On November 21, 2013, ISS posted its final policy updates for the 2014 proxy season. While the updates were not as numerous as prior year’s updates, they were significant. The updates impact ISS’s vote recommendations on directors and say-on-pay (SOP) proposals.
Director Vote Recommendations
On the Director Vote Recommendations policy update, ISS basically implemented the policy it announced for 2014 as part of its 2013 policy updates, but with a few revisions to account for feedback it received. ISS will make director vote recommendations on a case-by-case basis after considering a number of factors. For 2014, if a board fails to act upon a shareholder proposal that received majority support during the prior year’s vote, ISS will consider:
- The board’s outreach efforts to shareholders in the wake of the vote disclosed in the proxy;
- The board’s rationale for the level of implementation of the proposal;
- The subject matter of the shareholder proposal;
- The level of support for and opposition to the proposal and the board’s/company’s engagement with shareholders;
- The continuation of the underlying issue as a voting item on the ballot either as a shareholder or management proposal; and
- Other factors, as appropriate.
Say-on-Pay Vote Recommendations
With regards to ISS quantitative tests to assess a company’s pay-for-performance (P4P) alignment with respect to developing the ISS vote recommendation on say-on-pay proposals, ISS only revised one of the three quantitative tests, Relative Degree of Alignment (RDA). ISS introduced RDA for in 2012. Under the old RDA formula, ISS took a weighted look at the company’s percentile rank of total shareholder return (TSR) and CEO pay against the ISS-selected peers on a 1- and 3-year basis. The old RDA formula weighted 1-year TSR and pay ranks at 40% and 3-year TSR and pay ranks at 60%, which effectively caused the most recent year to have a disproportionate impact on a company’s overall RDA score. For 2014, ISS is eliminating this weighted approach and will look solely to 3-year TSR and pay ranks. However, ISS will utilize an annualized 3-year TSR to determine TSR rank and 3-year average CEO pay to establish pay rank. This shift in the policy can hurt or help companies depending on where their recent performance has been relative to the prior two year’s performance.
ISS did not address whether the concern thresholds for the RDA test would remain the same or be revised for 2014. Given that ISS appears to be trying to grade companies on a curve, I would not be surprised to see the concerns levels for RDA be revised for 2014.
Effective Date for 2014 Policy Updates
ISS will apply the 2014 Policy Updates to shareholder meetings on or after February 1, 2014. ISS will release a complete set of updated policies in December 2013 (likely to include the Burn Rate Caps for the 2014 proxy season as well as other revisions, perhaps even updates to the RDA concern levels).