On November 16, 2012, Institutional Shareholder Services (ISS) released its 2013 Corporate Governance Policy Updates and Procedures. Certain key policy changes are summarized below.

Board Responsiveness: Governance Failures

ISS currently recommends under extraordinary circumstances voting against or withholding the vote from directors or entire boards due to material failures of governance, stewardship, risk oversight or fiduciary responsibilities of the company. The 2013 policy will include a footnote indicating that examples of risk oversight include, among other things, hedging of company stock or significant pledging of company stock.

Board Responsiveness: Majority-Supported Shareholder Proposals

Currently, ISS recommends a vote against or withholding the vote from entire boards (except new nominees, who are considered case-by-case) if the board failed to act on a shareholder proposal that received support from a majority of shares outstanding in the previous year or that received support of a majority of shares cast in the previous year and one of the two previous years. In 2013, this analysis will be tweaked to include the flexibility to vote against individual directors, not just the entire board, and will include additional guidance on the case-by-case sufficiency of board action in response to a majority-supported shareholder proposal. Beginning in 2014, the two-year analysis will drop off and the majority of shares cast only in the previous year will trigger the analysis of the company's responsiveness to majority-supported shareholder proposals. In other words, for 2014 board elections, the one-year votes cast analysis will commence with proposals included on company proxies in 2013.

Director Competence: Overboarded Directors

ISS currently recommends voting against individual directors who sit on more than six public company boards or CEOs of public companies who sit on boards of more than two public companies besides their own. Currently, parent and subsidiaries owned at least 20 percent by the parent were counted as a single board. Starting in 2013, all subsidiary boards will be counted as separate boards.

Inside Director Categorization

ISS is simplifying categorization of inside directors from five triggering characteristics to three. Under the new criteria, an inside director is a director who meets any of the following criteria:

  • is a current employee or current officer of the company or an affiliated company
  • is a beneficial owner of more than 50 percent of the company's voting power
  • is named in the summary compensation table (excluding former interim officers)

Pay-for-Performance Evaluation

Based upon the results of its 2012-2013 survey, ISS notes that pay/performance misalignment, problematic pay practices and board responsiveness are among the key drivers for companies receiving low support on their say-on-pay proposals. The following are two areas that ISS noted:

  • Peer Groups. ISS uses a peer group analysis to compare CEO pay and company performance within a group of 14 to 24 companies that are reasonably similar in terms of industry profile, size and market capitalization. ISS's current methodology uses the global industry classification standard (GICS) to build peer groups. Starting in 2013, ISS will consider the company's selected peers in addition to the company's GICS industry peers.
  • Realizable Pay. Companies that demonstrate significant unsatisfactory long-term pay for performance or, in the case of non-Russell 3000 index companies, if misaligned pay and performance are otherwise suggested, the analysis continues with an assessment of seven qualitative factors. Starting in 2013, realizable pay compared to grant pay will be added to the list of qualitative factors. Realizable pay will include relevant cash and equity-based grants and awards made during a specified time period using the value of actual earned awards or target value (i.e., stock price at the end of the performance measurement period) for ongoing awards. Stock options and stock appreciation rights will be priced as of the end of the performance period using the Black-Scholes option pricing model. This factor may mitigate or exacerbate CEO pay for performance.

Voting on Golden Parachutes in Acquisition, Merger, Consolidation or Proposed Sale

Currently ISS analyzes proposals to approve the company's golden parachute compensation on a case-by-case basis for recently adopted or materially amended agreements satisfying any of several criteria. In 2013, this analysis will be expanded to include existing change-in-control arrangements rather than focusing exclusively on new or extended arrangements. Although recent adoptions of policy will tend to carry more weight overall, the presence of multiple problematic existing policies will also be closely scrutinized.

Social/Environmental Issues

ISS has updated its guidance related to social and environmental shareholder proposals to establish overarching principles and clarify the factors used in the analysis. Additionally, ISS has modified its guidance on shareholder proposals to link executive compensation to environmental or social criteria. Currently ISS recommends a vote against such proposals. However, beginning in 2013, ISS will recommend a case-by-case analysis for such proposals. ISS notes that such proposals are becoming more commonplace in certain industry sectors, specifically extractive industry sectors.


ISS recommends a case-by-case analysis for proposals requesting information on a company's lobby activities, including direct lobbying and grassroots lobbying. Beginning in 2013, the description of shareholder requests for information will be expanded to include lobbying "policies and procedures" and "indirect lobbying." Requests for information related to significant controversies, fines or litigation is expanded to include all lobbying-related activities, not just public policy activities.

In addition to its policy updates, on December 4, 2012, ISS released frequently asked questions related to its 2013 peer group methodology. To address the peer group methodology there are 16 FAQs and 10 FAQs relate to updating peer group information.