Proxy Advisors

ISS Opening Peer Group Submission Window for Companies with Late Year Meetings

ISS announced that it will open its peer group change submission window starting 9 am Eastern on July 10, 2017.  Any companies that will have an annual meeting between September 16, 2017 and January 31, 2018 may submit changes made to their peer groups for that will be disclosed in their next proxy statement. The ISS peer group change submission window will close at 8 pm Eastern on July 21, 2017.

For companies with meetings during the time period that do not submit peer group changes, ISS will use the proxy-disclosed peer group from the company’s last filed proxy statement (i.e., generally those from last year).

For information about the peer group submission to ISS process and methodology for ISS selected peer groups for U.S. and Canadian companies, companies can visit ISS’s website, https://www.issgovernance.com/company-peer-group-feedback

ISS’ peer submission form can be accessed at https://login.isscorporatesolutions.com. As in prior years, ISS only permits companies to submit these peer group changes and not any third parties, such as compensation consultants, attorneys, or proxy solicitors.

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Glass Lewis Releases 2017 Policy Updates

On November 18, 2016, Glass Lewis announced that it had released updated 2017 proxy voting guidelines for several countries and that updated guidelines for other countries would be released over the next few weeks. The announcement can be found at: http://www.glasslewis.com/2017-proxy-season-asian-guidelines-available/

The countries that Glass Lewis released updated proxy voting guidelines for initially were:

Glass Lewis identified the following key areas for changes in the US 2017 proxy voting guidelines (none related to compensation):

  • Evaluating director commitments
  • Governance following an IPO or spin-off
  • Board evaluation and refreshment

And these were the key areas for Canada:

  • Evaluating director commitments
  • Board responsiveness to a failed advisory vote
  • Equity compensation plans
  • Shareholder rights plans
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ISS Policy Updates for 2017

ISS has announced several updates for its policies for 2017 (generally apply starting February 1, 2017 unless otherwise noted). Initially, ISS departed from past practice of announcing all annual policy updates at the same time when it issued an update with respect to its pay for performance policy on November 8, 2016 and then followed this up with its “normal” annual policy updates on November 21, 2016.

Pay for Performance Updates

ISS announced that in its 2017 pay for performance analyses (typically undertaken as part of ISS’ evaluation of a company’s say-on-pay proposal), it will add six relative quantitative performance metrics to its qualitative analysis. The six metrics are: relative ROIC, ROA, ROE, revenue growth, EBITDA growth, and growth in cash flow from operations — all evaluated over a three year period relative to the ISS peers for a company and presented in a table included in the qualitative portion of its pay for performance analysis. ISS may later include these six performance metrics in the quantitative analysis section of its pay for performance analysis — perhaps for the 2018 proxy season. I think we can expect that 2017 will be a year for ISS to learn how investors and companies think of the six performance metrics being disclosed in addition to TSR which ISS has included in its reports for many years.

ISS has indicated that the weight afforded each of these six metrics will vary by industry, though it did not release what those weights will be. I expect ISS will release a set of FAQs with the industry weights if it follows what it has done with other policies.

I expect these six performance metrics will play a factor in ISS’s analysis of situations where the current quantitative screens show a medium or high concern level. So if a company expects it will garner such concern levels under the current ISS quantitative tests, it should see how it fares against its expected ISS peers on these six performance metrics.  I expect companies could be in for a tougher time from ISS if they score below median in several of these six performance metrics, with greater importance of a below median score attached to those metrics carrying the greatest weight.

Finally, ISS announced that the Relative Degree of Alignment (RDA) test (one of the quantitative tests under the ISS pay for performance analysis).

Peer Group Submission

ISS also announced that its peer group submission window will run from November 28 to December 9. Companies that made changes to their peer group for 2016 should consider providing their updated peer group to ISS in order to ensure that ISS uses the company’s 2016 peer group in its analysis.  If a company does not submit a new peer group during the peer group submission window, ISS will use the existing peer group it has on file (which should be the 2015 peer group for most companies).

For more information about the ISS Pay for Performance Update and the Peer Group Submission, see this ISS press release (November 8, 2016): https://www.issgovernance.com/iss-announces-pay-performance-methodology-updates-2017/

 

Compensation-Related 2017 Policy Updates

ISS announced updates to its Equity Plan Scorecard Policy and a new policy with respect to proposal seeking to ratify director compensation.

Equity Plan Scorecard (EPSC) Policy Updates

When the proposal includes amendments to an equity plan:

  • If this includes a transfer of shareholder value to employees, ISS will supplement its EPSC with an overall impact of the proposed amendments.
  • ISS will now add a new factor under Plan Features that will weigh on the total points the proposal will receive under the EPSC policy — whether the plan prohibits the payment of dividends on unvested equity awards (though this factor will permit plans to receive full points if they accrue the dividends until the underlying award is vested/earned).
  • For the minimum vesting factor under Plan Features, ISS will only give credit if the plan contains a minimum 1 year vesting period that applies to all awards, which cannot be varied in an award agreement, except for up to 5% of the plan’s share authorization.
  • For proposals to amend non-employee director equity plans, ISS is expanding the qualitative factors that it can evaluate when the proposal exceeds the applicable shareholder value transfer or burn rate benchmarks, in keeping with its new policy on director pay ratification proposals.

As in years past, ISS likely will issue FAQs on the EPSC policy to take into account these updates prior to the next proxy season — perhaps in December or January.

Equity Proposals Submitted Only for 162(m) Approval

ISS clarified that proposals seeking shareholder approval of performance metrics in a cash incentive plan or equity plan for Section 162(m) purposes only will be evaluated on the basis of the compensation committee members’ independence.

Management Proposals Seeking Ratification of Director Compensation

ISS also announced a new policy with respect to proposals seeking ratification of director compensation. ISS will evaluate eight qualitative factors with respect to the magnitude, structure, and disclosure of director compensation. ISS will review the magnitude of director compensation relative to similar companies.

Other 2017 ISS Policy Updates

ISS released a number of additional policy updates for 2017 covering director elections, capital authorizations, and cross-market company policies.

For U.S. domestic issuers organized abroad, ISS will base its recommendations on say-on-pay proposals required by a foreign jurisdiction on ISS’ U.S. say-on-pay policy.

The updates to ISS policies for 2017 can be found in this press release (November 21, 2016):

ISS Announces 2017 Benchmark Policy Updates

as well as on the ISS policy gateway that has links to all the 2017 policy updates:

2017 Policy Information

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Share Withholding at Maximum Tax Rate

Accounting Standards Update (ASU) No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (available at: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2 FDocumentPage&cid=1176168028584. 2) permits companies to withhold shares up to the maximum statutory tax rates (once a company is applying all the provisions of ASU 2016-09). Many existing equity compensation plans specifically limit share withholding to the minimum statutory tax rates in order to avoid potentially negative accounting consequences, i.e., liability accounting instead of fixed, grant-date accounting for equity awards. So the question has been raised whether amending an existing equity plan that limits share withholding to the minimum statutory tax rate would pose an issue under the exchanges rules.  NYSE and NASDAQ have now both issued guidance on this issue which should help companies as they consider adopting ASU 2016-09 and implementing maximum share withholding.

NYSE

The NYSE indicates that a rule to add back shares that have never been issued is not a “formula.” Consequently, amending a plan to provide for withholding of shares based on a grantee’s maximum tax rate rather than the statutory minimum tax rate is not a material revision if the withheld shares are never issued, even if the withheld shares are added back to the plan.

But the NYSE also indicates that a rule to add back shares that have actually been issued generally would be considered a formula. Furthermore, the NYSE states that a rule to add back shares that are withheld from restricted stock upon vesting to cover taxes is a formula unless the forfeited shares are immediately cancelled upon vesting. Therefore, if the plan involves a formula, it must be limited to a term of 10 years from the date of the last shareholder approval. Consequently, if a plan sets the share withholding rate at the minimum statutory rate for restricted stock (and other awards where the shares are issued), then a change to increase the share withholding to the maximum statutory rate would be considered a material amendment that would require shareholder approval.

NYSE’s FAQs, including FAQ C-1, can be found at: https://www.nyse.com/publicdocs/nyse/regulation/nyse/equitycompfaqs.pdf

NASDAQ

NASDAQ also released guidance on this issue, but failed to specifically address the issue of issued versus unissued equity awards. According to the NASDAQ guidance, an amendment to increase the withholding rate to satisfy tax obligations would not be considered a material amendment to an equity compensation plan. But the guidance then goes on to state that allowing the holder of an award to surrender unissued shares to pay tax withholdings is similar to settling the award in cash at market price, and neither creates a material increase in benefits to participants nor increase the number of shares to be issued under the plan.

The NASDAQ guidance does not specifically address what happens if such a plan amendment is made to permit the surrendering of additional issued shares to pay tax withholding (e.g., restricted stock).  I think with the use of the term “unissued” in the NASDAQ guidance that NASDAQ is more than likely taking a similar stance as the NYSE, but some additional clarification from NASDAQ regarding issued share awards would be helpful.

NASDAQ’s FAQS can be found at: https://listingcenter.nasdaq.com/Material_Search.aspx?cid=71&mcd=LQ&sub_cid=114,97,109,101,103

Final Thoughts

If you are considering amending an existing equity plan to increase the share withholding rate to permit up to the maximum statutory rate (and you will be adopting the other ASU 2016-09 requirements), it is important to analyze the plan’s equity awards to determine if there are any would have issued shares, such as restricted stock. If so, then the plan amendment might be able to be crafted so that it maintains the plan’s existing tax withholding rate for issued share awards and only permits the increased tax withholding for unissued awards and therefore would not necessarily require shareholder approval.  Needless to say, companies should check with their legal and accounting advisers before undertaking such a plan amendment to ensure that it can be done without shareholder approval. Alternatively, companies could put the amendment to shareholders for approval, but should recognize that ISS likely will apply its Equity Plan Scorecard policy to the amended plan in making its vote recommendation.

For more information about ASU 2016-09, see this Exequity Client Alert: http://www.exqty.com/uploads/6/9/9/0/69908991/fasb_update_asc_718.pdf

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