On October 18, 2011, Institutional Shareholder Services, Inc. (ISS) published for comment its proposed 2012 updates to its proxy voting guidelines. The proposed updates include the following:
Board Response to Say-On-Pay Votes
- The proposed guideline provides that ISS will review, on a case-by-case basis, whether to approve the compensation committee members and the current say-on-pay proposal if the company's prior say-on-pay proposal received significant opposition. A higher level of scrutiny will be placed on companies where the say-on-pay proposal received less than 50% support.
- Recurring compensation issues, depending on severity, may result in an against vote on the say-on-pay proposal.
- ISS noted that when a significant number of shareholders oppose a say-on-pay proposal, an appropriate response from the company includes disclosure of its outreach efforts to major institutional investors as well as concrete actions that it has taken to address the compensation issues that resulted in the significant opposition votes. ISS requested comment on what level of less than 70% support warrants action by the company to address the concerns.
Board Response to Say-On-Pay Frequency Votes
- The proposed guideline would recommend a withhold/against vote against all incumbent director nominees if the board implements say-on-pay votes on a less frequent basis than the frequency chosen by a majority of votes cast at the most recent vote-on-frequency.
- The proposed guideline lists factors for a case-by-case analysis if the frequency of say-on-pay votes implemented by the board is less than the frequency chosen by a plurality, but not a majority, of votes cast at the most vote-on-frequency. ISS will consider the following: the board's rationale that a less frequent vote is beneficial to shareholders, the impact that a significant shareholder may have had on the vote outcome, whether ISS has identified significant executive compensation concerns or a history of problematic compensation practices, and significant levels of shareholder disapproval on the prior year's say-on-pay vote.
Proxy Access Proposals
- The proposed guideline introduces a non-exhaustive list of factors for evaluating, on a case-by-case basis, shareholder proposals seeking open or proxy access, including the rationale for the proposal, the proposed ownership thresholds, the number of directors that may be nominated and the method of determining which nominees will appear on the ballot if multiple shareholders submit nominations.
Evaluation of Executive Pay
- The proposed guideline would implement a new methodology for ISS's pay-for-performance analysis. The new analysis combines three quantitative factors: (1) the alignment between the company's total shareholder return rank and the CEO's pay rank within the peer group, measured over one-year and three-year periods; (2) the CEO's compensation multiple as compared to the peer group median; and (3) the alignment between the five-year historical trend in CEO pay and the company's trended total shareholder return over the same period.
- A non-exhaustive list of new qualitative factors ISS will review includes ratio of performance to time-based equity awards, ratio of performance-based compensation to overall compensation, and robustness of disclosure practices.
Equity Plans Related to Section 162(m)
- The vote recommendation responds to a proposed change in Internal Revenue Code Section 162 (m), requiring IPO companies to seek approval of performance-based restricted stock units to named executive officers. ISS will recommend approval on a case-by-case basis after conducting a full equity plan analysis.
Political Contribution Proposals
- The proposed guideline would shift ISS's policy from a case-by-case analysis to a general vote for proposals requesting greater disclosure of political contributions and trade association spending policies, subject to a consideration of current disclosure practices of the company and recent controversies, fines or litigation related to the company's political contributions.