Institutional Shareholder Services (ISS), a leading proxy advisory firm, recently released updates to its benchmark U.S. proxy voting policies.1 ISS will use the updated benchmark policies to formulate voting recommendations for public company shareholder meetings held on or after February 1, 2014.
ISS recommendations strongly influence the voting decisions of many institutional investors, and some institutional investors vote in accordance with ISS’ recommendations as a matter of policy.2 As a result, ISS’ voting recommendations often affect results of shareholder votes on key proposals, including director elections and say-on-pay. ISS has again made it clear in the updated policies that its case-by-case determinations of voting recommendations will depend in part on a company’s disclosures and actions regarding the relevant subject matter. Accordingly, compliance personnel should consult the updates and the complete voting policies and related ISS guidance as they become available when making governance and compensation decisions and preparing 2014 proxy disclosure.
Benchmark U.S. Policy Updates
Upcoming ISS webcast. On December 11, 2013 at 11:00 a.m. EST, ISS will hold a webcast to discuss its U.S. and Canadian policy updates and the key corporate governance issues investors are likely to grapple with in 2014. To register for this webcast you may click here.
Board responsiveness to majority-supported shareholder proposals. In making voting recommendations on director nominees in uncontested elections, ISS considers, among other matters, board responsiveness to votes on majority-supported shareholder proposals. ISS previously announced it would review board responsiveness to shareholder proposals that receive the support of a majority of the shares cast in the previous year.3 ISS has now issued a clarifying change to its policy.
For the 2014 proxy season, voting recommendations as to individual directors, committee members or the entire board will be made on a “fact-specific case-by-case” basis rather than a general “vote against or withhold” basis if the board failed to act on (that is, fully implement) a shareholder proposal that received the support of a majority of the shares cast in the previous year. The most important factor in ISS’ determination of its voting recommendation, starting in 2014, may be the board’s rationale for its chosen level of implementation of a majority-supported shareholder proposal as disclosed in the proxy statement. If a board did not fully implement a majority-supported shareholder proposal, ISS believes directors “should communicate how they made the determination that the response they chose is in the best interest of the shareholders.” This new factor is in addition to existing factors that will be considered, which include disclosed shareholder outreach efforts after the majority vote and board actions taken in response to that vote and the board's engagement with shareholders.
Boards should not feel pressured by this ISS policy update to fully implement a majority-supported shareholder proposal. As part of exercising their fiduciary duties, boards should evaluate the merits of any majority-supported shareholder proposal and determine whether full, partial or no implementation of the proposal is in the best interest of the company and its shareholders. However, boards should be prepared to engage with shareholders over their decision and provide proxy statement disclosure of their decision and rationale.
Pay-for-performance quantitative screen. ISS is changing its methodology for calculating the relative degree of alignment (RDA) pay-for-performance measure used to evaluate say-on-pay votes. The RDA measure examines the difference between the company’s total shareholder return (TSR) rank and the CEO’s total pay rank within an ISS-established peer group. Instead of the existing 40/60 weighted average of one-year and three-year RDA measures, the new methodology will include a single, annualized three-year RDA measurement period (or as many full fiscal years that the company has been publicly traded and disclosed pay data).
Under the new methodology, the TSR for each year in the RDA measurement period will be weighted equally and calculated to produce the annualized TSR for that period. ISS believes this will provide a “smoother performance measure that does not over-emphasize any particular year during the measurement period.” ISS will address relevant performance and pay in particular years during the qualitative phase of its review of executive pay, as applicable. As the prior RDA methodology placed greater emphasis on the most recent year, companies with volatile year-over-year TSR may find the new methodology to be a favorable change.
Realizable pay calculations. Beginning with February 1, 2014 meetings, ISS research reports will include chief executive officer realizable pay charts for all S&P 1500 companies similar to last year’s reports for large-cap companies. ISS may analyze realizable pay as part of its qualitative pay-for-performance analysis for certain companies. S&P 1500 companies should consider reviewing the drafts of their ISS reports to confirm that ISS’ calculation of realizable pay of the chief executive officer is accurate.4 These companies should also consider whether to include realizable pay disclosure in their proxy statements.
Lobbying. When determining its voting recommendation on proposals regarding a company’s lobbying activities, policies or procedures, which ISS will continue analyzing on a case-by-case basis, ISS will now also consider:
- executive level oversight of lobbying activity, in addition to board oversight; and
- the company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage in lobbying activities.
Under this updated policy, ISS will no longer consider the impact that any public policy issues specifically addressed in a proposal may have on the company’s business operations when determining ISS’ voting recommendation on such proposal.
Human rights risk assessment. ISS has adopted a new policy to address recent shareholder proposals regarding a company’s human rights risk assessment or related reports. ISS will now make recommendations on a case-by-case basis for shareholder proposals requesting that a company conduct an assessment of the human rights risks in its operations or supply chain or report on its human rights risk assessment process. In making its recommendation, ISS will consider:
- the degree to which existing relevant policies and practices are disclosed, including information on the implementation of these policies and any related oversight mechanisms;
- the company’s industry and whether the company or its suppliers operate in countries or areas where there is a history of human rights concerns;
- recent, significant controversies, fines or litigation regarding human rights involving the company or its suppliers, and whether the company has taken remedial steps; and
- whether the proposal is unduly burdensome or overly prescriptive.
Upcoming milestones. In addition to releasing its U.S. policy updates, public companies should stay tuned for the following ISS actions:
- the release of a complete set of updated ISS policies in full and/or summary form in December 2013;
- the release of updated frequently asked questions on key policies in December 2013; and
- updates to U.S. summary proxy voting guidelines in January 2014 based on ISS’ evaluation of new U.S. shareholder proposals anticipated for 2014.
Long-Term Policy Changes
In conjunction with the release of its 2014 U.S. policy updates, ISS opened a new consultation period seeking market feedback on potential, post-2014 changes to the following U.S. benchmark policies:
- director tenure;
- director independence;
- independent chair shareholder proposals;
- auditor ratification/tenure; and
- equity-based compensation plans.
To learn more, please click here. This is the first time ISS has employed this method for seeking feedback as it shifts its policy development from a seasonal to a continuous process. The consultation period remains open until February 2014.