On October 18, Institutional Shareholder Services (ISS) published for comment proposed changes to its proxy voting policies for 2012. ISS’ proposed policy updates for 2012 include the following:
Board and Proxy Access
- ISS clarified that, in determining whether to recommend shareholders vote FOR the election of directors serving on a company’s compensation committee, ISS will analyze, on a case-by-case basis, the company’s response to advisory votes on executive compensation (i.e., “say-on-pay” votes) receiving significant opposition. Such analysis will take into account the level of opposition to executive compensation policies and practices, the company’s ownership structure, disclosure regarding efforts to engage institutional investors regarding compensation issues, the company’s response to investor input, specific actions taken to address issues that resulted in significant opposition to executive compensation and actions taken with respect to prior executive compensation issues of concern. ISS noted that when a significant number of shareholders oppose a company’s executive compensation policies and practices, an appropriate response must include disclosure of the company’s outreach efforts to major institutional investors as well as concrete actions to address investors’ concerns. ISS requested comments regarding whether an explicit response is merited where less than 70% of shareholders vote in favor of say-on-pay proposals (and, if not 70%, what a suitable threshold would be), how quickly boards should be required to respond to significant opposition and whether ISS should consider additional factors in its analysis.
- ISS proposed to recommend shareholders withhold votes for, or vote against, incumbent directors if a board implements say-on-pay votes on a less frequent basis than the frequency which received the majority of votes cast at the most recent shareholder meeting where a say-on-pay frequency vote was held. ISS will determine its voting recommendations on a case-by-case basis if a board implements an advisory vote on executive compensation on a less frequent basis than the frequency which received a plurality, but not a majority, of votes cast, taking into account the board’s rationale for choosing a frequency that is different than the frequency supported by a plurality of shareholders, the company’s ownership structure, ISS’ analysis of the company’s executive compensation and other factors. ISS is soliciting comments regarding other factors that should be considered in its analysis of responses to say-on-pay frequency votes.
- ISS proposed to analyze shareholder proposals seeking proxy access on a case-by-case basis taking into account the proponent’s rationale for the proposal at the targeted company, the ownership thresholds proposed in the resolutions (e.g., percentage and duration of ownership), the maximum number of directors that shareholders may nominate each year and the method of determining which nominations should appear on the ballot if multiple shareholders submit nominations.
- In connection with ISS’ recommendations concerning say-on-pay proposals, ISS proposed to use a new methodology to evaluate pay-for-performance alignment, which will identify companies that have demonstrated strong, satisfactory, or weak alignment between total shareholder returns and CEO compensation over an extended period of time. The new methodology will incorporate a quantitative analysis followed, if applicable, by further qualitative analysis. The quantitative analysis will examine the degree of alignment between a company’s shareholder returns and its CEO’s pay relative to peer companies over a one and three year period, the multiple of a CEO’s total pay relative to the peer group median and the alignment between the trend in the CEO’s pay and the company’s returns over the past five fiscal years. Companies that demonstrate strong or satisfactory alignment will generally receive a positive recommendation while companies demonstrating weak alignment will receive further qualitative analysis. ISS has specifically requested comments regarding whether the factors to be considered by ISS’ proposed analysis align with institutional investors’ approach, whether the ISS analysis gives adequate consideration to long-term alignment, and whether additional factors ought to be considered.
- ISS is proposing to analyze, on a case-by-case basis, equity plan proposals of newly-public companies seeking favorable tax treatment under Section 162(m) of the Internal Revenue Code (which requires shareholder approval before a public company may award performance-based equity to named executive officers in order to qualify as performance-based compensation). Under the proposed policy, ISS would fully analyze the applicable equity plan, including the total shareholder value transfer under the plan, repricing provisions, change in control provisions and the burn rate of the plan. ISS is specifically seeking comment as to whether the potential tax deduction on performance-based compensation for named executive officers outweigh the adverse impact of problematic features in equity plans for newly-public companies and whether the compensation committee should be held responsible for equity plans that do not receive favorable tax treatment because shareholders do not support problematic aspects of the plan.
Environmental and Social
- In light of the 2010 Citizens United decision by the U.S. Supreme Court, ISS proposed to shift its current policy on corporate political contribution disclosure proposals from analyzing such proposals on a case-by-case basis to generally recommending that shareholder vote FOR proposals requesting greater disclosure of a company’s policies and oversight of political contributions and trade association spending policies and activities.
The comment period for ISS’ 2012 proxy voting policies ends on October 31, and ISS expects to release its final policy updates during the week of November 14.
To view the complete text of ISS’ draft policy updates for 2012, click here.