The proxy advisory firm Institutional Shareholder Services (“ISS”), recently issued its annual update to its 2011 proxy voting policies concerning executive compensation and corporate governance issues for shareholder meetings held on and after February 1, 2011. ISS policy guidelines are used by ISS to determine its vote recommendations for its institutional shareholder clients, which can have a material impact on the voting results of companies with a sizeable institutional shareholder bases. Public companies should be familiar with the new ISS policies to determine whether such policies may influence the voting results of their upcoming annual meetings. The most material updates for 2011 are summarized below.
Annual Say on Pay Vote. With respect to the frequency of the advisory shareholder vote concerning executive compensation, as expected, ISS is recommending an annual say on pay vote rather than a biannual or triennial vote. ISS states that such an advisory vote is most useful if it occurs in a consistent and timely manner. ISS believes an annual advisory vote provides the highest level of accountability and direct communication by responding consistently to the executive compensation information presented in each annual proxy statement.
Shortened List of Problematic Pay Practices. ISS has revised its policy on problematic pay practices by reducing the list of the most egregious pay practices that may lead to an adverse vote recommendation. ISS will continue a case-by-case evaluation of problematic pay practices, but this list identifies the most egregious practices that may result in a negative vote recommendation based on consideration of the company’s overall pay program and past practices. The list includes:
- Repricing or replacing underwater stock options/SARS without prior shareholder approval;
- Excessive perks or tax gross-ups;
- New or extended agreements that provide for:
- Change in control payments exceeding three times base salary and average/target/most recent bonus;
- CIC severance payments without involuntary job loss or substantial diminution of duties; and
- CIC payments with excise tax gross-ups.
No Longer Accept Future Commitments on Problematic Pay Practices. ISS will no longer accept future commitments on problematic pay practices as a way of preventing or reversing a negative vote recommendation. ISS states that its policies are transparent to issuers, which who should have sufficient awareness of ISS actions that may result in negative vote recommendations. ISS may still consider future commitments with respect to pay for performance and burn rate commitments and plan language related to certain equity grant practices.
No Longer Accept Private Disclosure of Less Than 75% Director Attendance. ISS policy has been to recommend a vote against or withhold from individual directors who attend less than 75%of board and committee meetings without a valid excuse. Previously, ISS would evaluate such absences on a case-by-case basis if the company provided meaningful public or private disclosure explaining the director’s absences. The revised policy will continue the recommendation of a vote against or withhold from such individual directors, but ISS has removed the private disclosure option for explaining absences. ISS will consider the following reasons for director absences, but only if disclosed in the proxy statements or other SEC filings:
- Medical issues/illness;
- Family emergencies; and
- If the director’s total service was three meetings or less and the director missed only one meeting.
Will Consider Company’s Overall Governance Practices and Takeover Defenses in Evaluating Proposals for Shareholders to Act by Written Consent. ISS’ current policy is to generally recommend a vote for proposals that provide for shareholder ability to act by written consent, taking into account the following factors:
- Shareholders’ current right to act by written consent;
- Consent threshold;
- Inclusion of exclusionary or prohibitive language;
- Investor ownership structure; and
- Shareholder support of, and management’s response to, previous shareholder proposals.
ISS will now also consider, as an additional factor, the company’s overall governance practices and takeover defenses (with an emphasis on shareholders’ ability to call special meetings) in evaluating such proposals. ISS will evaluate on a case-by-case basis (and may recommend against) if the company has the following shareholder rights provisions:
- An unfettered right of shareholders to call special meetings at a 10 percent threshold;
- A majority vote standard in uncontested elections;
- No nonshareholder-approved pill; and
- An annual elected board.