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ISS Issues 2018 Policy Updates

On November 16, 2017, ISS released it policy updates for 2018.  These updated policies will apply to shareholder meeting on or after February 1, 2018.

For the U.S., there are several compensation-related policies that were updated:

  • Pay-for-Performance Policy — starting in 2018, ISS will add a new relative quantitative test that measures relative CEO against three to four relative financial performance metrics, which will vary by industry, all measured over a 3-year period similar to the RDA or Relative Degree of Alignment test which compares CEO pay and TSR over a 3-year period.

Note: ISS indicated that it will provide specific details around the mechanics of its updated quantitative P4P screening methodology in an updated P4P white paper. ISS did not give an estimated timeframe for the release of this updated white paper, but in the past, such P4P white papers have been released in late January or early February after policy updates. I will provide details on the P4P quantitative screening mechanics once the white paper becomes available.

  •  Advisory Votes on Executive Compensation: Compensation Committee Communications and Responsiveness–this policy looks at a company’s response to a say on pay (SOP) vote that received less than 70% support. ISS is now clarifying the information it wants companies to detail in their subsequent year proxy statements about their reaction to such a low SOP vote, including the timing and frequency of shareholder engagements, whether independent directors participated, the specific concerns raised by dissenting shareholders, and disclosure of specific and meaningful action to address shareholders’ concerns.
  • Board Accountability–ISS will generally vote against members of the board committee responsible for approving/setting non-employee director compensation if there is a pattern (i.e., two or more years) of awarding excessive non-employee director compensation without disclosing a compelling rationale or other mitigating factors.

The ISS policy updates can be found on ISS’ Latest Voting Policies page:

Latest Voting Policies

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ISS Opens Its QualityScore Data Verification Window Through November 28

On November 13, 2017, ISS opened the data verification window for its QualityScore.  The data submission window will remain open until 8 pm Eastern on November 28. The data submission for both QualityScore and peer groups is doen through ISS’s Governance Analytics database, so a working user login is required for companies to make these submissions.

ISS at the same time released an updated technical document on QualityScore that details the factors that go into it, available at:

http://images.info.isscorporatesolutions.com/Web/ISSCorporate/%7Bec72720c-4c60-4f81-a5e6-ddf60de12b0c%7D_qualityscore-techdoc-13112017.pdf 

 

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ISS Open Peer Group Submission Window Until November 20

On November 6, 2017, ISS announced that it had opened the window for companies to submit changes to their proxy-disclosed peer groups. Companies that submit updates will have ISS use their updated peer groups when ISS conducts its proxy analyses.  The submission window will remain open until 9 am Eastern on November 20.

For more information, see the ISS Press Release at:

ISS Announces Peer Group Submission, Review Window to Open November 20

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SEC Issues CEO Pay Ratio Guidance

On September 21, 2017, the SEC released a BUNCH of guidance on the CEO Pay Ratio, including an interpretative release, Division of Corporation Finance guidance on calculating the pay ratio, and new, revised and withdrawn Compliance & Disclosure Interpretations.

The Interpretative Release

The guidance in the release boils down to, “We meant what we said in the final rule.” But also includes a couple of additional examples

The interpretative release [ Release No. 33-10415; 34-81673; File No. S7-07-13] is focused on the Pay Ratio Disclosure, and provides guidance on:

  • The use of reasonable estimates, assumptions, and methodologies and statistical sampling;
  • Use of internal records to determine whether the 5% de minimis non-U.S. employee exemption is available;
  • Use of internal records to identify the median employee;
  • How companies can identify who is an employee for purposes of applying the CEO Pay Ratio Disclosure rule, i.e., can apply a widely recognized test under another area of law that the company otherwise uses to determine whether its workers are employees.

Division of Corporation Finance Guidance

The guidance released by the Division of Corporation Finance focuses on the use of sampling and other reasonable methodologies to identify the median employee:

  • The guidance makes clear that companies may combine the use of reasonable estimates with the use of statistical sampling or other reasonable methodologies.
  • Provides examples of sampling methods that companies may use.
  • Provides examples of situations where companies may use reasonable estimates.
  • Provides examples of other reasonable methodologies companies may use and indicates that a combination of reasonable methodologies may be employed.
  • Provides examples of the use of reasonable estimates, statistical sampling and other reasonable methods.

Compliance & Disclosure Interpretations

The C&DIs make clear that instead of calculating total annual compensation for all employees, companies can select another consistently applied compensation measure (CACM) to identify the median employee. Any measure that reasonably reflects the annual compensation of employees could serve as a CACM.

The C&DIs also permit companies to describe the pay ratio as a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K in their disclosures.

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ISS Launches 2018 Policy Survey

On August 3, 2017, ISS launched its 2018 Governance Principles Survey.  Part 1 (General Questions) of the survey can be accessed at:

https://www.surveymonkey.com/r/ISS_2018_Annual_Policy_Survey

New for this year, the ISS Policy Survey is broken into two parts: (1) a general questions part, and (2) a more in-depth questions part. The general questions portion of the survey will be available through 5 pm Eastern on August 31, 2017.  The more in-depth questions portion of the survey will be available through 5 pm Eastern on October 6, 2017.

General Questions Portion (Closes August 31, 2017 at 5 pm Eastern)

This portion of the survey includes 6 questions. ISS is soliciting feedback on the following key issues:

  • One-Share, One-Vote Principle
  • Gender Diversity on Boards
  • Share Issuance and Buyback Proposals
  • Virtual/Hybrid Meetings
  • Pay Ratio Between Senior Executives and Employees

On the Pay Ratio issue, it appears that ISS is seeking to understand how organizations (institutional shareholders and the like) will analyze data on pay ratios and use such data.

In-Depth Questions Portion (Closes October 6, 2017 at 5 pm Eastern)

Part 2 of the survey can be accessed at

https://www.issgovernance.com/file/policy/2018-iss-policy-survey2.pdf

This portion of the survey is available after the general questions portion. ISS indicates that it permits respondents to drill down into key issues by market and region, and includes compensation-related questions.

On compensation for US companies, Part 2 of the survey asks the following questions:

  • Does your organization support the use of an outcomes-based measure, such as realizable pay, as part of ISS’ quantitative pay-for-performance evaluation?
  • How should ISS use realizable pay as part of the quantitative pay-for-performance evaluation?
  • What factors should be considered in determining whether a non-employee director (NED) pay program presents a governance concern with respect to high pay magnitude?
  • What factors should be considered in determining whether an NED pay program presents governance concern with respect to problematic pay structure?
  • Currently, ISS provides cautionary language in proxy analyses after identifying a pattern (i.e. multiple years) of high (outlier) NED pay levels at a company. What actions [by ISS]would be appropriate in such instances?

 

The ISS press release on the release of the survey can be found at https://www.issgovernance.com/iss-launches-2018-global-benchmark-policy-survey/

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