Archive October 2013

This morning MSCI Inc. announced that it will be seeking strategic alternatives for its Institutional Shareholder Services, Inc. (ISS) business [you can read the press release here: http://www.issgovernance.com/pressISS103113] . This represents the start of a process that may eventually lead to a full separation of ISS from MSCI. However, as MSCI points out, it is not certain that any transaction will occur with respect to ISS.

MSCI joins a growing list of companies that controlled ISS only to find that it might not provide the right synergies with corporate-focused sales and services (since many corporate issuers have a big issue in buying anything from a company that controls ISS).

Frankly, depending on the outcome of this process, it could lead to some significant changes to ISS policies, both current and future, as well as to the policy development process.  It might be time for ISS and MSCI to consider what transpired when Glass Lewis & Co. put itself on the block a few years back and ended up being purchased by the Ontario Teachers’ Pension Plan Board (“OTPP”) and Alberta Investment Management Corp. (“AIMCo”).  It may make sense for a consortium of large institutional shareholders to acquire ISS and effectively use it as their “outsourced” research office. The research could then continue to be sold to other institutional shareholders and corporate issuers.  We’ll have to wait and see what alternatives get explored and where things come out and if it means any change for ISS.

Yesterday ISS posted its draft 2014 policies; available at http://www.issgovernance.com/2014draftpolicycommentperiod.  A couple of these deal with compensation issues and were not hinted at in their survey over the summer.

Board Responses to Majority-Supported Shareholder Proposals
http://www.issgovernance.com/files/2014ISSDraftPolicyUSBoardResponsetoMajoritySupportedShareholderProposals.pdf

ISS is seeking comments regarding what factors folks consider when a board does not fully implement a majority-supported shareholder proposal. Currently, ISS considers factors such as: disclosed outreach efforts by the board to shareholders in the wake of the vote; rationale provided in the proxy statement for the level of implementation; the level of support and opposition; actions taken by the board; and other factors as appropriate.

ISS specifically is asking what points should a board’s rationale include in explaining its responsiveness to shareholders in cases where a majority-supported shareholder proposal is not fully implemented.

Board Responses to Majority-Supported Shareholder Proposals Observations: I think companies should review the majority-supported shareholder proposals over the past 2-3 years to determine how they might react if such a proposal were introduced at their meeting.  If it would cause a problem or likely could not be completely implemented, then the company may wish to file a comment with ISS to ensure that this point of view is heard by ISS before the policy is finalized.

Pay for Performance Quantitative Screen
http://www.issgovernance.com/files/2014ISSDraftPolicyUSCanadaP4P.pdf

For Relative Degree of Alignment (RDA), ISS is proposing to switch from using a 40%/60% weighting of 1-year and 3-year Total Shareholder Returns (TSR) to using an annualized 3-year TSR rank only. For CEO Pay rank, ISS is suggesting using only the total CEO pay rank for the full 3 years.

ISS is requesting comments on two related issues:

1. Whether there are circumstances under which the performance or pay from the most recent year should weigh more heavily in a Pay for Performance (P4P) analysis?
2. Whether there are any unintended consequences from using a simple, unweighted 3-year pay and performance measure as the basis for RDA?

Pay for Performance Quantitative Screen Observations: This proposal to use the 3 year annualized TSR for purposes of determining the 3 year performance rank against ISS-selected peer sand the 3 year CEO pay rank likely will help moderate some of the swings in the ISS Quantitative P4P assessments from year-to-year.  I liken it to using a 3-year average for purposes of determining a company’s run rate (or ISS Burn Rate), compared to calculating run rate/Burn Rate for a single year or using a weighted average for those figures that more heavily weights the most recent year. This should help companies by using a broader, equally weighted time-period.  But, it could cause problems for companies that hit the P4P speed bump and are trying to recover.  Whereas under the current ISS P4P model, corrections in the most recent year would have a disproportionate impact on the overall RDA score, that will no longer be the case.  In such situations, especially if a company is found to have had high CEO pay ranked against its ISS-selected peers in prior years, the fact that it lowers pay in the most recent year, the company might still have issues with the RDA score for some time (at least until those “high” prior pay years fall off the calculation).  It is also worth noting that ISS is not indicating what the threshold levels will be for purposes of triggering “medium” or “high” concern under RDA.  If the thresholds remain the same, then this change in RDA is likely to be beneficial to most companies.  However, if the thresholds are lowered, then it could might simply keep things status quo for most companies without any real change in the expected outcome under the ISS P4P Quantitative model.  Hopefully ISS will address that in the final policies (but by then it will be a bit too late for comments—it would have been nice if ISS had posted more details about what the refined Quantitative P4P Tests/Analysis would look like so folks could fully consider the implications when providing comments on these draft 2014 policies).

Other Observations

It is interesting to see that ISS has not proposed any change in its current equity plan proposal policy.  The survey had suggested that it was considering a more “holistic” approach to equity plan proposals.  Also missing from the draft 2014 policies is any policy regarding director tenure – which received quite a bit of attention in the release detailing the results of the ISS Policy Survey conducted over the summer.  So, while these two items weren’t addressed in the draft policies, they still might get issued as part of the final 2014 policy updates.  However, I think that is a bit doubtful and it is more likely that ISS will continue to research and work on those areas and may seek introduce new policies addressing those issues in a future annual policy update.

Comments

Comments will be taken until November 4, 2013.  Comments can be sent to policy@issgovernance.com and will be published as received unless otherwise requested in the body of the email.

ISS just published the results of its annual policy survey.  The results are available at:

http://www.issgovernance.com/files/ISS2013-2014PolicySurveyResultsReport.pdf

ISS conducted the policy survey from July 31, 2013 through September 13, 2013. ISS received over 500 responses, 128 from institutional shareholders and 350 corporate issuers (92% of whom were located in the U.S.).

There is a hint in the responses that ISS might consider implementing a policy with respect to director tenure, as a majority (74%) of institutional shareholders indicated long director tenure was problematic.  If it does, the responses seem to suggest that ISS might choose 15 years as the initial line-in-the-sand for judging long director tenure.  But, we’ll have to keep an eye out on the draft ISS policies to see if a new policy on director tenure gets proposed.

On equity plan proposals, 75% of institutional shareholders indicated that they significantly weigh performance conditions on awards, cost of equity plans, and other plan features if ISS moves to a holistic approach to equity plan evaluation.  I think it is likely that ISS will propose such a holistic policy with respect to equity plan proposals.  Unfortunately, this will cause less certainty for issuers when trying to figure out their equity plan proposals as they won’t necessarily have one hundred percent certainty that a particular combination of plan language, costs and features would result in support from ISS. But, we’ll have to wait and see what policy ISS proposes (if any) as part fo its draft policy release for the 2014 proxy season, which I expect out later this month or early next month.