Institutional Shareholder Services ("ISS") recently released its 2013 policy updates for the United States, Canada, Europe, Asia and other international markets. With respect to U.S. Corporate Governance Policies, significant changes relate to pay-for-performance evaluations, say-on-golden parachute proposals, and board responsiveness to majority-supported shareholder proposals.
Peer Group Formation: Instead of relying on a peer group selected on the basis of market capitalization, revenues (or assets for financial firms), and GICS industry classification, ISS will now use a company’s self-selected peers meeting ISS’ size criteria as a factor for peer group formation. ISS’ peer group selection was frequently criticized by companies. The new methodology will use peers identified by a company as well as peers from the company’s GICS group, with a focus on 8-digit GICS codes to identify peers in a related industry. When ISS determines the peer group, it will prioritize peers that maintain the company near the median of the group, are in the company’s chosen peer group, and have chosen the company as a peer.
Realizable Pay: ISS is adding realizable pay as compared with grant date pay to the research report for large-cap companies. Realizable pay will consist of the sum of cash and equity-based compensation based on actual earned awards, and target values for ongoing awards, calculated using stock price at the end of the measurement period. Stock options or stock appreciation rights (SARs) will be revalued using the remaining term and updated assumptions, as of the performance period, using the Black-Scholes Option Pricing model. ISS acknowledges that the realizable pay consideration may mitigate or exacerbate a CEO’s pay-for-performance concerns.
Pledging or Hedging of Company Stock: ISS will now consider, on a case-by-case basis, whether the pledging of company stock by directors or executives rises to a level of serious concern for shareholders that should result in a negative vote recommendation. In making this determination, ISS will consider: whether the annual proxy statement contains an anti-pledging policy prohibiting future pledging activity; the magnitude of aggregate pledged shares in terms of total common shares outstanding, or market value or trading volume; the disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time; the disclosure that stock ownership and holding requirements do not include pledged company stock; and any other relevant factors. Further, ISS now considers any hedging of company stock as a problematic practice that will result in a negative voting recommendation on the election of directors.
Say-on-Golden Parachute Proposals
When considering say-on-golden parachutes vote recommendations, ISS will now consider pre-existing, change-in-control arrangements and not simply newly adopted agreements. Features in change-in-control arrangements that may lead to an "against" vote recommendation include one or more of the following:
- Single- or modified single-trigger cash severance;
- Single-trigger acceleration of unvested equity awards;
- Cash severance greater than three times salary and bonus;
- Excise tax gross-ups triggered and payable (rather than a provision to provide excise tax gross-ups);
- Excessive golden parachute payments (on an absolute basis or as a percentage of the value of the transaction);
- Recent amendments that incorporate problematic features, or recent actions (such as extraordinary equity grants) that make packages so attractive as to influence merger agreements that may not be in the shareholders’ best interests; or a
- Company assertion that a proposed transaction is conditioned on shareholder approval of the say-on-golden parachute advisory vote.
Recent amendments incorporating problematic features will carry more weight in the overall analysis.
Majority Supported Shareholder Proposals
ISS is phasing in more stringent rules pertaining to board responsiveness to majority-supported shareholder proposals. Commencing in 2014, ISS will recommend a vote against, or withhold, for some or all directors if the board does not act upon a shareholder proposal that received a majority of votes cast in the prior year. This represents a change from the ISS proposed update, in which this rule would have applied for 2013. In contrast, for 2013, ISS will recommend a vote against, or withhold, only if the shareholder proposal had received a majority of the shares outstanding for the prior year, or a majority of the votes cast in the prior year and in one of the two previous years.