On September 26, 2011, Institutional Shareholder Services (ISS) released its 2011-2012 Policy Survey Summary Results, which summarizes the responses ISS received as part of its annual policy survey. Of the responses, 153 were from institutional investors and 205 were from issuers.
In North America, 60% of investors and 61% of issuers responded that executive compensation was the most important governance topic, which is similar to last year’s results. Of the topics addressed with regards to compensation, the following were stand-out results:
- A majority of investors (62%) said that pay that is significantly higher than peer pay levels was very relevant in determining whether executive pay is aligned with company performance, while a majority of issuers (51%) said that it was only somewhat relevant.
- In making the same determination, both an overwhelming majority of investors (88%) and a slight majority of issuers (49%) said that pay levels that have increased disproportionately to the company’s performance trend was a very relevant factor.
- Investors (57%) and issuers (46%) responded that they sometimes consider discretionary annual bonus awards (i.e., those not based primarily on the attainment of pre-set goals) to be problematic if the awards are not aligned with company performance.
- Views diverged among investors as to what level of opposition to a say-on-pay vote should require an explicit response from the board regarding improvements to pay practices: the highest level of investors (36%) indicated that level of opposition should be “more than 20%,” while the next highest level of investors (24%) responded for “more than 30%.” Investors and issuers also had different views on this issue. On a cumulative basis, investors (72%) said there should be an explicit response from the board regarding pay practice improvements if opposition exceeds 30%, while issuers (48%) said an explicit response wasn’t necessary unless there was more than 50% dissent.
- Where shareholder value transfer (SVT) cost is excessive relative to peers, investors responded as follows to the extent certain positive factors mitigate the cost to shareholders, as compared to issuer responses:
- Above-median, long-term shareholder return – issuers (72%) and investors (47%) responded that this factor should very much mitigate the cost to shareholders.
- Low average burn rate relative to peers – investors (55%) said “somewhat,” while issuers (59%) said “very much.”
- Double-trigger change in control (CIC) equity vesting – issuers (40%) and investors (61%) responded “somewhat” to this factor.
- Reasonable plan duration based on historical share usage – a majority of investors (53%) responded “somewhat,” while the same percentage of issuers responded “very much.”
- Robust vesting requirements (>5 years) – investors (46%) and issuers (45%) agreed that this factor should somewhat mitigate the cost to shareholders.
- Where the SVT cost is not excessive relative to peers, investors responded as follows to the extent certain negative factors should weigh against the plan, as compared to issuer responses:
- Liberal CIC definition with automatic award vesting – investors (55%) responded “very much,” while issuers (54%) responded “somewhat.”
- Excessive potential share dilution relative to peers – investors (59%) responded “very much,” while the same percentage of issuers responded “somewhat.”
- High CEO or NEO “concentration ratio” – investors (54%) and issuers (45%) agreed that this factor should somewhat weigh against the plan.
- Automatic replenishment (“Evergreen funding”) – investors (57%) responded “very much,” while issuers (51%) responded “somewhat.”
- Prolonged poor financial performance – investors (73%) and issuers (41%) agreed that this factor should somewhat weigh against the plan.
- Prolonged poor shareholder returns – investors (73%) responded “very much,” while issuers (42%) responded “somewhat.”
- An overwhelming majority of investors do not consider automatic accelerated vesting of outstanding grants upon a CIC (79%) or accelerated vesting at the board’s discretion after a CIC (71%) to be appropriate. A vast majority of issuers disagree and consider both scenarios appropriate, 61% and 76%, respectively.
- Finally, an overwhelming majority of investors (80%) said that an equity plan coming to shareholder vote for the first time after an IPO (in order to qualify for Section 162(m) tax deductibility) should be evaluated under the same guidelines as a “standard” equity plan, even if no new shares are requested, as compared to issuers (59%) who said that it should not.
A majority of investors (57%) indicated more engagement activity with companies in 2011. With regards to engagement activity with institutional shareholders, issuers almost equally cited “about the same as in 2010” and “more engagement in 2011.”
With regards to director qualifications, investors and issuers agreed on all but one of the categories of information in evaluating the nominations of directors to boards:
- Director’s recent industry/sector experience – investors (40%) and issuers (61%) said that this is “very relevant.”
- Director biographic information and general director detail – investors (43%) and issuers (47%) said that this is “relevant.”
- Performance of companies where director serves (or served) on board(s) –investors (41%) and issuers (44%) said that this is “relevant.”
- Governance track record(s) for firms where director serves (or served) on board(s) –both investors and issuers (46%) said that this was “relevant.”
- Continuing Boardroom Education – investors (42%) and issuers (45%) said that this was “somewhat relevant.”
- Finally, investors (33%) said that ISS recommendations at other public companies where director serves (or served) on board(s) is somewhat relevant, while issuers (50%) said that this is “not relevant.”
On the topic of board issues, investors strongly supported the proposal (70%) that companies should adopt a policy of appointing an independent chair after the current (combined) CEO/chair leaves the position, while issuers strongly opposed it (73%). Among the nine critical governance principles presented by the survey, board independence was identified as the second most important governance topic by investors (41%) but came in fifth with issuers (19%). When asked whether various types of restrictions (notice, inclusiveness, timing, content and ownership) on shareholders’ ability to act by written consent are appropriate for an issuer to adopt in response to a majority-supported shareholder proposal on this topic, investors (57%, including responses for “all of the above”) indicated that notice restrictions were appropriate, and a vast majority (89%) of issuers agreed. In relation to the other types of restrictions, the content restrictions selection was least chosen as appropriate from both issuers (4%) and investors (9%). Finally, a vast majority of investors (63%) and issuers (81%) responded that a “net-long” restriction on the right to call special meetings, whereby a shareholder or group of shareholders must hold the requisite ownership threshold in a net-long position, would not raise board responsiveness concerns.
For shareholder rights, both investors and issuers agreed that a company’s governance provisions (67% of investors and 63% of issuers) and the quality of state corporate law (74% of investors and 93% of issuers) are the top two factors in evaluating proposals to make the state of incorporation the exclusive venue for shareholder litigation. With regards to what extent certain changes to a company’s governance practices potentially outweigh the potential economic benefits of changing its state of incorporation, investors and issuers did not agree on anything:
- Classification of board – investors (46%) responded “very much,” while issuers (48%) responded “not much.”
- Raising vote requirements for amending charter/bylaws – investors (50%) responded “very much,” while issuers (38%) responded “not much.”
- Raising vote requirements for approving mergers – investors (47%) responded “very much,” while issuers (35%) responded “not much.”
- Higher ownership thresholds to call a special meeting – investors (38%) responded “somewhat,” while issuers (36%) responded “not much.”