Today, ISS released the results of its 2011-12 Policy Survey. Every year, ISS seeks input from both its institutional investor clients and the corporate issuer community, "in order to get a better understanding of the breadth of financial market views on a range of topics including boards of directors, shareholder rights, and executive compensation/remuneration." Issuers and investors complete the same survey. ISS received more than 335 total responses, 138 institutional investors (63% located in the U.S., with the remainder divided among U.K., Europe, Canada, and Asia-Pacific) and 197 corporate issuers (81% in the U.S.).
According to the survey report:
- A majority of both investor (60%) and issuer respondents (61%) cited executive compensation as one of the top three governance topics for the coming year, similar to last year's survey results.
- On a global basis, board independence was identified among the three most important governance topics by approximately 40 percent of investor respondents. For issuers, the second most commonly cited topic in North America was risk oversight.
- Investors and issuers had different views on when companies should address shareholder opposition during "say on pay votes." On a cumulative basis, 72% of investors said there should be an explicit response from the board regarding pay practice improvements if opposition exceeds 30%. Among issuers, 48% said an explicit response wasn't necessary unless there was more than 50% dissent. (The most commonly cited level of opposition on a say-on-pay proposal that should trigger an explicit response from the board regarding improvements to pay practices was "more than 20%" for investor respondents.)
- A majority of investor respondents (57%) indicated more engagement activity with issuers in 2011. When asked about engagement activity with institutional shareholders, issuer respondents almost equally cited "about the same as in 2010" and "more engagement in 2011."
- Pay levels relative to peers and a company performance's trend are relevant for both investor and issuer respondents when determining pay for performance alignment. When determining whether executive pay is aligned with company performance, an overwhelming majority of investor respondents considered both pay that is significantly higher than peer pay levels and pay levels that have increased disproportionately to the company's performance trend to be very relevant. On the other hand, most issuer respondents indicated that both of these factors to be "somewhat relevant."
- A majority of investor respondents (57%) and 46% of issuer respondents agreed that discretionary annual bonus awards (i.e., those not based on attainment of pre-set goals) to be sometimes problematic if the awards are not aligned with company performance.
- Regarding new equity plans, responses from investor and issuer respondents varied as to whether positive factors, such as above median long-term shareholder return; low average burn rate relative to peers; double-trigger CIC equity vesting; reasonable plan duration; robust vesting requirements, should be taken into account to mitigate an equity plan where shareholder value transfer (SVT) cost is excessive relative to peers. Most investor respondents were reluctant to indicate that any of those factors would "very much" mitigate the cost.
- Where SVT cost is not excessive and whether negative factors, such as liberal CIC definition with automatic award vesting; excessive potential share dilution relative to peers; high CEO or NEO "concentration ratio"; automatic replenishment; prolonged poor financial performance; prolonged poor shareholder returns, weigh against the plan, a majority of investor respondents indicated all of the factors, with the exception of high CEO/NEO "concentration ratio," should "very much" weigh against the plan.
- An overwhelming majority of investor respondents do not consider automatic accelerated vesting of outstanding grants upon a change in control or accelerated vesting at the board's discretion after a change in control to be appropriate. The vast majority of issuer respondents disagree, and consider both scenarios appropriate.
- Seventy percent of investor respondents indicated that companies should adopt a policy of appointing an independent chair after the current (combined) CEO/chair leaves the position. A substantial majority of issuer respondents disagree, with 73% indicating that companies should not commit themselves to an independent chair.