On October 15, 2014, ISS released its draft 2015 policies. These included two draft policies applicable to U.S. companies:
- Equity Plan Proposal Policy–ISS is proposing to implement an Equity Plan Scorecard for analyzing equity plan proposals; and
- Independent Chair Shareholder Proposal Policy– ISS is proposing a more holistic policy to analyze such shareholder proposals.
Now, I think it is a bit generous to call these draft “policies” as they lack many of the important details that would enable institutional shareholders and issuers to properly analyze and comment on these “drafts.” The draft policies raise many questions and offer few details on how they would actually be applied in practice. So it is nearly impossible to determine with complete accuracy how ISS Research will apply these draft policies.
Equity Plan Proposal Policy Update
ISS is proposing to use an equity plan scorecard composed of three categories: Plan Cost; Plan Features; and, Grant Practices. In some respects, it appears that ISS is simply reshuffling some of the existing components of its equity plan proposal policy.
Plan Cost will look at the Shareholder Value Transfer (SVT) just like the current policy does. However, the draft policy does not indicate what the consequence would be of a proposed plan’s SVT coming in above its ISS company-specific allowable cap. Given that the three categories will be weighted in some fashion, it may make sense to no longer have a hard and fast line for SVT cost for the proposal, but I expect that will be too great of a change for ISS. So we’ll have to wait and see how ISS will weight the three categories as well as how it will score within each category and what the consequence of being above or below the SVT allowable cap will be for an equity plan proposal.
Plan Features will look to the following plan features:
- Automatic single-triggered award vesting upon a CIC;
- Discretionary vesting authority;
- Liberal share recycling on various award types; and
- Minimum vesting period for grans made under the plan.
This list is from the draft policy and doesn’t necessarily correspond to the plan features that cause ISS to currently recommend against a proposed equity plan. Again, the draft policy does not indicate the consequence of a plan having any of these features. It could be that a company loses possible points for this category for every one of these features that the plan contains. Of course, there is also no indication of how these features would be weighted, i.e., equally weighted or disproportionately weighted to penalize for those features which ISS has identified as being more egregious. So, we will have to wait for the final policy to see exactly what ISS has in mind for the plan features category.
Grant Practices will incorporate ISS’s current Burn Rate analysis, but then include a couple of other items, including:
- Vesting requirements in most recent CEO equity grants;
- The estimated duration of the proposed plan based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years;
- The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;
- Whether the company maintains a claw-back policy; and
- Whether the company has established post exercise/vesting share-holding requirements.
Again, as with the other categories, ISS has not let us know how all these items will be counted and what weight each will hold in determining the overall Grant Practices category score. So, once again we’ll have to wait until the final policy to know what ISS is thinking here.
ISS also indicated that the Equity Plan Scorecard would have its factors and weightings keyed to company size and status: S&P 500, Russell 3000 (excludes S&P 500), Non-Russell 3000, and Recent IPOs or Bankruptcy Emergent companies. Again, ISS does not offer even a hint of what factors and weightings it would use for each of these groups nor how things would differ between groups.
ISS also indicates that its options overhang carve-out policy would no longer be available. Likewise, companies would no longer be able to make a burn rate commitment as they had in the past to avoid a negative ISS vote recommendation when their burn rate exceeded their industry burn rate cap.
ISS has requested comments on the new draft equity plan proposal policy, specifically:
- Whether there are certain factors in the scorecard approach that should be more heavily weighted when evaluating equity plan proposals?
- Any unintended consequences from shifting to a scorecard approach?
Independent Chair Shareholder Proposal Policy Update
ISS is proposing to revise its policy with respect to shareholder proposals for independent chairs to add new governance, board leadership, and performance factors that it will analyze when coming up with its vote recommendation on such proposals. ISS has identified the following as new factors that will be weighed (but there is no indication whether this is an exhaustive list):
- Absence/presence of an executive chair,
- Recent board and executive leadership transitions at the company,
- Director/CEO tenure, and
- A longer (five-year) TSR performance period.
Again, ISS does not offer a comprehensive list of factors that it will now apply and instead, asks for comments on what factors are considered important when reviewing such proposals. Additionally, like with the Equity Plan Proposal Policy, ISS has not indicated the weightings for these factors.
Comments on ISS Draft 2015 Policies
ISS will accept comments on its draft 2015 policies through 6:00 p.m. EDT on October 29, 2014. Comments can be submitted by sending them to policy@issgovernance.com
ISS announcement of Draft 2015 Policies: http://www.issgovernance.com/policy-gateway/2015-benchmark-policy-consultation/
Equity Plan Scorecard (Equity Plan Proposal Policy): http://www.issgovernance.com/file/publications/equity-plan-scorecard-us.pdf
Independent Chair Shareholder Proposals (U.S.): http://www.issgovernance.com/file/publications/independent-chair-shareholder-proposals-us.pdf