On November 21, 2013, Institutional Shareholder Services Inc. (“ISS”) published corporate governance policy updates to its benchmark proxy voting guidelines. In general, the updates are relatively minor compared to those implemented by ISS in recent years. The policy updates will apply to shareholder meetings held on or after February 1, 2014. The complete text of the U.S. Corporate Governance Policy – 2014 Updates can be found here. A summary of the 2014 policy updates is provided below, followed by a more detailed discussion of each update.
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Board Responsiveness to Majority-Supported Shareholder Proposals
In last year’s policy updates, ISS announced that, beginning in 2014, the trigger for evaluating a board’s response to a shareholder proposal would be if such proposal received the affirmative vote of a majority of the shares cast in the previous year. Previously, ISS would issue a negative recommendation on director nominees if a board failed to act on a shareholder proposal that received the support of a majority of the shares (i) outstanding the previous year or (ii) cast in the previous year and one of the two previous years. The 2013 updates also indicated that ISS would analyze responsiveness to majority-supported shareholder proposals on a case-by-case basis and gave ISS broad discretion to choose which directors to hold accountable if ISS deemed board responsiveness unsatisfactory.
The 2014 policy updates confirm that ISS will make vote recommendations on a case-by-case basis on individual directors (rather than generally recommending a vote against) if the board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year. ISS, however, modified the factors that it will look to in analyzing a board’s responsiveness to a majority-supported shareholder proposal. Specifically, ISS indicated that it would add to the list of factors to consider the board’s rationale for acting, or failing to act, on a majority-supported shareholder proposal as disclosed in the proxy statement. According to ISS, it adopted this “comply or explain” approach in light of feedback from respondents who generally agreed that boards should either implement majority-supported shareholder proposals or explain less than full implementation. ISS recommends that a board in this situation explain in its proxy statement how its response is in the best interest of shareholders. Pay-for-Performance Quantitative Screen
Under current ISS policy, when analyzing pay-for-performance alignment for purposes of determining whether or not to recommend voting in favor of say-on-pay proposals, one of the quantitative factors ISS considers is the relative degree of alignment between the company’s total shareholder return rank and the CEO’s total pay rank within a peer group, measured over a one-year period (weighted 40%) and a three-year period (weighted 60%). In its 2014 policy updates, ISS has simplified the relative degree of alignment methodology by eliminating the one-year period. Under the revised methodology, ISS will calculate the relative degree of alignment measured over a three-year period (or as many full fiscal years as the company has been publicly traded and disclosed pay data). ISS’s rationale for shifting to a single three-year period is to decrease the effects of volatility and the timing of equity awards and to better reflect a company’s long-term performance. Lobbying Disclosure Shareholder Proposals
ISS has modified the factors that it will consider when analyzing lobbying disclosure shareholder proposals on a case-by-case basis. Beginning in 2014, ISS will consider the company’s disclosure regarding lobbying activities, specifically including the company’s support of trade associations or other groups that may lobby on behalf of the company. ISS also updated its policy to clarify that it will consider the company’s disclosure of the level of oversight over lobbying activities by both management and the board. Finally, ISS deleted one of the factors it previously considered (i.e., the impact that the public policy issues in question may have on the company’s business operations, if specific public policy issues are addressed). ISS deleted this factor because shareholder proponents generally no longer submit the types of proposals that gave rise to ISS considering that factor in its analysis. Human Rights Risk Assessment Shareholder Proposals ISS has adopted a new policy with respect to shareholder proposals requesting that a company conduct an assessment of the human rights risks in its operations or supply chain or report on how it assesses human rights risks. ISS will analyze such proposals on a case-by-case basis, considering (i) the level of disclosure regarding relevant policies and oversight mechanisms; (ii) the company’s industry and whether it operates in areas linked to human rights risks; (iii) recent and significant human rights controversies involving the company or its suppliers and any remedial steps taken; and (iv) whether the proposal is overly burdensome or prescriptive.
Realizable Pay Calculations for S&P 1500 Companies
ISS currently includes realizable pay calculations in its research reports for S&P 500 companies. Beginning in 2014, ISS will publish realizable pay charts in its research reports for all companies in the S&P 1500 and may comment on realizable pay as part of its qualitative pay-for-performance analysis for such companies.
New Benchmark Policy Consultation Period
ISS announced that it opened a benchmark policy consultation period on November 21, 2013 to gather comments on the following topics for which it is considering adopting policy changes:
- Director tenure
- Director independence
- Independent chair shareholder proposals
- Auditor ratification
- Equity-based compensation plan proposals
The comment period will end in February 2014. ISS made clear that, even if it ultimately adopts policy changes on these topics, they would not take effect until the 2015 proxy season at the earliest.