Both ISS and Glass Lewis have issued their 2016 policy updates. Glass Lewis issued its 2016 policy with little fanfare in early November and ISS issued its updated policies for 2016 on November 20, 2015. Links to both firms’ 2016 policies are as follows:
- Glass Lewis’ Proxy Paper Guidelines, 2016 Proxy Season: http://www.glasslewis.com/assets/uploads/2015/11/GUIDELINES_United_States_20161.pdf
- ISS’ Americas Proxy Voting Guidelines Updates, 2016 Benchmark Policy Recommendations: http://www.issgovernance.com/file/policy/2016-americas-policy-updates.pdf
ISS at the same time issued an updated FAQ on its Equity Plan Scorecard (EPSC) Policy: 2016 U.S. Equity Plan Scorecard, Frequently Asked Questions: http://www.issgovernance.com/file/policy/faq-on-iss-us-equity-plan-scorecard-methodology.pdf
The ISS policy updates and FAQs apply to shareholder meetings held on or after February 1, 2016.
Taking a look at the specific policy updates of each for 2016 concerned with compensation, we see the following:
Glass Lewis now indicates that if it identifies egregious compensation practices, it may not only recommend against the Say-on-Pay vote but also recommend against the compensation committee based on the practices or actions of the committee during the year. Glass Lewis identifies as possible egregious practices: large one-off payments; the inappropriate, unjustified use of discretion; or, sustained poor pay performance practices.
ISS’ 2016 policy updates did not directly impact the majority of its compensation policies. Of note is that ISS did revise its policy with respect to compensation-related votes at externally-managed issuers. Now, ISS will generally recommend against the Say-on-Pay proposal where there is an external management structure in place and there is insufficient detail in the company’s disclosures for ISS to perform a comprehensive pay-for-performance analysis. ISS also changed the way ti will approach shareholder proposals to adopt holding periods and will now “strongly consider retention ratio and holding period duration among several other factors.”
In regard to directors, ISS also modified its policy with respect to overboarding. ISS is providing a 1-year transition period for companies to comply with the new overboarding policy and will only issue “warnings” in its proxy reports. After that period, ISS will issue negative vote recommendations on directors who are not public company CEOs and who sit on more than five (5) public company boards. ISS will issue such negative vote recommendations until the director sits on five (5) or fewer public company boards. ISS decided not to further restrict the number of boards on which an acting CEO can sit (Sitting CEOs will not be overboarded unless they sit on more than three public company boards–their own board and up to two (2) other public company boards).
ISS announced June 17, 2015 it has begun its semi-annual peer group construction process for Russell 3000 companies. Russell 3000 companies having meetings between September 16, 2015 and January 31, 2016 may submit the peer group that will be disclosed in the proxy for such meeting used for CEO benchmarking purposes by 8 pm Eastern on Friday, July 10, 2015.
Companies that have not made any changes to their proxy-disclosed peer group or that do not wish to provide such information in advance, do not have to participate.
Starting June 29, 2015, companies can submit their peer groups using the web form available at:
Companies will also have to submit a confirmation letter on company letterhead, submitted using an email address that is from the company’s email domain of the company’s contact.
ISS wants companies to note the following (from Friday’s ISS announcement):
- The peer group provided should be the peer group used for benchmarking CEO pay for the fiscal year ending prior to your next annual meeting.
- If your annual meeting is after January 31, 2016, no action is required as ISS will conduct a separate peer submission process for these companies in late-2015.
- While public disclosure of this information is not required, our expectation is that the same peers provided via this form will be disclosed in the upcoming proxy. Significant differences between submitted peers and peers cited in the 2015 proxy for 2014 pay may cause ISS to re-run the peer group and may result in the company not being able to pre-submit peers in future years.
- The ISS research team will use this information only for the purpose of constructing peer groups.
- Submissions should include your complete peer list, selected through the lookup tool provided.
- Please do not make multiple submissions or submit information other than relevant peers, as this may disrupt accurate submission of your peers.
- Important: Following submission of the online form, you will need to confirm your submission by sending ISS an electronic copy (scanned PDF or equivalent) of the submitted list on your company’s letterhead along with your name, email address and company name, to email@example.com. The confirmation email must be from the email domain of the company contact, in order to confirm that the submission was made by an authorized party. Detailed instructions for this confirmation step are provided online as part of the submission process.
- Feedback and confirmation letters must be submitted no later than 8PM EDT on Friday, July 10, 2015.
- Note that, as in prior years, ISS peer groups are not finalized until our research is published.
FAQs about ISS’s peer group methodology are set out in, 2015 U.S. Proxy Voting Policies and Procedures–Frequently Asked Questions on Peer Group Selection Methodology, which can be found at:
ISS recently announced that it will be revising its corporate governance scoring system again this year. The new system will be referred to as QuickScore 3.0 (when will ISS come up with some snappier titles for its sequels?). There will be a data verification period for companies from 9 am Eastern on November 3rd through 8 pm Eastern November 14th. QuickScore 3.o will then be released (into the wild?) at 9 am Eastern on November 24th.
ISS indicates that the changes embodied in QuickScore 3.0 include:
- Enhanced methodology which for US companies will include the disclosure of annual performance evaluations for the board, the presence of a controlling shareholder, a material degradation to the rights of shareholders, the existence of a sunset provision for companies with unequal voting rights, and the weighting of board gender diversity.
- Closer examination of investigations to include review of the type of regulatory investigation and the materiality of penalties.
- Enhancements to the company report to include historical scores, a log of data changes and trending analysis.
- Exapaned coverage of 4,500 companies in 30 markets with deeper coverage of Europeans companies in the STOXX 600 and emerging market coverage for Brazil, Russia, South Africa, and the introduction of India, China, and South Korea in Q1 2015.
ISS has released a technical document for QuickScore 3.0 that lists the factors considered by QuickScore 3.0 for each region. The document can be found at: http://www.issgovernance.com/file/products/qs3-appendix-final.pdf
The factors that will be considered under the Compensation subscore of QuickScore 3.0 for US companies include:
- What is the degree of alignment between the company’s cumulative 3-year pay percentile rank, relative to peers, and its 3-year cumulative TSR rank, relative to peers?
- What is the degree of alignment between the company’s 1-year pay percentile rank, relative to peers, and its 1-year TSR rank, relative to peers?
- What is the size of the CEO’s 1-year pay pay, as a multiple of median pay for company peers?
- What is the degree of alignment between the company’s TSR and change in CEO pay over the past five years?
- What is the ratio of the CEO’s total compensation to the next highest paid executive?
- What is the degree of alignment between the company’s annualized 3-year pay percentile rank, relative to peers, and its 3-year annualized TSR rank, relative to peers?
- Are any NEOs eligible for multi-year guaranteed bonuses?
- What is the ratio of the CEO’s non-performance-based compensation (All Other Compensation) to Base Salary?
- Do the company’s active equity plans prohibit share recycling for options/SARS?
- Do the company’s active equity plans prohibit option/SAR repricing?
- Does [sic.] the company’s active equity plans prohibit option/SAR cash buyouts?
- Do the company’s active equity plans have an evergreen provision?
- Do the company’s active equity plans have a liberal CIC definition?
- Has the company repriced options or exchanged them for shares, options or cash without shareholder approval in the last three years?
- Does the company’s average 3-year equity grant rate exceed the greater of 2 percent and the average of its industry/index peers?
- Did the company disclose a claw back or malus provision?
- What are the vesting periods mandated in te plan documents for executives’ stock options or SARS in the equity plans adopted/amended in the last 3 years?
- What are the vesting periods mandated in the plan documents, adopted/amended in the last three [sic.] years, for executives’ restricted stock/stock awards?
- What is the holding/retention period for stock options (for executives)?
- What is the holding/retention period for restricted shares/stock awards (for executives)?
- What proportion of the salary is subject to stock ownership requirements/guidelines for the CEO?
- Does the company disclose a performance measure for the short term incentive plan (for executives)?
- What is the level of disclosure on performance measures fr the latest active or proposed long term incentive plan?
- Did the most recent Say on Pay proposal receive shareholders’ support below 70%?
- What’s the trigger under the change-in-control agreements?
- Do equity based plans or other long term awards vest completely upon a change in control?
- What is the multiple of pay in the severance agreements for the CEO (upon a change-in-control)?
- What is the basis for the change-in-control or severance payment for the CEO?
- Does the company provide excise tax gross-ups for change-in-control payments?
- What is the length of employment agreement with the CEO?
- Has ISS’ qualitative review identified a pay-for-performance misalignment?
- Has ISS identified a problematic pay practice or policy that raise concerns?
We’ll have to see what impact this has on the QuickScores for US companies. However, base dont eh above, I do not think the changes will be too significant in the vast majority of cases.
On October 15, 2014, ISS released its draft 2015 policies. These included two draft policies applicable to U.S. companies:
- Equity Plan Proposal Policy–ISS is proposing to implement an Equity Plan Scorecard for analyzing equity plan proposals; and
- Independent Chair Shareholder Proposal Policy– ISS is proposing a more holistic policy to analyze such shareholder proposals.
Now, I think it is a bit generous to call these draft “policies” as they lack many of the important details that would enable institutional shareholders and issuers to properly analyze and comment on these “drafts.” The draft policies raise many questions and offer few details on how they would actually be applied in practice. So it is nearly impossible to determine with complete accuracy how ISS Research will apply these draft policies.
Equity Plan Proposal Policy Update
ISS is proposing to use an equity plan scorecard composed of three categories: Plan Cost; Plan Features; and, Grant Practices. In some respects, it appears that ISS is simply reshuffling some of the existing components of its equity plan proposal policy.
Plan Cost will look at the Shareholder Value Transfer (SVT) just like the current policy does. However, the draft policy does not indicate what the consequence would be of a proposed plan’s SVT coming in above its ISS company-specific allowable cap. Given that the three categories will be weighted in some fashion, it may make sense to no longer have a hard and fast line for SVT cost for the proposal, but I expect that will be too great of a change for ISS. So we’ll have to wait and see how ISS will weight the three categories as well as how it will score within each category and what the consequence of being above or below the SVT allowable cap will be for an equity plan proposal.
Plan Features will look to the following plan features:
- Automatic single-triggered award vesting upon a CIC;
- Discretionary vesting authority;
- Liberal share recycling on various award types; and
- Minimum vesting period for grans made under the plan.
This list is from the draft policy and doesn’t necessarily correspond to the plan features that cause ISS to currently recommend against a proposed equity plan. Again, the draft policy does not indicate the consequence of a plan having any of these features. It could be that a company loses possible points for this category for every one of these features that the plan contains. Of course, there is also no indication of how these features would be weighted, i.e., equally weighted or disproportionately weighted to penalize for those features which ISS has identified as being more egregious. So, we will have to wait for the final policy to see exactly what ISS has in mind for the plan features category.
Grant Practices will incorporate ISS’s current Burn Rate analysis, but then include a couple of other items, including:
- Vesting requirements in most recent CEO equity grants;
- The estimated duration of the proposed plan based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years;
- The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;
- Whether the company maintains a claw-back policy; and
- Whether the company has established post exercise/vesting share-holding requirements.
Again, as with the other categories, ISS has not let us know how all these items will be counted and what weight each will hold in determining the overall Grant Practices category score. So, once again we’ll have to wait until the final policy to know what ISS is thinking here.
ISS also indicated that the Equity Plan Scorecard would have its factors and weightings keyed to company size and status: S&P 500, Russell 3000 (excludes S&P 500), Non-Russell 3000, and Recent IPOs or Bankruptcy Emergent companies. Again, ISS does not offer even a hint of what factors and weightings it would use for each of these groups nor how things would differ between groups.
ISS also indicates that its options overhang carve-out policy would no longer be available. Likewise, companies would no longer be able to make a burn rate commitment as they had in the past to avoid a negative ISS vote recommendation when their burn rate exceeded their industry burn rate cap.
ISS has requested comments on the new draft equity plan proposal policy, specifically:
- Whether there are certain factors in the scorecard approach that should be more heavily weighted when evaluating equity plan proposals?
- Any unintended consequences from shifting to a scorecard approach?
Independent Chair Shareholder Proposal Policy Update
ISS is proposing to revise its policy with respect to shareholder proposals for independent chairs to add new governance, board leadership, and performance factors that it will analyze when coming up with its vote recommendation on such proposals. ISS has identified the following as new factors that will be weighed (but there is no indication whether this is an exhaustive list):
- Absence/presence of an executive chair,
- Recent board and executive leadership transitions at the company,
- Director/CEO tenure, and
- A longer (five-year) TSR performance period.
Again, ISS does not offer a comprehensive list of factors that it will now apply and instead, asks for comments on what factors are considered important when reviewing such proposals. Additionally, like with the Equity Plan Proposal Policy, ISS has not indicated the weightings for these factors.
Comments on ISS Draft 2015 Policies
ISS will accept comments on its draft 2015 policies through 6:00 p.m. EDT on October 29, 2014. Comments can be submitted by sending them to firstname.lastname@example.org
ISS announcement of Draft 2015 Policies: http://www.issgovernance.com/policy-gateway/2015-benchmark-policy-consultation/
Equity Plan Scorecard (Equity Plan Proposal Policy): http://www.issgovernance.com/file/publications/equity-plan-scorecard-us.pdf
Independent Chair Shareholder Proposals (U.S.): http://www.issgovernance.com/file/publications/independent-chair-shareholder-proposals-us.pdf