ISS Policy Updates

ISS has issued its 2016 Proxy Voting Policy Updates, which apply to shareholder meetings occurring on or after February 1, 2016. The changes include the following:

Overboarding. For most directors except for CEOs, the maximum number of public company boards permitted before a director will be considered "overboarded" is being reduced from six to five. There will be a one-year grace period until February 1, 2017, giving directors and companies time to make any changes in advance of the 2017 proxy season. During 2016, ISS will highlight if a director is on more than five public company boards, but will not make adverse voting recommendations unless the current maximum of six boards is exceeded. For CEOs, the current overboarding limit will remain at two outside directorships.

Unilateral Board Actions. ISS currently makes adverse recommendations on individual directors or the full board at the annual meeting following a unilateral board amendment of the charter or bylaws that adversely affects shareholder rights.

For existing public companies, the updated policy generally calls for continuing to withhold votes in the case of unilateral adoption of a classified board or supermajority requirements to amend the charter or bylaws, or the elimination of shareholders’ ability to amend the bylaws.

For newly-public companies that took unilateral actions prior to or in connection with an IPO, ISS will generally make case-by-case determinations, with significant weight given to shareholders’ ability to make future changes to the governance structure through a simple majority vote, and their ability to hold directors accountable through annual director elections. A public commitment to put the provisions to a shareholder vote within three years of the IPO can be a mitigating factor.

Compensation of Externally-Managed Issuers (EMIs). An EMI’s failure to provide sufficient disclosure for shareholders to reasonably assess compensation for named executive officers will be deemed to be a problematic pay practice and generally warrant a negative recommendation against the say-on-pay proposal.

Proxy Access. ISS indicated that it plans to continue its current approach, but will release an "FAQ" document in December to provide more detail "on which additional provisions ISS considers overly restrictive" in management and shareholder proposals to adopt proxy access. It also plans to clarify the framework it would use to analyze proxy access nominations.

Equity Plan Scorecard. The basic policy has not changed, but a few adjustments were made (as discussed in FAQs on US Equity Plan Scorecard), including:

  • The "IPO" model has been renamed "Special Cases" to cover companies with less than three years of disclosed equity grant data (e.g., IPO and bankruptcy emergent companies).
  • The Special Cases model will include grant practice factors other than burn rate and duration for Russell 3000/S&P 500 companies.
  • Scoring for change in control vesting (including automatic single-trigger vesting) has been adjusted.
  • A longer holding period is required for post-vesting/exercise for full points, and certain other factor scores have been adjusted.

Glass Lewis 2016 Policy Updates

Glass Lewis has updated its 2016 Proxy Voting Policies.

Overboarding. Beginning in 2017, Glass Lewis will generally recommend voting against a director who serves as an executive officer of any public company while serving on a total of more than two public company boards (reduced from three) and any other director who serves on a total of more than five public company boards (reduced from six). During 2016, Glass Lewis may note as a concern instances where directors do not meet the 2017 requirements.

Exclusive Forum Provisions. Glass Lewis will no longer recommend that votes against the chairman of the nominating and governance committee for IPO companies that have exclusive forum provisions. Instead, it will consider such provisions along with any other charter or bylaw terms that it believes unduly limit shareholder rights, such as supermajority vote requirements, a classified board or a fee-shifting bylaw. Its policy in contexts outside of a spin-off, merger or IPO remains unchanged: to recommend votes against the chairman of the nominating and governance committee, where a company adopts an exclusive forum provision without shareholder approval.

Nominating Committee Performance. Glass Lewis has indicated that it may consider recommending shareholders vote against the chair of the nominating committee "where the board’s failure to ensure the board has directors with relevant experience, either through periodic director assessment or board refreshment, has contributed to a company’s poor performance."

Environmental and Social Risk Oversight. Glass Lewis has codified its existing policy regarding director oversight of environmental and social issues to make. In cases where the board or management has failed to sufficiently identify and manage a material environmental or social risk that Glass Lewis believes did or could negatively impact shareholder value, it will recommend shareholders vote against directors responsible for risk oversight in consideration of the nature of the risk and the potential effect on shareholder value.

Conflicting Management and Shareholder Proposals. Glass Lewis we will consider the following in evaluating conflicting proposals: (i) the nature of the underlying issue; (ii) the benefit to shareholders from implementation of the proposal; (iii) the materiality of the differences between the terms of the shareholder proposal and management proposal; (iv) the appropriateness of the provisions in the context of a company’s shareholder base, corporate structure and other relevant circumstances; and (v) a company’s overall governance profile and, specifically, its responsiveness to shareholders as evidenced by a company’s response to previous shareholder proposals and its adoption of progressive shareholder rights provisions.

Compensation Updates. Glass Lewis made modest adjustments relating to one-time and transitional awards to highlight certain factors considered in evaluating such awards and expectations regarding relevant disclosure. It also clarified the quantitative and qualitative factors used to analyze equity compensation plans.

ISS Compensation Peer Group

Companies in the Russell 3000 or Russell MicroCap Index with annual meetings between February 2, 2016 and September 15, 2016 may notify ISS of any updates to their self-selected pay benchmarking peer group by 8pm EST on December 11, 2015.

No action is required if there are no changes to the peer group most recently disclosed as of December 2015, typically in the most recent proxy statement. However, companies that have modified their peer groups since then or intend to do so in the circumstances described below should consider notifying ISS. Companies can notify ISS using this ISS US Company Peer Group Feedback Web Form.

In most cases, ISS would request that companies provide the peer group used for pay decisions in 2015. If the anticipated 2016 changes are due to business events that have made companies in the 2015 peer group no longer relevant (e.g., significant business changes, mergers, spinoffs, or bankruptcies), an updated peer group would be appropriate – but should match the disclosure in the 2016 proxy statement.

The peer group used by ISS generally relies on GICS industry classifications and gives priority to members of the company’s peer group used for CEO pay benchmarking purposes; however, ISS has indicated it may adjust peer groups where believed appropriate, as explained in its FAQs on US Peer Groups for ISS. Additionally, ISS has indicated that the company’s peers may not appear in the ISS peer group , as discussed in the FAQs.

Glass Lewis Compensation Peer Group

Glass Lewis utilizes peer groups generated by Equilar based on a company’s self-disclosed peer group and the strength of connection between peer companies (i.e. one-way vs. reciprocal connections). The top 15 peers are used in its pay-for-performance analysis, as discussed in its Pay-for-Performance FAQs.

Equilar is offering companies a similar opportunity to update peer groups that will appear in 2016 proxy statements. Equilar recalculates peer groups in January and July of each year.

Companies that wish to provide updated peer groups in connection with proxy statements filed between January 15 and July 14, 2016 should submit this 2016 Equilar Peer Group Update Web Form by December 31, 2015. The form includes a link to FAQs.