On October 16, 2012, Institutional Shareholder Services (ISS) published for comment its draft proxy voting policy updates for the 2013 proxy season. The proposed policy changes are the result of the policy survey ISS conducted over the summer. ISS's proposed policy changes would affect:

  • Votes on boards of directors based on their responses to shareholder proposals that received majority support;
  • Say-on-pay criteria, including peer group selectionmethodology, "realizable pay" as a factor in the evaluation of pay-forpractice;
  • Analysis of golden parachute arrangements; and
  • Assessment of shareholder proposals to link executive compensation to environmental and social non-financial performancemetrics.

The proposed policy updates are discussed inmore detail below.

Board Response to Majority-Supported Shareholder Proposals

ISS is proposing to strengthen its existing policy with respect to board responsiveness tomajority supported shareholder proposals to be in line with an evolvedmarket view of board responsiveness to such shareholder proposals.

Under its current policy, ISS recommends votes against or withholds votes fromthe entire board of directors (except new nominees, who are considered on a case on a proposal that:

  • received the support of amajority of the shares outstanding the previous year; or
  • received the support of a majority of shares cast in the last year and one of the two previous years.

Under the proposed policy, ISS would recommend a vote against or withhold votes fromthe entire board of directors (except new nominee the board failed to act on a shareholder proposal that received the support of amajority of shares cast in the previous year.

ISS is requesting specific comments on the following:

  • Are there circumstances where a board should not implement amajority that receives support fromamajority of votes cast for one year?
  • How would your organization vote on directors who failed to implement a shareholder proposal that receivedmajority support in the previous year (vote against the full board; vote against the governance committee; other)?
  • Would a commitment fromthe company for future implementation of a shareholder proposal that receivedmajority support of votes cast in the previous year be acceptable?

Management Say-on-Pay Proposals

Self-Selected Peer Group

ISS conducts annually a pay-for-performance analysis to identify alignment between executive pay and executive performance over a period of time. ISS looks at "peer group alignment," which is the alignment between a company's total shareholder returns (TSRs) and a CEO's total pay rank within a peer group (based on the company's Global Industry Classification Standard (GICS)) ,measured over one-year and three-year periods. ISS proposes to take into account, in addition, the company's self-selected GICS industry peer group, subject to size constraints, when determining a company's peer group for purposes of the ISS pay-for-performance evaluation. ISS states that this will be an improvement fromthe current methodology, whichmay not reflectmultiple business lines in which a company operates and could omit companies that would be relevant peers. However, ISSmaintains that the new proposed peer group methodology will maintain the same focus on using peer group companies that are similar in terms of industry profile, size, andmarket capitalization. The new proposedmethodology enhances the peer group alignment analysis by incorporating information froma company's self-selected peer group for pay benchmarking purposes. ISS also proposes to include using slightly relaxed size requirements, especially at very small and very large companies, and using revenue instead of assets for certain financial companies.

ISS is requesting specific comments on the following:

  • Are there additional or alternative ways that ISS should use the company's self-selected peer group to informits peer group construction?
  • Since company size is highly correlated with levels of executive pay, what is a reasonable size range (revenue/assets) for peer group construction?
  • Are there additional factors that investors should consider in peer group construction for payfor- performance evaluation?

Realizable Pay

ISS proposes to add "realizable pay" compared to grant pay as a qualitative factor to be used in the review of say-on-pay for companies with largemarket capitalizations. "Realizable pay" will consist of the sum of relevant cash and equity-based grants and awardsmade during a specified performance period, based on equity award values for actual earned awards, or target values for ongoing awards, calculated using the stock price at the end of the specified performance period. Along with other qualitative factors used in this review, realizable pay compared to grant pay will be analyzed to determine how various pay elements work to encourage or to undermine long-termvalue creation and alignment with shareholder interests.

ISS is requesting specific comments on the following:

  • How would you define realizable pay?
  • Should stock options be considered based on intrinsic or Black-Scholes value?
  • What should be an appropriatemeasurement period for realizable pay?

Pledging of Company Stock

ISSmaintains a list problematic pay practices thatmay warrant a negative vote recommendation. ISS proposes to add pledging of company stock to this list of problematic pay practices. ISS cites concerns by both investors and issuers that pledging of company stock by an executive as loan collateral may have a detrimental effect on shareholders and the company's stock price, and could also potentially violate company insider trading policies. ISS notes that adding pledging of company stock to the list of problematic pay practices would allow shareholders to communicate objections to such practices.

ISS is requesting specific comments on the following:

  • What would you consider a "significant" level of pledging of company stock that causes concern for investors?
  • If pledging raises concerns significant enough to warrant voting action, should this action be directed at themanagement say-on-pay proposal, the board, or members of one of the board committees?
  • Would you consider a company's remedial actions on pledging (such as a commitment not to pledge in the future or commitment to unwind their positions within a reasonable period) sufficient to address concerns?
  • Are there additional factors that investors should consider for the case-by-case analysis?

Say on Golden Parachute Proposals

ISS also proposed to revise its policies on shareholder votes on golden parachute proposals. Under the Dodd-Frank Act, since April 25, 2011, companies have been required to hold separate shareholder votes on golden parachute proposals when they seek approval for mergers, sales, and certain other transactions. ISS proposes to revise its policy on golden parachute proposals to:

  • include existing change-in-control arrangementsmaintained with named executive officers rather than focusing on only new or extended arrangements, and
  • further scrutinize multiple legacy problematic features in change of control agreements. ISS notes that this proposal is likely to result in a greater number of recommendations against golden parachute proposals.

ISS proposes that the following features will result in an "against" recommendation (depending on the number,magnitude and/or timing of the features):

  • Single-trigger or modified-single-trigger cash severance;
  • Single-trigger acceleration of unvested equity awards;
  • Excessive cash severance (more than three times base salary and bonus);
  • Excise tax gross-ups triggered and payable;
  • Excessive golden parachute payments;
  • Recent amendments incorporating problematic features or recent actions thatmaymake packages so attractive as to influencemerger agreements thatmay not be in the best interests of shareholders; and
  • A company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote.

ISS proposes that recent amendments incorporating problematic features will carrymore weight in the overall analysis than other factors listed above, but it will also scrutinize closely the presence of multiple problematic features.

ISS is requesting specific comments on the following:

  • When evaluating payments arising fromproblematic pay practices in the context of a say on golden parachute proposal, would you differentiate between new and existing arrangements when determining whether to support the proposal?
  • Would the number of problematic features be a consideration when evaluating a say on golden parachute proposal?
  • Are there any other factors that should be considered in evaluating say on golden parachute proposals?

Environmental and Social Non-Financial Performance Metrics

ISS is proposing to change its existing policy on proposals to link executive compensation to environmental and social non-financial performancemetrics (sustainabilitymetrics) from"generally vote against" to "vote case-by-case." It is proposing this change in response to (i) companies increasingly incorporating sustainabilitymetrics into executive compensation considerations and (ii) investor initiatives increasingly addressing such non-financial performancemetrics. The new policy would be more likely to lead to support of such proposals, depending on the structure and scope of the proposal and the circumstances of the particular company. It would also replace the list of specific social and environmental criteria that proposalsmay suggest with a general reference to sustainable criteria and clarify that sustainability refers to social, as well as environmental, issues. It would also clarify that the controversies or violations regarding environmental and social issuesmay be significant or persistent. In voting on a case-by-case basis on such proposals, ISS would consider:

  • whether the company has significant and/or persistent controversies or violations regarding social and/or environmental issues;
  • whether the company hasmanagement systems and oversightmechanisms in place regarding its social and environmental performance;
  • the degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation practices; and
  • the company's current level of disclosure regarding its environmental and social performance.

ISS is requesting specific comments on the following:

  • Would your organization consider factors in addition to those currently considered by the policy when a proposal requesting the addition of environmental and social non-financial performancemeasures to an executive compensation plan is being evaluated?
  • Does your organizationmake a distinction between proposals requesting the addition of environmental and social non-financial performancemeasures to executive compensation plans and those proposals that request a report on linking, or on the feasibility of linking, environmental and social non-financial performancemeasures to executive compensation plans?


ISS has requested comments on the proposed updates via email to policy@issgovernance.com by October 31, 2012 and will take the comments into consideration when releasing its final 2013 proxy voting policies in November. To read the proposed 2013 draft policy updates in their entirety, visit http://issgovernance.com/policycomment2013.