Public Company Compliance
Institutional Shareholder Services Inc. (ISS) has published its voting policy updates for the 2017 proxy season, and those involved with public company compliance can add “generally insignificant changes to ISS voting policies” to their thankful lists this holiday. The 2016-2017 policy survey that ISS conducted earlier this fall, which gauged how institutional investors, corporate issuers and consultants/advisors to companies view various issues, indicated a number of potential changes to the ISS voting policies. However, most of these potential changes were not implemented. ISS did not change its policy on director tenure and board refreshment, despite over 50% of the surveyed institutional investors responding that a high proportion of long-tenured directors, the absence of any newly appointed directors, and lengthy average tenure are problematic. Additionally, ISS did not change its policy on evaluating non-CEO executive chairs for overboarding, continuing to evaluate them under the same standard as other non-executive directors, despite over 60% of the surveyed institutional investors favoring a stricter standard for the non-CEO executive chair (i.e., the standard applicable to CEOs).
Below is a brief summary of the significant changes to the ISS voting policies for 2017 that were announced on November 21, 2016:
- Financial metrics used in pay-for-performance analysis: ISS conducts a quantitative pay-for-performance screen that identifies potential misalignments between CEO pay and company performance, which will still be based on total shareholder returns (TSR). However, each company’s qualitative review will now include a comparison of the CEO’s pay and the company’s financial performance relative to its ISS-defined peer group. “Financial performance” will be measured using six financial metrics on a three-year basis: return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth. The weightings of these metrics will be based on a company’s industry group, and this new financial performance comparison may mitigate or heighten a pay-for-performance concern identified in the quantitative screen.
- Overboarding: Although ISS chose not to evaluate non-CEO executive chairs under the same standard as CEO chairs and instead elected to continue to evaluate such executive chairs under the same standard as non-executive directors, ISS did decrease the threshold number of public company boards that will trigger a vote against recommendation for non-executive directors from six boards to five boards. ISS will continue to recommend a vote against CEO chairs who sit on the boards of more than two public companies besides their own.
- Restrictions on Binding Bylaw Shareholder Proposals: ISS introduced a new policy under which ISS will recommend a vote against governance committee members if the company’s charter imposes undue restrictions on shareholders’ ability to amend the bylaws. Examples of such restrictions include a prohibition on the submission of binding shareholder proposals and share ownership/holding requirements for such shareholder proposals that are in excess of the Rule 14a-8 requirements.
- Shareholder Ratification of Non-Employee Director Pay: Management proposals seeking shareholder ratification of director compensation programs, which are being submitted in response to a growing number of lawsuits regarding director compensation, will be evaluated based on a number of qualitative factors, including the relative magnitude of director compensation as compared to similar companies, the presence of problematic pay practices, directors stock ownership guidelines and holding requirements, and meaningful limits on director compensation, among others.
- Equity Plan Scorecard: ISS evaluates equity incentive plans based on factors grouped under plan cost, plan features, and grant practices, with each factor having a maximum potential score and the plan receiving a “passing” score if it reaches a total of 53 out of a maximum of 100 potential points. A new plan feature was added for 2017: an evaluation of the payment of dividends on unvested equity awards. Full points will be earned if the plan expressly prohibits the payment of dividends before the award is fully vested, and no points will be earned if the plan is silent or incomplete (i.e., the prohibition is not applicable to all equity award types). ISS also clarified that in order to earn full points on the plan feature of a minimum vesting period, the equity plan must specify a minimum vesting period of one year for all award types under the plan.