On October 16, 2012, ISS released the 2013 draft updates to its proxy voting guidelines for comment by investors and issuers.1 Issuers should consider the proposed updates, summarized below, including any impact they may have on the expected level of support for the directors or the company’s other proposals. These policies would apply to shareholder meetings held on or after February 1, 2013. Comments on the proposed policy changes are due by October 31, 2012.


ISS is proposing a more stringent approach to its policy regarding implementation of shareholder-supported proposals from past years. Specifically, if the proposed policy is adopted, ISS would recommend a vote against or withhold from the entire board (except new nominees, for whom its recommendation would be case-by-case) if the board failed to implement a shareholder proposal that received the support of a majority of the votes cast in the previous year. Currently, ISS employs two less strict criteria, recommending a vote against or withhold if the board failed to act on a shareholder proposal that received the majority support of either (1) the shares outstanding in the previous year or (2) the votes cast in the last year and one of the two previous years.

The adoption by ISS of such a policy would change the current approach of many issuers, which is to allow shareholder proposals to come to a vote and then, taking the voting results, shareholder feedback and market trends into account, to determine whether and how to take responsive action without the threat of impending negative recommendations on directors. Instead, an issuer would be more likely to take action to prevent a precatory shareholder proposal from coming to a vote and passing in the first place — for example, by implementing, or proposing to implement, changes that address the topics raised by a proposal in a different manner than that requested by the proposal.

This policy change appears to contemplate retroactive application, in that ISS would recommend against or withhold votes in 2013 based on voting results in 2012, even though those voting results occurred prior to the adoption of the new policy. Retroactive application in this manner, however, would be unfair to companies that relied on ISS’s existing policies and determined to allow a shareholder proposal to come to a vote in 2012, even though there was a risk that it would pass by a majority of votes cast. These companies may have done so because the directors justifiably expected to have time to take shareholder responses and market trends into consideration in deciding how to proceed without facing an immediate requirement to implement the specific proposal. An abrupt change in policy by ISS would be procedurally unfair. Recommending against or withhold votes in 2013 based on 2012 results would fail to give appropriate consideration to those directors’ good faith reliance on ISS’s then-existing policies in deciding how to approach shareholder proposals in 2012.

Sullivan & Cromwell and others have raised this concern with representatives of ISS, and our firm intends to submit a formal comment in this regard.


ISS is proposing to change three inputs, both quantitative and qualitative, to the executive compensation evaluation policy that it adopted a year ago for purposes of formulating a recommendation on the company’s advisory say-on-pay proposal:

  • incorporating information about a company’s self-selected peers into ISS’s methodology for selecting peer groups as part of its quantitative pay-for-performance analysis;
  • including a comparison of “realizable” pay to grant date pay as part of its qualitative pay-for-performance analysis at large cap companies; and
  • adding pledging of shares as a negative qualitative factor in assessing executive compensation.

Peer group methodology. In conducting its quantitative analysis of pay-for-performance, ISS assesses a relative alignment, comparing companies within groups of 14-24 peers selected on the basis of market capitalization, revenue (or assets for financial firms), and GICS industry group.2 ISS’s construction of peer groups was a common subject of criticism by companies in the 2012 proxy season.3 As ISS notes, its current focus on the subject company’s GICS industry classification may not reflect multiple business lines in which the company operates, sometimes leading to the exclusion of a company’s competitors from, or the inclusion of inappropriate comparisons in, the ISS peer group. ISS’s draft revision would incorporate information about a company’s self-selected peers to improve this relative comparison. The proposed change in methodology would draw peers from GICS classifications represented in the company’s self-selected peer group, while maintaining the approximate proportions of these industries in the ISS peer group where possible. The methodology also would prioritize peers that maintain the company near the median of the peer group, that are in the subject company’s peer group, and that have chosen the subject company as a peer.4 Because many companies create peer groups based on multiple factors in addition to the GICS group, it is possible that ISS’s focus on that factor may have unintended consequences. It may be useful for companies to review their current peer group from ISS’s proposed perspective and evaluate the result.

Realizable pay. If ISS’s quantitative pay-for-performance analysis demonstrates “weak” alignment, then ISS conducts a further qualitative review to determine a final vote recommendation on management say-on-pay. This qualitative review takes into account a broad range of factors, including the use of performance-based awards, performance goals, peer group benchmarking, and financial performance. ISS is proposing adding “realizable pay as compared to grant pay” as one of these factors for large cap companies. “Realizable pay” would consist of the sum of relevant cash and equity-based grants and awards made during a specified performance period being measured, based on equity award values for actual earned awards, or target values for ongoing awards, calculated using the stock price at the end of the performance measurement period. In other words, it calculates performance-based pay by the final payouts made (or changes in value to ongoing awards) due to gains or losses in the company’s stock price over the measurement period. In doing so, it attempts to show how executive pay has been affected by performance. ISS states that “grant date pay,” by contrast, shows the intent of the pay decisions of the compensation committee. Unfortunately, neither the SEC’s current summary compensation table nor ISS’s proposed realizable pay calculation is entirely consistent, with both including elements of both grant date pay and earned pay.

Pledging of shares. ISS currently evaluates pay elements that are not based directly on performance on a case-by-case basis, but it maintains a list of “problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations.” ISS is proposing adding pledging of company stock by executives or directors to this list of problematic practices.5 In ISS’s view, pledging stock for margin accounts or other loans may adversely affect shareholders or the company by, among other possibilities, forcing the executive or director to sell a significant amount of company stock to satisfy a margin call, which could impact the company’s stock price or violate company insider trading policies, as well as allowing the executive or director to hedge economic exposure to the company’s stock, even while maintaining voting rights. Although, as ISS notes, pledging policies are not tied to compensation, it believes say-on-pay proposals are a reasonable mechanism for shareholders to voice concern with companies’ pledging policies because most executives and directors receive a substantial portion of their company shares through compensation programs.

Details not yet published. The proposed executive compensation policy changes generally omit significant details, especially as to the realizable pay and pledging of shares revisions. For example, ISS expressly seeks comments regarding the appropriate measurement period for realizable pay and how to define a “significant” level of pledging of company stock that causes concern for investors. Accordingly, it may be difficult for companies to assess how ISS will evaluate particular compensation decisions under the proposed policy changes.


Under SEC rules adopted in January 2011 pursuant to the Dodd-Frank Act, companies are required to hold a separate advisory vote on potential severance and change-in-control payments when seeking shareholder approval for mergers and other similar transactions. ISS’s proposed policy change regarding these so-called “say-on-golden-parachute” votes would continue to evaluate proposals on a case-by-case basis and take into account the factors set forth in ISS’s existing policies, adopted by ISS a year ago, such as single-trigger acceleration of unvested equity awards, excessive severance payments, and a company’s assertion that the proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote. The proposed 2013 policy, however, includes a focus on all existing change-in-control arrangements with executive officers, rather than focusing only on new or extended arrangements as under the current policy. Thus, for example, where the current policy considers factors such as recently adopted or materially amended agreements that include modified single triggers or excise tax gross-up provisions, the proposed 2013 policy would consider factors such as, simply, “Single- or modified-single-trigger cash severance” and “Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value).” It also offers a specific definition for “excessive” cash severance: greater than three times base salary and bonus. The proposal states that recent amendments that incorporate problematic features will tend to carry more weight on the overall analysis, but that the presence of multiple legacy problematic features also will be closely scrutinized.  ISS indicated that these proposed policy changes “will likely increase the number of ISS’ negative vote recommendations.”


ISS is proposing to modify its general position on shareholder proposals urging the company to link executive compensation to environmental and social non-financial performance (often referred to as “sustainability metrics”) from “generally vote against” to “vote case-by-case.” Additionally, the policy would delete the illustrative list of specific social and environmental criteria to which a shareholder proposal might seek to link compensation,6 thus employing only the general term “sustainability criteria,” and would clarify that “sustainability” refers equally to environmental and social issues. Finally, in evaluating any particular proposal, ISS would change the existing factor of whether the company has “significant and persistent controversies or violations” regarding sustainability issues to whether the company has “significant and/or persistent controversies or violations.”

These changes are intended to provide ISS with greater flexibility to incorporate developments in evolving environmental and social issues, particularly for certain industries such as the extractive industry sector or other sectors where companies have greater exposure to environmental issues.