Introduction

On December 6, 2012, Institutional Shareholder Services, Inc. (“ISS”) broadcast a webinar (“Webinar”) to provide additional information regarding its Final 2013 Corporate Governance Policy Updates, which were published on November 16, 2012 (the “Final Policies”). The Final Policies were adopted substantially as set forth in the proposed policy updates issued by ISS on October 15, 2012 (the “Proposed Policies”), which are more fully described in our previous Client Memorandum, “ISS Releases Proposed Voting Guidelines for 20131.”

This memorandum summarizes the key Final Policies applicable to U.S. Companies, together with some additional commentary provided by ISS staff members during the Webinar, and notes the differences between the Proposed Policies and Final Policies. To view the full text of the ISS proxy voting updates for U.S. companies, please see: http://www.issgovernance.com/policy/2013/policy_information.

Board Response to Majority-Supported Shareholder Proposals

The Final Policies include changes to ISS’ voting guidelines with respect to board response to majority-supported shareholder proposals that lower its threshold for recommending an AGAINST/WITHHOLD vote in cases where the board failed to act on a shareholder proposal. For elections occurring in 2014, ISS will recommend an AGAINST/WITHHOLD vote when the board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year (i.e., 2013). Previously, ISS’ guidelines called for recommending an AGAINST/WITHHOLD vote if the board failed to act on a shareholder proposal receiving the support of a majority of the shares outstanding the previous year, or when the board failed to act on a shareholder proposal receiving the support of a majority of the shares cast in the last year and any one of the previous two years.

The Final Policies provide (i) beginning in 2013, the voting guidelines addressing board action on majority-supported shareholder proposals will afford ISS greater flexibility by allowing it to issue recommendations with respect to individual board members or the entire board, as appropriate, and (ii) additional clarity regarding what constitutes board “action” with respect to shareholder proposals.

Pledging of Shares

Based on comments it received from issuers and institutional shareholders, ISS changed its approach from the Proposed Policies relating to pledging of company stock by company directors and executives. Under the Proposed Policies, ISS would have addressed pledging concerns by designating the allowance of pledging as a problematic pay practice. In the Final Policies, however, ISS has instead determined that the allowance of pledging of company stock, is more appropriately considered a corporate governance failure for which directors should be held accountable. The Final Policies indicate that ISS will take a case-by-case approach in determining a voting recommendation for directors of companies whose executives or directors have pledged company stock, and will consider the following factors: (i) presence in the company’s proxy statement of an antipledging policy that prohibits future pledging activity, (ii) magnitude of aggregate pledged shares in terms of total common shares outstanding or market value or trading volume; (iii) disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time; (iv) disclosure in the proxy statement that stock ownership and holding requirements do not include pledged company stock; and (v) any other relevant factors. ISS acknowledged that a significant level of pledging activities may give rise to an AGAINST/WITHHOLD vote recommendation with respect to individual directors connected with (or overseeing) the practice.

Management Say-On-Pay Proposals

The Final Policies to ISS’ Executive Compensation Evaluation Policy include those changes that were announced as part of the Proposed Policies to both its quantitative and qualitative analyses of pay-forperformance alignment used when determining whether to advise voting against a company’s say-on-pay proposal.

Company Peer Group

Consistent with the Proposed Policies, the Final Policies provide that in selecting peer group companies to be used in its quantitative analysis of a company’s pay-for-performance alignment ISS will consider such company’s self-selected peer group companies. Generally the self-selected peer group indentified in the company’s last proxy statement will be used for this purpose. However, during the Webinar, ISS announced that it will offer Russell 3000 index companies the opportunity to update their self-selected peer group information to reflect changes that have been made with respect to 2012 compensation decisions. Companies are encouraged by ISS to report any such changes by completing the web form, which can be found at http://www.issgovernance.com/PeerFeedbackUS.

Realizable Pay

Also consistent with the Proposed Policies, the Final Policies provide that for those companies for which ISS conducts a qualitative review of pay-for-performance alignment, ISS will consider “realizable pay,” in comparison to “grant pay,” as an additional factor when conducting its analysis of a company’s pay practices. However, the Final Policies provide that the use of realizable pay as a factor in its qualitative analysis would apply only to large cap companies. ISS clarified during the Webinar that it believed the “realizable pay” to “grant pay” comparison would be most meaningful in its analysis of large cap company pay practices, and furthermore, that it wished to test the use of this new factor on a smaller subset of companies before possibly applying the additional factor more widely in the future. For this purpose, a “large cap” company is a company included in the S&P 500.

Say on Golden Parachute Proposals

In a shift from its prior policy, as provided in the Proposed Policies and adopted in the Final Policies, ISS will consider not only new or recently extended change in control agreements, but will also focus on existing change in control agreements when determining its voting recommendation for a company’s say on golden parachute proposal. Recent amendments will continue to carry more weight in the analysis, but the presence of multiple legacy problematic features will also be more closely scrutinized.

Environmental and Social Non-Financial Performance Compensation-Related Proposals

The Final Policies provide that ISS will issue on a case-by-case basis voting recommendations for proposals that link environmental or social non-financial performance metrics to executive compensation. This approach, which is consistent with the Proposed Policies, supersedes its previous policy of generally recommending a vote AGAINST such sustainability criteria.

Conclusion

Because ISS policy updates have such great influence in the investing community, companies should consider the impact these updates may have on future director elections, proposals included in their proxy statements, and other future corporate actions.