New ISS policies for 2011

Thanks to Thomas Welk, Partner, Cooley LLP for bringing to my attention the proposed new ISS policies for 2011.  All of these new policies are currently open for comment until November 11. The following are of particular interest:

• Frequency of say-on-pay votes. With regard to frequency of say-on-pay votes, not surprisingly, ISS will adopt a new policy to recommend a vote in favor of companies providing for annual say-on-pay proposals. ISS believes that an annual vote provides the highest level of accountability and direct communication. ISS believes that with a triennial vote, for example, a company would not know whether the shareholder vote refers to the compensation year being reported or a previous year, making it more difficult to understand the implications of the vote. 
• Votes on golden parachutes. With regard to votes on golden parachute arrangements, ISS will adopt a new policy under which it will make vote recommendations on a case-by-case basis, consistent with ISS policies on problematic pay practices related to severance packages. ISS believes that the separate vote allows shareholders to weigh two potentially countervailing factors separately: whether shareholders on the whole benefit from the transaction and whether executives may benefit disproportionately and/or inappropriately. (ISS notes that the addition of the non-binding vote is not expected to change the merger analysis in any way.) ISS identifies the following as features that may lead to a recommendation against approval:
  • Recently adopted or amended agreements that include excise tax gross-up provisions (since prior annual meeting)
    • Recently adopted or amended agreements that include modified single trigger agreements (since prior annual meeting)
      • Single trigger payments that will happen immediately upon a change in control, including cash payment and such items as the acceleration of performance-based equity despite the failure to achieve performance measures
        • Single-trigger vesting of equity based on a definition of change in control that requires only shareholder approval of the transaction (rather than consummation) <br>o Potentially excessive severance payments
          • Recent amendments or other changes that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders
            • In the case of a substantial gross-up from pre-existing/grandfathered contract: what triggered the gross-up (i.e. option mega-grants at low point in stock price, unusual or outsized payments in cash or equity made or negotiated prior to the merger).
              • The company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote. ISS would view this as problematic from a corporate governance perspective.

• Independent board chair. Under current policy, ISS will generally recommend a vote in favor of shareholder proposals requiring an independent board chair, unless the company maintains a "robust counterbalancing governance structure including an independent lead director with clearly delineated duties, and does not have any problematic performance, governance or management issues." Beginning in 2011, ISS will generally recommend a vote in favor of shareholder proposals requiring an independent board chair unless there is a counterbalancing governance structure, as described above, and there are "compelling company-specific circumstances that challenge the efficacy of appointing an independent chair,,,," In effect, the burden is on the company "to explain to shareholders why the role of chairman cannot be filled by an independent director."
• Director attendance. If, because of ambiguous disclosure and separate reporting of board and committee attendance, it is not clear from the disclosure whether the director attended 75% of the aggregate of board meetings and meetings of committees of which the director is a member, ISS will recommend a withhold vote on that director. ISS will consider only reasons for poor attendance that are disclosed in the proxy, or in an SEC filing after the proxy, and will no longer accept private communications. In addition, ISS believes that the only acceptable reasons for attendance below the 75% threshold are as follows:
  • medical issues/illness;
  • family emergencies; and <br>o if the director's total service was three meetings or fewer and the director missed only one meeting.

• Votes to increase authorized capital. ISS acknowledges that its clients have overwhelmingly indicated that its existing quantitative model is "not a central factor" in its clients' evaluations of requests to increase authorized capital. ISS currently evaluates these proposals on a case-by-case basis. ISS does not propose to change its general approach, but plans to amend its policy as follows:
  • Replace ISS' quantitative model with a threshold-based allowable increase. For most issuers, the allowable increase would be 100% of existing authorized shares. The allowable increase would fall to only 50% for issuers with either (i) less than 50% of their existing authorized shares either outstanding or reserved, or (ii) one- and three-year total shareholder returns that are each in the bottom 10% of the U.S. market. The allowable increase for issuers meeting both conditions would be only 25%. As in 2010, the allowable increase would generally be the key determining factor in ISS' recommendations where there are no compelling disclosed risks to shareholders and share usage has been prudent.
    • Require that the proxy statement disclose risks of non-approval, such as a going-concern opinion, an order from a regulator to increase capital ratios, imminent bankruptcy or imminent liquidation.
      • Make explicit in the policy that ISS will generally not recommend in favor of a proposal to increase the authorized capital if, on the same ballot, ISS has recommended in favor of a reverse stock split that is not accompanied by a proportional reduction in authorized shares.