After a comment period on draft policies, ISS issued its Global Benchmark Policy Guidelines on November 16, 2012. These Guidelines cover shareholder meetings that occur on or after February 1, 2013 and are available in full here.
Voting on Director Nominees in Uncontested Elections
ISS currently recommends voting Against or Withhold for a director or an entire board where there are material failures of governance and oversight, failures to replace management or egregious director behavior. ISS is updating this policy to add that hedging of company stock and significant pledging of company stock by directors and management may qualify as a failure of risk oversight, depending on the facts and circumstances.
Board Response to Majority-Supported Shareholder Proposals
According to ISS, approximately 86% of institutional investors and half of issuers support implementation of a shareholder proposal that receives a majority of the shareholder vote. Currently, ISS recommends a vote Against or Withhold for an entire board of directors if they fail to act on a shareholder proposal that received support in the previous year from the majority of outstanding shares or the majority of votes cast in the last year and one of the two prior years. ISS is updating this policy to recommend a vote Against or Withhold for individual directors or an entire board of directors if they fail to act on a shareholder proposal that received a majority of shares cast in the previous year.
Director Attendance at Board and Committee Meetings
ISS currently recommends voting Against or Withhold for an entire board if not all directors attended 75% of the board and committee meetings and it was not disclosed which directors failed to attend. Since SEC rules require disclosure of who did not meet the 75% attendance test, ISS is removing the foregoing recommendation Against or Withhold for the entire board. However, ISS will continue to recommend voting Against or Withhold individual directors if they attended less than 75% of meetings, unless failure was due to medical issues, family issues or the result of missing one meeting.
ISS currently recommends voting Against or Withhold for directors who serve on more than six public company boards or CEOs who sit on more than two public company boards in addition to their own board. ISS is updating this policy to count a subsidiary owned at least 20% by its parent to constitute a separate board for directors other than the CEO. A CEO’s “own board” will include the boards of subsidiaries and affiliates.
Categorization of Directors
ISS updated its definition of an Inside Director to include interim officers and any non-executive director that is listed in the Summary Compensation Table due to their compensation.
Management Say-On-Pay Proposals
Currently, ISS recommends voting case-by-case on executive pay, comparing a company’s pay and performance relative to a peer group selected by ISS, which is based on company size and market capitalization. ISS recommends voting Against advisory votes on executive compensation if there is a misalignment between CEO pay and company performance, there are problematic pay performances and the board exhibits poor communication and responsiveness to shareholders.
For 2013, ISS will include a company’s selected peers in the peer group calculations, in addition to the peer group created by ISS, for their Say-on-Pay methodology. ISS also is enhancing their evaluation of pay-for-performance by using a comparison of future realizable pay to grant date pay, taking into account cash and equity grants and awards.
Say on Golden Parachute Proposals
In the one year since mandated shareholder votes on golden parachutes in connection with mergers and similar transactions began, golden parachute proposals have received a lower support than their underlying transactions and management say-on-pay proposals. An ISS survey shows that 74% of investors believe golden parachutes are problematic and that certain payment features are objectionable regardless of when they occur. Currently, ISS recommends voting case-by-case on golden parachutes based on a number of criteria and voting Against golden parachutes with excessive payments and several other features.
Taking investor commentary into consideration, ISS is updating its golden parachute recommendations to take into account existing change in control arrangements and place scrutiny on problematic legacy change in control agreements when reviewing new arrangements.
Environmental and Social Non-Financial Performance Compensation-Related Proposals
ISS changed their policy on environmental and social performance from generally vote against to vote case-by-case and replaced specific criteria with a general focus on environmental and social sustainability. The case-by-case approach will consider: (i) whether the company has significant or persistent environmental and social controversies and violations; (ii) whether the company has environmental and social policies and oversights and a comparison of these policies to their peers; and (iii) the company’s disclosure of environmental and social performance.
Additionally, ISS has established principles for voting on social and environmental proposals, deciding to vote case-by-case on each proposal depending on how it will enhance or protect shareholder value. In determining the likelihood that a social or environmental proposal will enhance or protect shareholder value, ISS will consider: (i) whether the proposal would be more effective if handled through government regulation or legislation; (ii) if the company already sufficiently handles the issue; (iii) if the proposal is unduly burdensome; (iv) how the approach compares to the industry’s standards; (v) whether the transparency requested is available through other means; and (vi) whether the transparency requested would create a competitive disadvantage.
Voting at Companies listed on U.S. Exchanges incorporated in tax havens
ISS created a new policy for foreign private issuers listed on U.S. exchanges that use exemptions for U.S. governance and disclosure rules, specifically focusing on those companies incorporated in Bermuda, the Marshall Islands or the Cayman Islands. For these issuers, ISS will vote Against non-independent director nominees, where the company does not have a majority independent board and does not have audit, compensation and nomination committees comprised of independent directors.