More on ISS’ Excessive Non-Employee Director Pay Policy

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ISS announced that it would not apply its excessive non-employee director (NED) pay policy until meetings on and after February 1, 2020. But in the U.S. Compensation Policies Frequently Asked Questions, Updated December 14, 2018, ISS indicated that adverse vote recommendations could be issued under this policy for meetings occurring on or after February 1, 2020 where ISS has identified excessive NED pay without compelling rationale in both 2019 and 2020.

This means that companies that might have excessive NED pay and wanted to addresses it so it would not be an issue in 2020, will need to address NED pay now. That’s because most companies are setting their director compensation for 2019, that will be disclosed in their 2020 proxy statements.

Therefore, if a company will have an issue under ISS’ NED pay policy in 2020, it will be extremely difficult to avoid that result. So, the way ISS is implementing this policy creates a real possibility that companies will be trapped into being amongst the top 3% NED pay in both their 2019 and 2020 proxy statements and have no real opportunity to address NED pay levels (since 2019 pay being set shortly) before ISS applies the policy in 2020.

Companies should therefore carefully review ISS’s new FAQ on NED pay and determine whether their director pay for any director would place him/her at the 90th percentile or higher for companies in their 2-digit GICS code in their index (S&P 500; combined S&P 400 and S&P 600; remainder of the Russell 3000 index; and, the Russell 3000-Extended). If so, then they should consider adding an explanation in their proxy explaining why their pay is higher for those directors and also consider better laying out the process used to set director pay, especially timing, so that shareholders and ISS can more easily see that the Company had very little opportunity to address NED pay levels for the 2020 proxy.

ISS Announces 2019 Policy Updates

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On November 19, 2018, ISS announced its policy updates for the 2019 proxy season. These updates will apply to shareholder meeting on and after February 1, 2019.

While ISS did not announce any changes to its pay policies for 2019, it did indicate that it will feature EVA metrics in its proxy reports for U.S. and Canadian companies on a phased-in basis over 2019. ISS will continue to use GAAP measures in its quantitative pay-for-performance (P4P) test’s Financial Performance Assessment (FPA) during 2019. However, the clear indication is that ISS will continue to study how to bring EVA metrics into its quantitative P4P assessment, as it received feedback from its clients that they agreed with the direction ISS was taking in this regard.

For director elections, ISS will make a change with respect to board gender diversity. For U.S. companies, ISS is announcing a new policy that will take effect February 1, 2020 with respect to companies in the Russell 3000 or S&P 1500 indexes that do not have any women on their boards may cause ISS to issue adverse voting recommendations with respect to nominating committee chairs, and, on a case-by-case basis, and with respect to other directors who are responsible for the board nomination process. The policy would allow the absence of board gender diversity to be temporarily explained and excused.

The 2019 policy updates can be found on ISS’ Latest Voting Policies Page:

Latest Voting Policies

See related EC Minute episode on ECMinute.com

http://www.ecminute.com/2018/12/05/episode-32-isss-2019-policy-updates/

ISS Opens Peer Group Submission Period

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On November 5, 2018, ISS announced that it will soon open its peer group submission period for companies having shareholder meetings between February 1, 2019, and September 15, 2019.

The ISS peer group submission period will run from Monday, November 19, 2018, at 9 am Eastern, through Friday, December 7, 2018, at 8 pm Eastern. Companies can submit peer groups using ISS Corporation Solutions’ (ICS) Governance Analytics platform.

If your company’s peer group changed from the one disclosed in your last proxy, you should give due consideration to providing the updated peer group to ISS during this period.  Providing your company’s updated peer group will help ensure that ISS uses the correct peer group in its analysis of your next proxy.

For more information, including links to ISS’ FAQs on its peer group methodology and the ICS Governance Analytics platform, please go to:

Company Peer Group Feedback

ISS Issues Draft 2019 Voting Policies for Comment

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This morning, ISS posted its draft voting policies on its website (https://www.issgovernance.com/policy-gateway/2019-benchmark-policy-consultation/). Anyone interested in providing comments on these draft voting policies may do so before 5:00 p.m. Eastern on November 1, 2018 by emailing his/her comments to ISS at  policy@issgovernance.com. Comments will be made public by ISS when the final voting policies are released–expected the middle of November 2018.

For the US market, ISS issued two draft voting policies:

  • Board Gender Diversity, and
  • Financial Performance Assessment Methodology

Board Gender Diversity

ISS is proposing to  generally vote against or withhold from the chair of the nominating committee (or other directors who are responsible for the board nomination process on a case-by-case basis) at companies when there are no female directors on the board. Mitigating factors that may be considered include:

• a firm commitment, as stated in the proxy statement and/or other SEC filings to appoint at least one female director to the board in the near term (before the next annual general meeting);
• the presence of at least one female director on the board at the immediately preceding annual meeting; and/or
• any other compelling factors considered relevant on a case-by-case basis.

ISS is proposing to apply the policy for meetings on or after February 1, 2020 , which gives a 1-year phase-in period (roughly 2019).

ISS is interested in comments concerning: when it should recommend against directors other than chair of the nominating committee, whether there are any mitigating factors that should be considered, and, if so, what weight should be given to such factors, the appropriate time period for a commitment to appoint a female director to an all male board, and whether commenters agree with the one year transition period for this policy to take effect.

Financial Performance Assessment Methodology

ISS is proposing shifting away from using GAAP financial measures to Economic Value Added (EVA)-related metrics, such as EVA Spread, EVA Margin, and EVA Momentum. ISS indicates that companies would be provided these EVA metric data points free of charge prior to their annual meeting and ISS analysis.

ISS is not clear on when this proposed policy change would take effect.  So it might be for 2019 or 2020.

ISS is asking whether commenters believe the quantitative P4P tests should continue to emphasize TSR. ISS is also interested in finding out if the decision is made to implement the EVA measures whether people would still like the GAAP measures to be reported on an informational basis.