for this factor. Second, no points will be earned if the plan allows for individual award agreements that reduce or eliminate the one-year vesting requirement.

Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m)) (formerly “Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related Compensation Proposals).” This policy has been renamed and reorganized to more clearly differentiate the evaluation framework applicable to the various types of amendment proposals.

Shareholder Ratification of Director Pay Programs. This is a new policy. ISS will recommend a vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors:

  • If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support; and
  • An assessment of the following qualitative factors:
    • The relative magnitude of director compensation as compared to companies of a similar profile;
    • The presence of problematic pay practices relating to director compensation;
    • Director stock ownership guidelines and holding requirements;
    • Equity award vesting schedules;
    • The mix of cash and equity-based compensation;
    • Meaningful limits on director compensation;
    • The availability of retirement benefits or perquisites; and
    • The quality of disclosure surrounding director compensation.

Equity Plans for Non-Employee Directors. ISS is attempting to clarify and broaden the various factors considered when assessing the reasonableness of non-employee director equity plans. ISS is updating the list of factors to be considered by including new factors (including relative pay magnitude and meaningful pay limits) and simplifying the language for the factors already considered.

The updated policy clarifies that when a non-employee director equity plan is determined to be relatively costly, ISS’ vote recommendation will be case-by-case, looking holistically at all of the factors, rather than requiring that all enumerated factors meet certain minimum criteria. This updated policy aligns the considered factors with the same ones provided under ISS’ new policy on proposals seeking ratification of non-employee director pay programs.