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Thursday, October 24, 2013

Looking Ahead – ISS 2014 Draft Policies and Proxy Survey Results

Institutional Shareholder Services (ISS) conducts an annual survey to obtain input on corporate governance issues.  The survey results are considered by ISS in preparing annual updates to its proxy voting policies.  The survey often provides insight into potential ISS policy changes for the upcoming proxy season.

A few weeks ago, ISS released the results of its 2014 proxy voting survey.  ISS received more than 500 responses from institutional investors and corporate issuers located within and outside of the United States.   The 2013-2014 Policy Survey Summary of Results can be accessed here.  This week ISS posted draft 2014 policies for comment here.  The draft policies include proposed changes for U.S. companies to Board Response to Majority-Supported Shareholder Proposals and the ISS Pay for Performance Quantitative Screen.  The comment period will close on November 4, 2013 and ISS anticipates releasing its final 2014 policy updates in November.

Below are highlights of the survey findings and draft policies covering board decision making and executive compensation matters:

1. Board Responsiveness

Last year ISS announced changes to its policy on board responsiveness to majority-supported non-binding shareholder proposals.  The 2014 survey included questions eliciting views on board responsiveness to shareholder mandates and what is a reasonable time-frame for the board’s response.  The survey results included mixed views from investors and issuers as to whether the board should implement a specific action to address the shareholder mandate or should be free to exercise its discretion and disclose the rationale for any action it takes.

The draft 2014 policies released this week include clarifications of the ISS change in approach and a request for comments.  Generally ISS will evaluate the board’s responsiveness in 2014 to majority-supported shareholder proposals appearing on companies’ ballots in 2013.  As part of this evaluation, ISS proposes to consider the board’s responsiveness in making its vote recommendations on director elections.  The director vote recommendations will be on a case-by-case basis and will consider the board’s rationale (as disclosed in the proxy statement) as a factor in the analysis.  ISS requests comments on what factors should be considered in evaluating board responsiveness if a board does not fully implement a majority-supported shareholder proposal and what points should a board’s rationale include in explaining its responsiveness to shareholders.

2. Director Tenure and Director Rotation

The 2014 survey included five questions on director tenure and rotation of director leadership positions.  Investor respondents indicated that long director tenure is problematic and can diminish a director’s independence and the board’s opportunity to refresh its membership.  In contrast, a significant majority of issuer respondents indicated that a director’s tenure should not be presumed to indicate anything problematic.  The length of board service that could cause concern included in the responses was generally more than 10-15 years.  Responses of investors and issuers were split as to whether ISS should consider a policy that takes into account director rotation with respect to the board chair, lead director, or chairs of key board committees.

3. Director Assessment

The survey requested feedback on how a director’s current or prior service on boards of other public companies is considered in assessing director performance.  Both investors and issuers agreed that a director’s current or prior public company board service should be a focal point in the assessment and listed some specific factors for consideration.

4. Equity Plan Evaluation

ISS has applied a case-by-case approach on recommendations for equity based compensation plan proposals.  Generally ISS recommends a vote against plans with high cost/dilution, problematic features, or lack of compliance on best practices in certain markets.  In the 2014 survey, ISS asked for input in the event ISS moves to a more holistic approach as to the factors and weights that should be considered (positively or negatively) in equity plan evaluations.  Investors weighed performance conditions on awards the highest, then cost of the plan and other plan features including burn rate/historical usage of shares and prior history of repricing.  Issuers focused on the cost of the plan, other plan features and plan administration.

5. Pay-for-Performance Quantitative Screen

The 2014 draft policy updates includes a potential change to the ISS quantitative pay-for-performance screen.  ISS uses the measure as a screen to identify companies with a potential pay-for-performance misalignment that would trigger a deeper qualitative analysis of the pay program.  The proposed changes simplify the methodology for calculating the relative degree of alignment and use a single 3-year measure.  The proposed method would calculate the difference between the company’s total shareholder return (TSR) rank and the CEO’s total pay rank within a peer group, as measured over a three-year period.  ISS requests feedback on the proposed change.

Action Items

In preparation for final year-end board meetings and the upcoming 2014 proxy season:

  • Be aware of ISS current focus areas – directors and boardroom decision-making in addition to alignment of executive pay and company performance;
  • Consider the 2014 survey results and the difference in views among investors and issuers;
  • Consider commenting on the ISS draft 2014 policies on board responsiveness and changes to the pay-for-performance quantitative screen; and
  • Monitor the final 2014 policy updates and the potential impact to the company.
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