October 16, 2012
On October 15, 2012, Institutional Shareholder Services (“ISS”), a leading proxy advisory firm, issued for comment certain proposed 2013 proxy voting policy changes. ISS has requested comments on the proposed changes via e-mail submissions to firstname.lastname@example.org by October 31, 2012 and will take the comments into account when issuing its 2013 proxy voting policies, which are expected to be released in November. Companies should pay particular attention to the proposed policy change relating to majority votes on shareholder proposals and consider commenting. The proposed policy updates, which are available at http://issgovernance.com/policycomment2013, address the following topics.
A. Board Response to Majority-Supported Shareholder Proposals
Noting that companies “have been increasingly responding to shareholders proposals that received only one year of a majority of votes cast,” ISS proposes to revise its existing policy regarding board responsiveness to shareholder proposals to recommend votes against or withhold votes from the entire board (except new nominees, who are considered case-by-case) if the board fails to act on a proposal that received the support of a majority of shares cast in the previous year. Under its current policy, ISS recommends votes against or withholds votes from the entire board if the board failed to act on a proposal that (i) received the support of a majority of shares outstanding in the previous year, or (ii) received the support of a majority of shares cast in the last year and one of the two previous years.
The proposed policy updates in part reflect the results of ISS’s annual policy survey, available at http://issgovernance.com/files/private/ISSPolicySurveyResults2012.pdf, which ISS uses as part of its annual proxy voting policy formulation process. Out of a total of 370 responses, including responses from 97 institutional investors and 273 companies, an overwhelming majority (86%) of investors indicated that boards should implement a shareholder proposal that received a majority of votes cast in the previous year. Almost half (47%) of issuers agreed.
B. Company Say-On-Pay Proposals
With respect to company say-on-pay proposals, ISS proposes taking into account the Global Industry Classification Standard (“GICS”) industry group of a company’s self-selected peer group, subject to size constraints, when developing a company’s ISS peer group, which ISS uses in its proprietary, quantitative pay-for-performance evaluation. Based on the result of the quantitative analysis, as well as a result of qualitative factors, ISS recommends whether shareholders should vote “for” a company’s say-on-pay proposal. ISS’s current peer group methodology focuses only on a company’s industry based on its GICS classification. By also considering a company’s own peer group, ISS states that it will be better able to identify and prioritize GICS industry groups beyond the subject company’s GICS classification.
In this regard, ISS’s annual policy survey indicated that, for purposes of ISS’s pay-for-performance comparison peer group, investors considered the following factors, among others, to be very or somewhat relevant: the ISS-selected peer company is within a specified size of the target company (84% of investors); the ISS peer is in the same GICS group as the target company (74% of investors); the ISS peer is within the same GICS group as one or more of the target company’s published peers (48% of investors); the ISS peer is included in the target company’s published peer group(s) (43% of investors); and the ISS peer has chosen the target company as a peer (39% of investors).
Separately, ISS proposes including a comparison of realizable pay to grant date pay as part of the qualitative evaluation of pay-for-performance alignment. Realizable pay will consist of the sum of relevant cash and equity-based grants and awards made during the specified performance period being measured, based on equity award values for actual earned awards, or target values for ongoing awards, calculated using the stock price at the end of the measurement period. In response to the ISS policy survey, 50% of investors indicated that they consider both granted and realized/realizable pay as an appropriate way to measure pay-for-performance alignment.
Finally, ISS proposes to add pledging of company shares, apparently by both executive officers and directors, to the list of problematic pay practices that may lead to negative vote recommendations. In this regard, according to ISS’s annual policy survey, 49% of investors (and, similarly, 45% of issuers) viewed any pledging of company stock (e.g., shares used as collateral for margin accounts or other loans) by executives or directors as significantly problematic.
C. Company Golden Parachute Proposals
ISS also proposes revised policies with respect to shareholder votes on company golden parachute proposals. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, companies are required to hold separate shareholder votes on potential golden parachute payments when they seek shareholder approval for mergers, sales, and certain other transactions. ISS is proposing to update its current policy on golden parachute proposals to: (1) include existing change-in-control arrangements maintained with named executive officers rather than focusing only on new or extended arrangements and (2) place further scrutiny on multiple legacy problematic features in change-in-control agreements. ISS indicated that this change in policy would likely result in ISS recommending against a greater number of company golden parachute proposals than it currently does.
With respect to the second prong, ISS’s proposed policy notes that while recent amendments that incorporate problematic features will tend to carry more weight on the overall analysis as to whether to recommend votes against golden parachute proposals, the presence of multiple legacy problematic features will also be closely scrutinized. The full list of problematic pay practices related to golden parachute compensation includes: (1) single- or modified single-trigger cash severance; (2) single-trigger acceleration of unvested equity awards; (3) excessive cash severance (i.e., greater than three times base salary and bonus); (4) excise tax gross-ups triggered and payable (as opposed to a provision to provide excise tax gross-ups); (5) excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); (6) recent amendments that incorporate any problematic features (such as those listed in (1) through (5)) or recent actions (such as extraordinary equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or (7) the company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote.
D. Environmental and Social Non-Financial Performance Metrics
Noting that companies in certain sectors, including the extractive industry sector, are increasingly incorporating environmental and social non-financial performance metrics (i.e., sustainability metrics) in executive compensation, ISS proposes to modify its position on proposals to link executive compensation to such metrics from “generally vote against” to “vote case-by-case.” In addition, the proposed policy would replace the list of specific social and environmental criteria that proposals may suggest with a general reference to “sustainability (environmental and social) criteria. In voting on such proposals, ISS proposes to consider: (1) whether the company has significant and/or persistent controversies or violations with respect to social and/or environmental issues; (2) whether the company has management systems and oversight mechanisms in place with respect to its social and environmental performance; (3) the extent to which industry peers have incorporated similar sustainability criteria in their executive compensation practices; and (4) the company’s current level of disclosure regarding its environmental and social performance.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you work, or any of the following:
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James J. Moloney – Orange County, CA (949-451-4343, firstname.lastname@example.org)
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Gillian McPhee – Washington, D.C. (202-955-8201, email@example.com)
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