Institutional Shareholder Services, Inc. (ISS), a leading proxy advisory firm, has issued updated voting policies for the 2013 proxy season. This article provides an overview of key changes presented in the policy update.
Board Responsiveness to Majority-Supported Shareholder Proposals
The policy of ISS has been to recommend a negative vote regarding all directors if the board has failed to adequately implement a shareholder proposal that received either: (1) approval by vote of a majority of shares outstanding at the previous annual meeting; or (2) approval by vote of a majority of shares present at the previous annual meeting and one of the two preceding annual meetings. Beginning in 2014, ISS will recommend a negative vote if a shareholder proposal is not implemented after receiving the vote of a majority of shares present at a single annual meeting. This tighter standard is partially offset by a change to the voting guidelines, effective for 2013, that will provide ISS with the flexibility to make negative recommendations regarding individual directors, committee members, or the full board.
ISS has also provided additional guidance regarding its review of board implementation of shareholder proposals. Under the revised guidelines, to be “responsive” to a shareholder proposal, the board generally must fully implement the proposal. However, if the board’s response provides less than full implementation, ISS will consider the following factors in reaching its determination: (1) the subject matter of the proposal; (2) the level of shareholder support of the proposal; (3) board outreach to shareholders after the vote; (4) board actions in response to shareholder engagement; (5) continuation of the underlying issue as a voting item on the ballot (i.e., whether implementation requires additional shareholder approval); and (6) other factors as appropriate.
ISS uses its Pay-for-Performance analysis to determine the voting recommendation regarding a company’s Say-on-Pay proposal. Pay-for-Performance analyzes the correlation between a company’s executive pay and financial performance relative to an ISS-selected group of peer companies. Previously, ISS selected the peer group using the company’s Global Industry Classification Standard code and a range of revenue and market capitalization values similar to that of the company. ISS will now also take into account a company’s self-identified peer companies, as disclosed in the company’s proxy statement.
Hedging and Pledging of Company Stock
ISS has indicated that it will treat any hedging of company stock and significant pledging of company stock by directors or executive officers as a failure of board risk oversight that could result in a negative voting recommendation regarding individual directors, committee members, or the entire board. ISS will review pledging of company stock on a case-by-case basis using the following factors: (1) the quantity of pledged shares; (2) reductions in pledged shares; (3) exclusion of pledged stock in calculating stock ownership requirements; (4) the adoption of an anti-pledging policy; and (5) other factors as appropriate.
ISS will continue to review Say-on-Golden Parachute proposals on a case-by-case basis, but it will no longer provide a grandfather exception from review for legacy change-in-control severance agreements. Nevertheless, recently adopted or amended agreements that incorporate change-in-control features that ISS considers to be problematic (such as excise tax gross-ups and single or modified-single trigger cash severance) will receive greater scrutiny.
ISS recommends a negative vote for any director who serves on the board of more than six public company boards or who is the CEO of a public company and serves on the board of two or more additional public companies, although the negative recommendation in the latter case is only with respect to the outside company boards. In determining the number of boards a director serves on, ISS had considered a parent company and any subsidiary company owned at least 20 percent by the parent to be a single board. Under the new guidelines, all public company boards will be counted individually, regardless of any parent-subsidiary relationship.
It has been the policy of ISS to generally recommend a negative vote regarding any directors who did not attend at least 75 percent of the board and applicable committee meetings in the prior year, unless an acceptable reason for the limited attendance is disclosed. The policy update clarifies that ISS will also make a negative recommendation regarding any director for whom it is unclear from company disclosures whether the director attended at least 75 percent of board and applicable committee meetings.
Environmental and Social Issues
ISS will continue to make case-by-case recommendations regarding proposals related to environmental and social issues, which may include consumer and product safety, labor standards, human rights, diversity, and corporate political issues. The update clarifies that in making case-by-case determinations, the enhancement and protection of shareholder value will be the primary consideration, with other factors—such as prior company action, the burden of the proposal, and industry practices—also being considered. ISS has also changed its recommendation regarding proposals to link executive compensation to environmental and social factors from “generally vote against” to “vote case-by-case.” In determining its recommendation, ISS will continue to review whether the company has material controversies or regulatory violations related to such issues, oversight mechanisms in place at the company, industry standards, and current disclosures by the company.
ISS makes case-by-case recommendations regarding proposals requesting information about a company’s lobbying activities, taking into account the company’s current disclosure, material controversies or litigation regarding lobbying activities, and the effect of public policy issues on the company’s business. ISS has expanded the scope of this recommendation to also apply to proposals related to indirect lobbying and lobbying policies and procedures.