Only ten days ago, I posted on ISS’ announcement of its 2018 benchmark proxy voting policies. Then last week, right before Thanksgiving, ISS published nine “Preliminary Frequently Asked Questions,” five announcing changes to its Equity Plan Scorecard and four changes to its Quantitative Pay-for-Performance Screens.
The four changes ISS announced to its application of its Quantitative Pay-for-Performance Screens are as follows:
1. Effective for annual meetings on or after February 1, 2018, the threshold for a medium level of concern on the Multiple Of Median (MOM) quantitative screen for S&P 500 constituents covered by ISS U.S. policy will change from 2.33 to 2.00.
2. For 2018, ISS will smooth both beginning-of-period and end-of-period stock prices for the purpose of calculating Total Shareholder Return (TSR) by averaging the beginning and ending stock price for the month closest to the fiscal year end of a company (to reduce the impact of point-in-time stock price fluctuations in the calculation of TSR. The impact of dividends and stock splits occurring during the averaging period will be factored into the calculation of TSR. If a company’s fiscal year end is on/after the 15th of the month, then that monthly average will be used; otherwise, the monthly average for the prior month will be used.
3. ISS has added a Financial Performance Assessment (FPA) test to the quantitative pay-for-performance screen, applied as a secondary measure after the traditional three screens (Multiple of Median, Relative Degree of Alignment, and Pay-TSR Alignment) have been calculated. ISS will use the FPA test to identify certain companies that resulted in a “medium” level of concern on the primary screens, but had relatively strong fundamental financial performance, and may reduce the final level of quantitative concern to “low.” Conversely, the secondary FPA test may identify certain companies that otherwise received a “low” level of concern but had relatively weak fundamental financial performance; in those cases, the company’s final level of quantitative concern may be increased to “medium.”
4. In applying the FPA test, ISS will select and weigh certain performance metrics, including ROIC, ROA, ROE, and EBITDA Growth, slightly differently in each industry, according to a table included in the FAQs. ISS will use four of the metrics for most industries, but for a small number of industries, three will be used.
The five changes ISS announced to its use of Equity Plan Scorecard are as follows:
5. ISS increased the passing score for companies subject to the S&P 500 scoring model to 55 points for the 2018 policy year. For all other EPSC models, the passing score will remain 53 points.
6. ISS “simplified” the Change in Control Vesting factor within EPSC. For the 2018 policy year, ISS will give full credit where the company’s equity plan contains specific treatment for both time- and performance-based awards. For performance-based awards, ISS will approve of accelerated vesting in one of three forms: (i) actual performance achieved, (ii) pro-rata of target based on the elapsed proportion of the performance period, or (iii) a combination of both actual and pro-rata. Otherwise, the performance awards must be forfeited or terminated upon a change in control. In cases where there are no performance-based awards, points for this factor will be based solely on the treatment of time-based awards.
For time-based awards, acceleration upon a change in control cannot be automatic single-trigger or discretionary. In all other cases, ISS will give no receive credit for the Change in Control Vesting factor within EPSC.
7. ISS reduces the threshold for receiving full credit on the Holding Requirement factor under EPSC from a 36-month holding period to a 12-month holding period (or, as before, holding through the end of employment). However, a holding period of less than 12 months will result in no credit. Companies with holding periods that apply only until ownership guidelines are met will not receive credit on this factor.
8. The EPSC contains three CEO vesting-related factors, one each for time-based options, time-based restricted stock, and performance-based equity awards. ISS decreased the threshold for receiving full credit on all three of these factors to plans to having a vesting requirement of at least three years from the date of grant until all shares from the award vest, from four years or more.
9. Finally, ISS will give full credit on the Broad Discretion to Accelerate Vesting factor within EPSC only for equity plans that limit discretion to accelerate awards in the cases of death and disability. Authority to accelerate awards in the case of a change in control will not receive credit under this factor.
ISS will certainly be issuing more guidance before we begin filing our proxy statements (and hopefully before we begin to draft them), so stay tuned.
P.S.: As I am posting this I see that Glass Lewis has issued its Voting Guidelines for 2018. I guess this means you will be hearing from me again this week!