On September 26, 2011, Institutional Shareholder Services (ISS) released 2011-2012 Policy Survey Summary Results, which summarizes the responses ISS received as part of its annual policy survey. The summary is available at:
http://www.issgovernance.com/files/PolicySurveyResults2011.pdf
Under its US policy questions involving compensation, the survey summary indicates:
- A majority of investor respondents indicated that they considered both pay that is significantly higher than peer levels (66%) and pay levels that have increased disproportionately to the company’s performance trend (88%) to be very relevant.
- A majority (57%) of investor respondents indicated that they “sometimes” consider discretionary annual bonus awards (those not based primarily on the attainment of pre-set goals) to be problematic if the awards are not aligned with company performance.
- There was no clear majority view among investor respondents as to what level of opposition to a say-on-pay vote should require an explicit response from the board regarding improvements to pay practices, but the highest level of investor respondents (36%) indicated that level of opposition should be “More than 20%” while the next highest level of investor respondent support (24%) was for “More than 30%”, while both “More than 40%” and “More than 50%” each received support from 14% of the investor respondents.
- In the area of equity plan proposals that would exceed ISS’s shareholder value transfer cost, the survey indicates that a majority of investor respondents are “Somewhat” and “Very much” in favor of the factors tested by ISS to act as mitigating factors:
- Above median long-term shareholder return
- Low average burn rate relative to peers
- Double-trigger CIC equity vesting
- Reasonable plan duration based on historical share usage
- Robust vesting requirements (>5 years).
- Similarly, where the shareholder value transfer cost is not excessive, a majority of investor respondents are “Somewhat” and “Very much” in favor of weighing certain factors against the plan proposal:
- Liberal CIC definition with automatic award vesting
- Excessive potential share dilution relative to peers
- High CEO or NEO “concentration ratio”
- Automatic replenishment (“Evergreen funding”)
- Prolonged poor financial performance
- Prolonged poor shareholder returns
- A large majority of investor respondents indicated that single-trigger equity vesting (79%) upon or accelerated vesting at the board’s discretion after (71%) a CIC was not appropriate
- Finally, an overwhelming majority (80%) of investor respondents indicated that an equity plan coming to shareholder vote for the first time after an IPO (in order to qualify for Section 162(m) tax deductibility) should be evaluated under the same guidelines as a “standard” equity plan, even if no new shares are requested.
We don’t know yet how these survey responses will fit into ISS’s 2012 Policy Updates. But, I think we can start to see the glimmerings of what ISS might be considering, especially in the area of CIC protections and additional factors to weigh for and against equity plan proposals. We’ll have to wait to see what level of opposition ISS will view as triggering a company duty to respond to shareholders as well as how some of these other responses will play out in the policy updates. ISS might even have a few surprises in store for us for 2012! So we’ll have to wait and see what gets released as the 2012 Policy Updates in October or November 2011.