Public Company Compliance
Institutional Shareholder Services Inc. (ISS) announced the results of its 2016-2017 policy survey on September 29, 2016, which included responses from 115 institutional investors, 270 corporate issuers and 17 consultants/advisors to companies. ISS conducts a policy survey each year that helps to inform ISS’s annual voting policies, so public companies can get an indication now of the potential changes that ISS might make to its voting policies that will be applicable for the 2017 proxy season. Also, since one-third of the investor responses came from large institutional investors (those owning or managing at least $100 billion in assets), the survey can be a helpful indicator of the current views of these influential institutional investors.
The responses to two of the compensation-related survey questions are potentially helpful for public companies as they prepare for the 2017 proxy season. First, ISS asked whether the respondents would support the incorporation of other financial metrics, in addition to total shareholder returns (TSR), into the ISS pay-for-performance quantitative screen that is meant to identify potential misalignments between CEO pay and company performance. 79% of institutional investors and 68% of non-investors supported or strongly supported the incorporation of other financial metrics, while only 3% of institutional investors and 11% of non-investors opposed or strongly opposed the proposal. Both institutional investors and non-investors supported incorporating return on investment metrics (such as ROIC), earnings metrics (such as EPS) and cash flow metrics (such as FFO) into the ISS pay-for-performance analysis. If ISS takes these survey results into account, the 2017 voting policies will likely incorporate one or more of these additional financial metrics into ISS’s pay-for-performance quantitative analysis. To the extent the 2017 voting policies incorporate additional financial metrics into the pay-for-performance analysis, companies should consider applying these metrics in their internal analyses as well.
Secondly, ISS asked what frequency of advisory “say on pay” votes the respondents favored, since most companies that first held a “say on frequency” vote in 2011 will be holding their second vote during the 2017 proxy season. Institutional investors continue to favor annual “say on pay” votes, which received 66% of the vote. Only 11% of institutional investors favor biennial votes and 7% favor triennial votes, while 17% responded that “it depends on the company.” Non-investors also favor annual “say on pay” votes, which received 42% of the vote, but 31% of non-investors responded that “it depends on the company.” The most popular factors that respondents will take into account when determining the appropriate frequency for “say on pay” votes at a specific company are the presence or absence of recent problematic pay practices, financial performance and size of the company. Based on these survey results, ISS will likely continue to recommend annual “say on pay” votes, but if a board of directors chooses to recommend a different frequency, it should consider how these company-specific factors might influence investors’ decisions.
Responses to two of the governance-related survey questions are also potentially informative for public companies. ISS asked respondents which director tenure factors would prompt their organization to consider that there may be concerns with a board’s nominating and refreshment process. Institutional investors are focused on board refreshment, as over 50% of them responded that each of the following practices are problematic: a high proportion of directors with long tenure (e.g., 75% of the board having tenure of 10 years or more), the absence of any newly-appointed independent directors in recent years (e.g., five years), and lengthy average tenure on the board (e.g., average director tenure greater than 10 years). In contrast, less than one-third of non-investors considered any of these practices to be problematic. ISS also asked respondents whether executive chairs should be evaluated for overboarding under the same standard as the CEO (no more than three total boards) or under the same standard as non-executive directors (no more than five total boards). Institutional investors favored the stricter standard (64% compared to 36%), and non-investors favored the more lenient standard (62% compared to 38%). If ISS follows the preferences of institutional investors, the 2017 voting policies will likely incorporate a voting policy aimed at tenure and board refreshment and could potentially hold executive chairs to the stricter overboarding standard currently applied to CEOs.