We did a lot of work with pledging arrangements for clients this year – beginning in October 2012 when the ISS Global Policy Board released its 2013 Draft Policies for Comment, which was the first indication that ISS would be looking at pledging arrangements. We commented on the Draft Policies and specifically discussed the pledging issue with ISS personnel. We thought we had helped them distinguish between hedging and pledging, and recognize that not all pledging arrangements create risk for the company. In fact, many pledging arrangements are a natural outgrowth of the officer and director stock ownership guidelines that ISS strongly (and rightly) supports.
We were disappointed when ISS released its Final Policies for, and included "significant pledging of company stock" in a list with "bribery; large or serial fines or sanctions from regulatory bodies; significant adverse legal judgments or settlements" as examples of "failure of risk oversight." However, we remained hopeful that ISS would be judicious in its labeling of companies' pledging arrangements as "significant."
I can only speak to the companies with which we were involved, not the whole universe of public company. However, we advise a significant number of public companies on proxy statement disclosure, and it seemed that ISS criticized every client that disclosed an existing pledging arrangement among its officers and directors. The fact, which you point out, that all of the directors at all of the companies that ISS criticized – at least all of which I am aware – is, in my judgment, the result of ISS' waning influence and investors deciding that reasonable pledging arrangements, i.e., those that are not as extreme as those that were uncovered at Chesapeake Energy and Green Mountain Coffee Roaster, were not troubling.
With respect to companies developing and/or disclosing pledging policies in 2013, that was largely the result of ISS new position and the advice of executive compensation professionals like me bringing it to the attention of their clients. Most boards and compensation committees ardently embrace and seek to follow best practices in all areas of corporate governance, including executive compensation. As we have seen with stock ownership guidelines, performance-based compensation and, more recently, compensation clawback policies, when someone legal counsel (external or in-house), suggest that a policy or practice is evolving into a best practice for corporate governance, boards and compensation committees usually are quick to adopt it.
For most companies, it does not make sense to prohibit officers and directors from entering into reasonable pledging arrangements. In most cases, it is merely a means of gaining some liquidity while remaining heavily invested in company stock. Pledging is not like hedging, which would allow an officer or director to protect himself or herself against the risk of the stock's decline. A pledger remains fully exposed to the risk of stock's value declining. Thus, the interests of the officer or director remain fully aligned with the interests of other shareholders.