ISS Policy Updates for 2012

News Brief

By Amy Wood

Late last week, Institutional Shareholder Services (ISS) issued policy updates that are effective for shareholder meetings held on or after February 1, 2012. ISS expects to issue additional guidance in the form of FAQs and technical papers in December and after it does, we will issue a Cooley Alert to help clients understand how these policies may affect their 2012 shareholder meetings. In the meantime, here is a summary of the updates that were released last week:

  • Board Responsiveness to Say-on-Frequency Proposals: ISS will recommend withholding votes from the entire board of directors if the board decides to hold say-on-pay votes less frequently than the frequency that received the majority of votes cast at the 2011 meeting. ISS will make a case-by-case decision if the board decides to hold say-on-pay votes less frequently than the frequency that received a plurality (but not majority) of votes cast at the 2011 meeting. The case-by-case decision will be made after considering:
    • the board's rationale for selecting a different frequency;
    • the company's ownership structure and vote results;
    • ISS's analysis of whether there are compensation concerns or a history of problematic compensation practices; and
    • the previous year's support level on the company's say-on-pay proposal.

 

  • Board Response to Say-on-Pay Vote: ISS will make case-by-case recommendations for compensation committee members if the company's previous say-on-pay proposal received less than 70% of votes cast, taking into account:
    • the company's response, including disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support, specific actions taken to address the issues that contributed to the low level of support and other recent compensation actions taken by the company;
    • whether the issues raised are recurring or isolated;
    • the company's ownership structure; and
    • whether the support level was less than 50%, which would warrant the highest degree of responsiveness.

 

  • Pay-for-Performance Evaluation: Historically, ISS defined a "performance" problem as a company's one- and three-year total shareholder return (TSR) falling in the bottom half of such company's four-digit GICS industry group. In the event of a performance failure and a year-over-year increase in CEO compensation, ISS would find a "pay-for-performance disconnect" and absent a compelling justification for the increase in CEO compensation, such disconnect would result in a negative recommendation for say on pay or in some cases, compensation committee members.

 

  • For 2012, ISS will perform for Russell 3000 companies both a "peer group alignment" assessment, which will compare each company's TSR to a smaller peer group (12-24 companies selected by ISS using market cap, revenue and GICS industry group) and an "absolute alignment" assessment, which will look at the trend in CEO and company TSR over the prior five fiscal years. Additional details regarding this new methodology, possibly including details that will allow us to determine the composition of the new peer groups, will be the subject of a technical paper that ISS expects to issue in December.

 

  • For non-Russell 3000 companies and in all cases where ISS finds a misalignment between pay and performance, ISS will analyze the following qualitative factors to determine whether negative vote recommendations are warranted:
    • the ratio of performance- to time-based equity awards;
    • the ratio of performance-based compensation to overall compensation;
    • the completeness of disclosure and rigor of performance goals;
    • the company's peer group benchmarking practices;
    • actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers;
    • special circumstances related to, for example, a new CEO in the prior fiscal year or anomalous equity grant practices; and
    • any other factors deemed relevant.

 

  • Equity Plan Proposals for Section 162(m) Purposes: Historically, ISS supported proposals submitted solely for Section 162(m) purposes even the proposals would not otherwise be supported under its regular equity plan analysis because deductibility is generally in the best interest of shareholders. For 2012, if the Section 162(m) equity plan proposal is the first time that the company is submitting the equity plan to its public company shareholders following its IPO, ISS will do a full equity plan analysis – including an evaluation of shareholder value transfer, burn rate, repricing language, liberal change in control language and pay for performance – and may oppose proposals if these criteria are not satisfied. The new rationale is that certain adverse provisions may have a more detrimental potential impact on shareholders than the potential loss of tax deduction related to NEO grants. If the equity plan subject to the Section 162(m) proposal has previously been approved by a company's public company shareholders, then ISS will generally recommend supporting the proposal if it:
    • is only to include administrative features;
    • places a cap on the annual grants any one participant may receive to comply with the provisions of Section 162(m);
    • adds performance goals to existing compensation plans to comply with the provisions of Section 162(m) unless they are clearly inappropriate; or
    • covers cash or cash and stock bonus plans that are submitted to shareholders for the purpose of exempting compensation from taxes under the provisions of Section 162(m) if no increase in shares is requested.

 

  • Proxy Access: ISS will take a case-by-case approach to proxy access proposals, taking into account company-specific factors and proposal-specific factors, including the ownership thresholds in the resolution, the maximum proportion of directors that shareholders may nominate each year and the method of determining which nominations should appear on the ballot if multiple shareholders submit nominations.

 

  • Uncontested Director Elections & Risk Oversight: Under extraordinary circumstances, ISS will recommend withholding votes from individual directors, committee members or the entire board where there has been a material failure in a board's role in overseeing the company's risk management practices (risk oversight was not previously one of the specific types of governance failures that could trigger negative recommendations for directors).

 

  • Exclusive Venue Proposals: ISS will make case-by-case recommendations on these proposals after now also adding a company's litigation history to the list of factors to be examined and removing a meaningful special meeting right from the list of governance factors to be examined.

 

  • Dual-Class Capital Structure: ISS generally votes against these proposals unless certain criteria are satisfied. For 2012, ISS added (i) the company's rationale, (ii) the company's economic condition and (iii) the expected duration of the new class to the list of criteria it will examine.

 

  • Social & Environmental Issues: For 2012, ISS also updated its policies regarding hydraulic fracturing, recycling, political spending, lobbying activities, workplace safety and water issues. If you would like more specific information about these updates, please let us know.

If you have any questions about the ISS policy updates, please contact Amy Wood, Thomas Welk or Megan Arthur.

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