On October 15, 2012, Institutional Shareholder Services (ISS) issued proposed updates to its proxy voting guidelines for 2013. Interested parties have until October 31, 2012 to submit comments on these proposals.

Each year,1 ISS reviews and updates its proxy voting guidelines, taking into account emerging issues and trends, the evolution of market standards, regulatory changes, and feedback provided by ISS’ institutional clients. Once approved, the ISS 2013 Corporate Governance Policy Updates will likely become applicable to publicly traded companies with shareholder meetings on or after February 1, 2013. To view the full text of the ISS proposed policies, please see ISS’ website at policycomment2013.


The 2013 policy updates applicable to U.S. companies2 include the following:

Board Response to Majority-Supported Shareholder Proposals

ISS proposes to change its policy toward board responsiveness to majority-supported shareholder proposals. In support of this change, ISS cites its own studies showing an increased interest by institutional shareholders in board responsiveness to shareholder proposals. According to ISS, the changes are consistent with an “evolved” market view of such proposals.

Under current policy, ISS recommends a vote of “Against” or “Withhold” for an entire board (except for new nominees, who would be evaluated on a case-by-case basis) under the following two circumstances:

  • Board failure to act on a shareholder proposal that received the support of a majority of the shares outstanding the previous year; or
  • Board failure to act on a shareholder proposal that received the support of a majority of shares cast in the last year and in one of the two previous years.

Under the proposed policy, ISS would lower the threshold for issuing an Against/Withhold recommendation, making it applicable to any instance where the board failed to act on a shareholder proposal that received the support of a majority of shares cast in the previous year.

Management Say-On-Pay Proposals

ISS has proposed several changes to its Executive Compensation Evaluation Policy, which it uses to determine whether to recommend a “For” or “Against” vote on a company’s say-on-pay proposal, and which was extensively modified last year. In particular, ISS has proposed the following changes to its policy: (i) allowing more flexibility in selecting a company’s peer group; (ii) incorporating consideration of “realizable pay,” as compared to “grant date pay,” as part of its qualitative pay-for-performance alignment review process; and (iii) including the pledging of shares by executives or directors as a problematic pay practice.

Company Peer Group

ISS’ pay-for-performance evaluation generally includes an analysis of the alignment between the company’s pay and performance (defined for this purpose as the company’s total shareholder return), on a relative basis over one-year and three-year periods using an ISS-selected peer group of 14-24 companies, as well as on an absolute basis over a five-year period. The peer group used for the relative alignment analysis is selected based on similarity in industry profile, size and market capitalization, focusing on the company’s GICS industry classification. Following the implementation of this new evaluation policy last year, ISS received feedback that using the GICS code of only the subject company may not encompass all aspects of a company’s business, and therefore may result in a peer group that does not accurately reflect an appropriate cross section of the subject company’s competitors. Taking this into account, ISS proposes to provide more deference to the company’s own self-selected peer group used for compensation-related purposes. ISS would do this by (1) including as data points used in forming the ISS peer group not only the GICS code of the subject company, but also the GICS codes of companies identified by the subject company as part of its peer group and (2) prioritizing companies for inclusion in the ISS peer group that are in the subject company’s self-selected peer group, and that have chosen the subject company in their peer group. In addition, ISS will continue to apply size constraints it deems appropriate, so that the subject company is generally in the middle of the size range of its ISS peer group.

Realizable Pay Versus Granted Pay Comparison

During the most recent proxy season, many companies disclosed alternative methods of analyzing compensation levels in addition to the way compensation is calculated and disclosed in the summary compensation table. In particular, the summary compensation table reflects equity compensation values calculated as of the date of grant; however, such “granted pay” calculations use certain assumptions that do not necessarily take into account the amount of compensation that may actually be “realized” upon the achievement of relevant performance goals in future years, or the movement of a company’s stock price since the date of grant. For those companies for which ISS conducts a qualitative review (because the quantitative relative and absolute alignment reviews identified possible areas of concern), ISS proposes looking at “realizable pay,” compared to “grant pay,” as one of the pay elements used by ISS to determine if the company’s pay practices are aligned with shareholder interests. For this process, ISS has indicated that the “realizable pay” calculation would consist of calculating the sum of relevant cash and equity-based grants made in the period being measured, based on equity award values of actual earned awards, or target levels for awards still ongoing, and using the stock price at the end of the measurement period. The “realizable pay” analysis, like the other factors considered as part of the qualitative review, such as the ratio of performance-based to time-based equity awards and the overall ratio of performance-based compensation, could either mitigate or exacerbate executive pay for performance concerns.

Pledging of Shares

ISS currently identifies repricing underwater options, providing tax gross-ups, and providing excessive perquisites as among “problematic” pay practices that may result in a negative say-on-pay recommendation. In 2012, ISS highlighted the pledging of company stock by company directors and executives as a concerning pay practice. ISS believes that pledges may have a detrimental effect on shareholders if the director or officer is forced to sell company stock because such a sale could negatively impact the stock price or violate insider trading policies. Furthermore, ISS is concerned that such pledging could be used as a hedging strategy to immunize an executive against negative economic exposure. ISS has proposed that any pledging of company stock be considered a problematic pay practice, which may result in an adverse say-on-pay recommendation.

Say on Golden Parachute Proposals

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires a company to hold a separate shareholder vote on potential “golden parachute” payments when it seeks shareholder approval for a merger, sale, or similar transaction. Previously, ISS focused on what it identified as “problematic” severance features in new or recently amended change in control agreements, such as:

  • Single-trigger equity or cash severance;
  • Cash severance greater than three times the executive’s current base salary and bonus;
  • Excise tax gross-ups; and
  • Excessive golden parachute payments.

ISS now proposes not only to examine new or recently extended change in control agreements, but also to focus on existing change in control agreements. Therefore, ISS will consider existing agreements containing such features when it determines whether to advise against a particular say on golden parachute vote. Recent amendments will continue to carry more weight, but the presence of multiple legacy problematic features will also be closely scrutinized.

Environmental and Social Non-Financial Performance Compensation-Related Proposals

For 2013, ISS is proposing to change its approach to proposals that link environmental or social non-financial performance metrics to executive compensation. These so-called sustainability metrics typically affect mining and other natural resources companies, but can conceivably impact any company whose operations implicate environmental or social issues.

According to ISS, proposals to adopt sustainability metrics are proliferating because of investor initiatives, such as in the UN Principles for Responsible Investment. ISS reports that such initiatives are seeing increased participation by institutional investors. Further, an ISS survey found that a majority of investors believed that the adoption of sustainability metrics could be beneficial to shareholders.

The current ISS policy on sustainability metrics calls for recommending that investors vote against such metrics. However, ISS now proposes a substantial departure from its current practice, namely, by recommending that investors at least consider sustainability measures on a case-by-case basis. ISS also proposes additional changes to the text of its guidelines. Together, the proposed changes are reflected in the following markup of ISS’ current policy on Environmental, Social, and Governance (ESG) Compensation-Related Proposals:

Generally vVote AGAINST CASE-BY-CASE on proposals to link, or report on linking, executive compensation to sustainability (environmental and social) criteria. such as corporate downsizings, customer or employee satisfaction, community involvement, human rights, environmental performance, or predatory lending. However, tThe following factors will be considered:

  • Whether the company has significant and/or persistent controversies or violations regarding social and/or environmental issues;
  • Whether the company has management systems and oversight mechanisms in place regarding its social and environmental performance;
  • The degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation practices; and
  • The company’s current level of disclosure regarding its environmental and social performance.


Because ISS policy updates have such great influence in the investing community, companies should consider the impact these proposals may have on future director elections, proposals included in their proxy statements, and other future corporate actions. Interested parties may also comment on these proposals to ensure that their views are considered by ISS as it decides whether to adopt these proposals. The comment deadline is October 31, 2012.