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Equilar’s Peer Group Submission Window Open Until December 31, 2016

Equilar announced that companies may now submit their peer groups through December 31, 2016.  Equilar recommends companies that will file their proxies between January 15, 2017 and July 15, 2017 submit their peer groups.  The company peer groups will be used to create the company’s 2017 Equilar Market Peers™.

As a reminder, the Equilar Market Peers are used by Glass Lewis when it generates its say on pay vote recommendations.

Companies may submit their updated peer groups at: https://insight.equilar.com/app/peer_update/

Equilar’s FAQs on its peer group submission process and how the Equilar Market Peers may differ from the Glass Lewis Market Peers powered by Equilar can be found at: https://insight.equilar.com/app/peer_update/peer_update_faq.jsp

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Caution on Transferable Equity Award Provisions

As companies begin to get their equity plan proposals ready for the 2017 proxy season, it is an appropriate time to review those equity plan proposals to see if they contain or permit the transfer of equity awards to third parties for value, e.g., the ability of participants to sell stock options to an unrelated investor, such as was done at Microsoft in 2003. If companies review ISS’s Equity Plan Scorecard Policy, there is not a specific mention of any concern over transferable stock awards.  Instead, companies need to review the ISS policy on Transferable Stock Option (TSO) Programs.  Under that policy, ISS indicates that it will recommend against equity plan proposals if the details of an ongoing TSO program are not provided to shareholders.

This is significant because the specific criteria that ISS expects companies to detail are not those ordinarily include in a typical equity plan proposal seeking shareholder approval of a new or amended equity plan, and include, but are not limited to, the following:

  • Eligibility
  • Vesting
  • Bid-price
  • Term of options
  • Cost of the program and impact of the TSOs on a company’s total option expense, and
  • Option repricing policy.

If a company’s equity plan provides for the transferability of equity awards to third parties, and the above TSO disclosure are not made (which ISS will then evaluate on a case-by-case basis), then the company can expect a negative ISS vote recommendation on their equity plan proposal even if they have run the ISS Equity Plan Scorecard model and believe the plan will pass muster.

Source: ISS United States Proxy Voting Manual, 2016 Benchmark Policy Recommendations, Effective for Meetings on or after February 1, 2016, Published February 23, 2016,  p. 187

This very scenario just played out at Thor Industries, Inc. Thor had an equity plan proposal in its proxy filed October 27, 2016 (https://www.sec.gov/Archives/edgar/data/730263/000119312516748833/d251706ddef14a.htm#tx251706_29 ) that provided for transferability of equity awards to third parties (see Section 6.6 of the Thor Industries, Inc. 2016 Equity and Incentive Plan). “A Nonstatutory Stock Option may, in the sole discretion of the Administrator, be transferable to a permitted transferee, as hereinafter defined, upon written approval by the Administrator to the extent provided in the Option Agreement.” The plan goes on to define permitted transferree to include “(b) third parties designated by the Administrator in connection with a program established and approved by the Administrator pursuant to which Participants may receive a cash payment or other consideration in consideration for the transfer of such Nonstatutory Stock Option.” [emphasis added]

As a result of this language, ISS found that the proposed plan permitted the transfer of stock options to financial institutions without prior shareholder approval.  ISS classified this as a problematic equity-related provision under its list of overriding features and practices.  As a result, even though the plan scored sufficient points under the ISS Equity Plan Scorecard to warrant ISS support, ISS nevertheless recommended against the proposed plan in its November 22, 2016 report. Thor announced it would amend its proposed equity plan to remove this transferability feature (https://www.sec.gov/Archives/edgar/data/730263/000114420416136370/v453873_defa14a.htm) and then filed the updated proxy with the amended proposed plan that had removed this transferability feature on November 28, 2016 (https://www.sec.gov/Archives/edgar/data/730263/000119312516777872/d301535ddefa14a.htm). Then on November 29, 2016, ISS released an updated Proxy Report Alert in which it changed it recommendation to support Thor’s proposed equity plan.

The odd thing in all this? None of Thor’s current named executive officers hold any stock options and stock options are not part of the long-term incentive program disclosed for fiscal 2016. This case serves as a good reminder to check equity plans being taken to shareholders to ensure that they do not permit such TSO programs without shareholder approval.

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Glass Lewis Releases 2017 Policy Updates

On November 18, 2016, Glass Lewis announced that it had released updated 2017 proxy voting guidelines for several countries and that updated guidelines for other countries would be released over the next few weeks. The announcement can be found at: http://www.glasslewis.com/2017-proxy-season-asian-guidelines-available/

The countries that Glass Lewis released updated proxy voting guidelines for initially were:

Glass Lewis identified the following key areas for changes in the US 2017 proxy voting guidelines (none related to compensation):

  • Evaluating director commitments
  • Governance following an IPO or spin-off
  • Board evaluation and refreshment

And these were the key areas for Canada:

  • Evaluating director commitments
  • Board responsiveness to a failed advisory vote
  • Equity compensation plans
  • Shareholder rights plans
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ISS Peer Group Submission Window Open Until 8 pm Eastern on Dec. 9

ISS announced that the window period for public companies to submit updates for their peer groups is open and will close at 8 pm Eastern on December 9, 2016.

The peer group submissions are now handled through ISS Corporate Solutions’ Governance Analytics website.  Only companies (issuers) may submit their peer groups to ISS.

What peer companies is ISS seeking?  Those that were used to set pay that is required to be covered in the next proxy to be filed. For example, for calendar-year companies, their 2017 proxies will cover 2016 pay and pay decisions. Therefore, ISS is seeking the peer group used for setting/considering 2016 pay, not the peer group used for setting/considering 2017 pay (which would be required to be disclosed in the 2018 proxy). If a company has not made any changes to its 2016 peer group compared to its 2015 peer group, it does not have to submit anything to ISS.  If a company has made changes to its 2016 peer group, it should seriously consider submitting this peer group to ISS during the window period to ensure that the 2017 ISS proxy report accurately reflects the company’s 2016 peer group as disclosed in the proxy.  Failure to submit an updated peer group for 2016 will mean that ISS will likely use the company’s 2015 peer group in its 2017 proxy report.

For more information about the peer group submission process, companies can visit this ISS website:

https://www.issgovernance.com/company-peer-group-feedback

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ISS Policy Updates for 2017

ISS has announced several updates for its policies for 2017 (generally apply starting February 1, 2017 unless otherwise noted). Initially, ISS departed from past practice of announcing all annual policy updates at the same time when it issued an update with respect to its pay for performance policy on November 8, 2016 and then followed this up with its “normal” annual policy updates on November 21, 2016.

Pay for Performance Updates

ISS announced that in its 2017 pay for performance analyses (typically undertaken as part of ISS’ evaluation of a company’s say-on-pay proposal), it will add six relative quantitative performance metrics to its qualitative analysis. The six metrics are: relative ROIC, ROA, ROE, revenue growth, EBITDA growth, and growth in cash flow from operations — all evaluated over a three year period relative to the ISS peers for a company and presented in a table included in the qualitative portion of its pay for performance analysis. ISS may later include these six performance metrics in the quantitative analysis section of its pay for performance analysis — perhaps for the 2018 proxy season. I think we can expect that 2017 will be a year for ISS to learn how investors and companies think of the six performance metrics being disclosed in addition to TSR which ISS has included in its reports for many years.

ISS has indicated that the weight afforded each of these six metrics will vary by industry, though it did not release what those weights will be. I expect ISS will release a set of FAQs with the industry weights if it follows what it has done with other policies.

I expect these six performance metrics will play a factor in ISS’s analysis of situations where the current quantitative screens show a medium or high concern level. So if a company expects it will garner such concern levels under the current ISS quantitative tests, it should see how it fares against its expected ISS peers on these six performance metrics.  I expect companies could be in for a tougher time from ISS if they score below median in several of these six performance metrics, with greater importance of a below median score attached to those metrics carrying the greatest weight.

Finally, ISS announced that the Relative Degree of Alignment (RDA) test (one of the quantitative tests under the ISS pay for performance analysis).

Peer Group Submission

ISS also announced that its peer group submission window will run from November 28 to December 9. Companies that made changes to their peer group for 2016 should consider providing their updated peer group to ISS in order to ensure that ISS uses the company’s 2016 peer group in its analysis.  If a company does not submit a new peer group during the peer group submission window, ISS will use the existing peer group it has on file (which should be the 2015 peer group for most companies).

For more information about the ISS Pay for Performance Update and the Peer Group Submission, see this ISS press release (November 8, 2016): https://www.issgovernance.com/iss-announces-pay-performance-methodology-updates-2017/

 

Compensation-Related 2017 Policy Updates

ISS announced updates to its Equity Plan Scorecard Policy and a new policy with respect to proposal seeking to ratify director compensation.

Equity Plan Scorecard (EPSC) Policy Updates

When the proposal includes amendments to an equity plan:

  • If this includes a transfer of shareholder value to employees, ISS will supplement its EPSC with an overall impact of the proposed amendments.
  • ISS will now add a new factor under Plan Features that will weigh on the total points the proposal will receive under the EPSC policy — whether the plan prohibits the payment of dividends on unvested equity awards (though this factor will permit plans to receive full points if they accrue the dividends until the underlying award is vested/earned).
  • For the minimum vesting factor under Plan Features, ISS will only give credit if the plan contains a minimum 1 year vesting period that applies to all awards, which cannot be varied in an award agreement, except for up to 5% of the plan’s share authorization.
  • For proposals to amend non-employee director equity plans, ISS is expanding the qualitative factors that it can evaluate when the proposal exceeds the applicable shareholder value transfer or burn rate benchmarks, in keeping with its new policy on director pay ratification proposals.

As in years past, ISS likely will issue FAQs on the EPSC policy to take into account these updates prior to the next proxy season — perhaps in December or January.

Equity Proposals Submitted Only for 162(m) Approval

ISS clarified that proposals seeking shareholder approval of performance metrics in a cash incentive plan or equity plan for Section 162(m) purposes only will be evaluated on the basis of the compensation committee members’ independence.

Management Proposals Seeking Ratification of Director Compensation

ISS also announced a new policy with respect to proposals seeking ratification of director compensation. ISS will evaluate eight qualitative factors with respect to the magnitude, structure, and disclosure of director compensation. ISS will review the magnitude of director compensation relative to similar companies.

Other 2017 ISS Policy Updates

ISS released a number of additional policy updates for 2017 covering director elections, capital authorizations, and cross-market company policies.

For U.S. domestic issuers organized abroad, ISS will base its recommendations on say-on-pay proposals required by a foreign jurisdiction on ISS’ U.S. say-on-pay policy.

The updates to ISS policies for 2017 can be found in this press release (November 21, 2016):

ISS Announces 2017 Benchmark Policy Updates

as well as on the ISS policy gateway that has links to all the 2017 policy updates:

2017 Policy Information

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