Changes to RiskMetrics Group’s Burn Rate Commitment Policy

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RiskMetrics Group just announced that its Research Group is allowing companies some flexibility in their burn rate commitments for 2010. Companies that have a 3-year average burn rate that exceeds their GICS industry group cap must either publicly commit to maintaining their burn rate for the next three years at the burn rate cap for their GICS industry group as determined by RiskMetrics for that year or face a negative vote recommendation on their equity compensation plan proposals from RiskMetrics.

Some of the approaches that RiskMetrics’ Research Group has found acceptable include:

  1. Committing to the average between the 2009 and the 2010 RiskMetrics burn rate caps,
  2. Committing to the average between the 2010 and the 2011 RiskMetrics burn rate caps, and
  3. Committing to the 2010 cap for one year, the 2011 cap for one year, and the 2012 cap for the last year.

As a result of the significant declines in the RiskMetrics Burn Rate Caps for 2010 (discussed here), RiskMetrics had little choice other than to work with companies on this issue.  I’ve spoken to companies that were willing to let RiskMetrics recommend against their plans as a result of this policy and would then discuss with their shareholders how inflexible RiskMetrics was being on this issue given the dramatic shift in burn rate caps. It sounds like RiskMetrics’ Research Group heard this message and decided that some flexibility was warranted.

I think this will make the commitment a little easier for companies to swallow, but the last two options do present their own concerns. Yes, equity grants (# of awards granted) probably increased on average for 2009.  Yes, that data was not included in the burn rate caps that RiskMetrics came out with for 2010. Yes, when those 2009 grants get factored into the 2011 burn rate caps, the caps will likely rise from where they sit for 2010.  But by how much and to where exactly?  Good questions, with not very good answers at this time. Hence, the last two options are a little less certain for companies but offer an opportunity for an increase in the rate a company commits to, but the exact extent of it will be unknown until subsequent years, but they should be better than simply committing to the 2010 burn rate caps.


How Will Your Company Fare Under RiskMetrics’ Pay For Performance Policy?

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Well, as I’m sure you know, RiskMetrics consolidated its Pay for Performance (P4P) Policies into a more unified approach for 2010.  Additionally, RiskMetrics tweaked the P4P Policy a bit.  However, the initial screen applied to determine whether a more in-depth analysis is warranted remains comparing a company’s 1- and 3-year Total Shareholder Returns (TSR) to that of its GICS industry group medians.  If a company’s 1- and 3-year TSRs are both below its GICS industry group medians, then RiskMetrics will take a closer look at things. More specifically, RiskMetrics would look more closely at the relationship between company performance and the CEO’s pay during the past five years, paying more attention to the prior 3 years.

RiskMetrics figures out the GICS industry group 1- and 3-year TSR medians on a quarterly basis.  So for companies that have fiscal years that end between November 15, 2009 and February 14, 2010, RiskMetrics will apply the 1- and 3-year TSRs it calculated for the GICS industry groups as of December 30, 2009.  Those figures were recently published and are available on RiskMetrics website at:


RiskMetrics Issues FAQs for Tax and Governance Havens

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On January 4, 2010, RiskMetrics issued a set of Frequently Asked Questions on Tax and Governance Havens: International Incorporation Issues.

RiskMetrics identifies the following countries as tax and governance havens:

  • Anguilla
  • Antigua/Barbuda
  • Bahamas
  • Barbados
  • Cayman Islands
  • Guernsey
  • Isle of Man
  • Jamaica
  • Jersey
  • Liberia
  • Marshall Islands
  • Mauritius
  • Monaco
  • Netherland Antilles
  • Panama
  • Virgin Islands (UK)

So what exactly is the consequence for a company to be incorporated in a tax and governance haven? RiskMetrics’ policy response depends on the type of company involved.  Further details along with some examples involving director elections are set forth on page 3 of the FAQs.

RiskMetrics also stats that some countries traditionally thought of as tax havens (such as Switzerland, Luxembourg and Ireland) are not included in the above list because they do not meet both conditions, i.e., they are tax havens, but they do not qualify as governance havens since they have well-defined corporate laws and codes and do not offer the governance flexibility of the governance havens listed. As such, these countries would fall under RiskMetrics’ international voting guidelines.

In the FAQs RiskMetrics indicates that certain companeis are incorporated in these traditional tax havens that do not also qualify as governance havens and may be listed in the U.S. However, RiskMetrics is unwilling to apply its policies on a one-off basis to companies incorporated in such countries that are listed in the U.S. and not to the rest of the companies incorporated there for which sufficient information necessary to undertake a U.S. policy-style analysis is unavailable.

So for companies that had reincorporated to places like Switzerland or Ireland and were hoping RiskMetrics might be persuaded this yer to apply the U.S. policies to their proxies, it looks like they’ll have to wait a bit longer.  Interestingly, RiskMetrics concludes  the FAQs by looking at the results of its issuer and institution surveys about what policies to apply and concludes that there appears to be no consensus.  I take that to mean that until there is a clear desire to have U.S. listed companies that happen to be incorporated in tax havens that are not also governance havens analyzed under U.S. policies, as demonstrated by its annual survey, RiskMetrics will be unlikely to change its position regarding what policy it will apply to such companies.

Full text of the FAQs can be found on RiskMetrics’ website at:


NASPP Chicago Presentation – RiskMetrics’ 2010 Policy Updates and Implications

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This presentation was used by Ed at a meeting of the National Association of Stock Plan Professionals’ Chicago Chapter on December 8, 2009.

Ed looks at the possible implications from the changes to the way RiskMetrics determines stock price and volatility as well as illustrates the significant changes for maximum burn rates under RiskMetrics’ Burn Rate Table for Russell 3000 companies.

Presentation (PDF click HERE)