Live! From Silicon Valley, where I spoke to the SV Chapter of NASPP on “Changes to Your Equity Plan Documents to Reduce Risk (Thirty-Five Changes to Avoid Unwanted Outcomes),” ISS is launching Governance QuickScore 3.0 this week, which ISS uses to assess governance practices at public companies, replacing QuickScore 2.0. QuickScore 3.0 adds five new factors to the QuickScore 2.0 list, including:
- Does the company disclose a policy requiring an annual performance evaluation of the board?
- Has the board failed to implement a shareholder resolution supported by a majority vote, or failed to address the issue underlying majority director withhold votes?
- Has ISS’ review found that the Board of Directors recently took action that materially reduces shareholder rights?
- Is there a sunset provision on the company’s unequal voting structure?
- Does the company have a controlling shareholder?
The new QuickScore 3.0 also revises a number of the factors from the current QuickScore 2.0, as follows:
- Has a regulator initiated enforcement action against the company in the past two years? (This factor used to refer only to securities regulators.)
- Has a regulator initiated enforcement action against a director or officer of the company in the past two years? (This factor used to refer only to securities regulators.)
- What percentage of directors received shareholder approval rates below 80%? (This factor used to say below the “industry-index level.”)
- Does the company’s average three-year equity grant rate exceed the greater of two percent and the average of its industry/index peers? (This factor used to refer to grant of awards at “excessive rate.”)
- Did the most recent Say on Pay proposal receive shareholders’ support below 70%? (This factor used to say “below the industry-index level.”)
Finally, ISS now will score two former “zero-weight” questions under QuickScore 3.0:
- How many women are on the board?
- How many financial experts serve on the audit committee?
Companies should seriously consider reviewing the new factors, as well as the old, to determine their effect and may want to address these new or revised factors in proxy disclosure.
The full list of 32 factors relating to executive compensation for U.S. companies in ISS QuickScore 3.0 is as follows:
113 Does the company disclose a performance measure for the short term incentive plan (for executives)?
129 Do the company's active equity plans prohibit share recycling for options/SARS?
130 Does the company's average 3-year equity grant rate exceed the greater of 2 percent and the average of its industry/index peers?
131 What are the vesting periods mandated in the plan documents for executives' stock options or SARS in the equity plans adopted/amended in the last 3 years?
132 What are the vesting periods mandated in the plan documents, adopted/amended in the last three years, for executives' restricted stock / stock awards?
134 What is the holding/retention period for stock options (for executives)?
135 What is the holding/retention period for restricted shares / stock awards (for executives)?
138 Do the company's active equity plans prohibit option/ SAR repricing?
139 Has the company repriced options or exchanged them for shares, options or cash without shareholder approval in the last three years?
145 What proportion of the salary is subject to stock ownership requirements/guidelines for the CEO?
148 What's the trigger under the change-in-control agreements?
153 Do equity based plans or other long term awards vest completely upon a change in control?
155 Did the company disclose a claw back or malus provision?
156 Are any of the NEOs eligible for multi-year guaranteed bonuses?
161 What is the multiple of pay in the severance agreements for the CEO (upon a change-in-control)?
162 Does the company provide excise tax gross-ups for change-in-control payments?
163 What is the length of employment agreement with the CEO?*
226 What is the degree of alignment between the company's cumulative 3-year pay percentile rank, relative to peers, and its 3-year cumulative TSR rank, relative to peers?*
227 What is the degree of alignment between the company's 1-year pay percentile rank, relative to peers, and its 1-year TSR rank, relative to peers?*
228 What is the size of the CEO's 1-year pay, as a multiple of the median pay for company peers?
229 What is the degree of alignment between the company's TSR and change in CEO pay over the past five years?
232 What is the ratio of the CEO's total compensation to the next highest paid executive?
237 What is the ratio of the CEO's non-performance-based compensation (All Other Compensation) to Base Salary?
238 Does the company's active equity plans prohibit option/SAR cash buyouts?
239 Do the company's active equity plans have an evergreen provision?
240 Do the company's active equity plans have a liberal CIC definition?
246 What is the level of disclosure on performance measures for the latest active or proposed long term incentive plan
247 What is the basis for the change-in-control or severance payment for the CEO?
300 Has ISS' qualitative review identified a pay-for-performance misalignment?
301 Has ISS identified a problematic pay practice or policy that raise concerns?
328 Did the most recent Say on Pay proposal receive shareholders' support below 70%?
329 What is the degree of alignment between the company's annualized 3-year pay percentile rank, relative to peers, and its 3-year annualized TSR rank, relative to peers?