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ISS Releases Global Policy Survey Results

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On September 25, 2020, ISS released the results of its 2020 Global Benchmark Policy Survey. In the global section, ISS had several compensation-related questions, mainly related to the impact of COVID-19.

COVID-19

ISS’s 202 COVID-Guidance—62% of Investors and 87% of Non-Investors responded that ISS should keep its 2020 COVID-19 guidance or similar guidance in place into 2021 and continue to apply flexible approaches where warranted through at least 2021 main proxy seasons. While 27% of Investors indicated that ISS should keep the guidance in place for 2021 for specific markets, companies or industry sectors (e.g., travel, restaurants, retail, and leisure) that continue to be severely impacted by the pandemic, but not continue it more generally for 2021.

Shareholder Meeting Formats—Asked about their preferred shareholder meeting format, 77% of Investors and 31% of Non-Investors indicated a preference for “hybrid” meetings, with the possibility for shareholders to attend and participate in the meeting either in-person or via effective remote communications. However, the majority of Non-Investors (42%) preferred in-person meetings, with virtual meetings used only when there is a compelling reason (such as pandemic restrictions).

Compensation Adjustments—Asked about what view best reflects their view of executive compensation in the pandemic’s wake, 70% of Investors indicated that the pandemic’s impact on the economy, employees, customers and communities and the role of government-sponsored loans and other benefits must be considered by boards, incorporated thoughtfully into compensation decisions to adjust pay and performance expectations, and should be clearly disclosed by shareholders. Only 33% of Non-Investors shared that view. The most prevalent view of Non-Investors (53%) was that the pandemic differs from previous market downturns and many boards and compensation committees will need flexibility to make decisions regarding reasonable adjustments to performance expectations and related changes to executives. Only 10% of Investors shared that view. In my opinion, this points to potential tension between Investors and Non-Investors regarding what they deem appropriate for adjustments regarding incentive compensation in light of the pandemic. Given Investors’ preference expressed in this question, companies should fully explain adjustments in their proxy statements, to provide the information that many shareholders will desire to put any adjustments in the proper context.

Adjustments to Short-Term/Annual Incentive Programs—The last COVID-19 question asked for the participants’ views with respect to adjustments to short-term/annual incentive programs in light of the pandemic. The majority of Investors (51%) and Non-Investors (54%) though that it would be reasonable for companies to make mid-year changes to annual incentive metrics, performance targets and/or measurement periods to reflect the changed economic realities, as well as to suspend the annual incentive program and instead make one-time awards based on committee discretion. Again, if any action like this is undertaken, companies should fully explain the rationale for such action in their proxy statement.

Independent Chair

The two U.S./North America questions in the policy survey focused on independent chairs.

View of Independent Chairs—The first asked participants for their view regarding independent board chairs. A majority of Investors (47%) believe an independent chair is generally the preferred model, but think there are company-specific circumstances that can justify other models. The second most prevalent view of Investors (38%) is that absent an emergency or temporary transition period, an independent chair position is the defualt preferred model for board leadership. Non-Investors viewed things a bit differently. A majority (48%) believe there is no single preferred model for board leadership and that any assessment should take company-specific factors into account. The next most prevalent view of Non-Investors (34%), echoed the majority of Investors view that an independent chair is generally the preferred model, but thinks there are company-specific circumstances that can justify other models.

Significant Governance or Risk Oversight Failures—The second question asked participants to rank the governance or risk oversight failures to be significant when evaluating an independent chair proposal. Investors ranked the following as their top five issues:

  • Significant misconduct or mismanagement by the company, board or senior executives resulting in legal and reputational risks.
  • Unilateral board actions that have materially diminished shareholder rights without shareholder agreement or ratification.
  • Significant failures of audit or internal controls oversight.
  • Insufficient board responsiveness to a majority shareholder vote (for example, against a say on pay vote or a director election or for a shareholder proposal).
  • Significant concerns about failure to address risks to the business model or the company’s long-term viability such as those related to climate change.

Meanwhile, Non-Investors had a different top five list of failures:

  • Significant misconduct or mismanagement by the company, board or senior executives resulting in legal and reputational risks.
  • Significant failures of audit or internal controls oversight.
  • Insufficient board responsiveness to a majority shareholder vote (for example, against a say on pay vote or a director election or for a shareholder proposal).
  • Unilateral board actions that have materially diminished shareholder rights without shareholder agreement or ratification.
  • Significant concerns about failure to address risks to the business model or the company’s long-term viability such as those related to climate change.

Investors appear to rank higher any failure that implicates shareholders rights than do the Non-Investors. This likley will create some tensions between the two groups. Companies would do well to consider the Investors preferences if they ever consider an action which could impact shareholder rights.

Full results of the ISS Policy Survey can be found at:
https://www.issgovernance.com/wp-content/uploads/publications/2020-iss-policy-survey-results-report-1.pdf

Time to Check Your Shares!

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We are just now starting to get ready for the fall compensation committee meetings cycle for calendar-year companies. If your company’s stock price has been negatively impacted by the COVID-19 pandemic, now is a good time to look at your equity plans. You need to see how many shares are available and figure out how long those shares are likely to last given both current stock prices and potential changes in stock prices that might affect the size of your future annual equity grants.

I have already worked with several companies that undertook this exercise. Several companies have determined they have just enough shares to make it until their 2022 annual meeting, so they will continue on as normal until then. For others, they realized they might not have enough shares available after their 2021 annual grant, so they have started the process of going back to shareholders for approval of additional shares at their 2021 annual meetings.

It is better to test the waters on this before you get swamped with year-end duties. If you find you may need more shares after your 2021 annual grants, you can then calmly start the process for going to shareholders in 2021 for approval of more shares.

ISS Launches Annual Global Policy Survey

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ISS has launched its annual Global Policy Survey. The results inform ISS policy updates for the 2021 proxy season (likely to be effective for meetings on or after February 1, 2021).

While there are compensation-related questions, they appear in the context of COVID-19. Specifically, ISS is asking about expectations generally regarding compensation adjustments as well as adjustments to short-term/annual incentive programs. No questions about adjustments of long-term incentive programs/awards were included. We will need to see how shareholders respond and what ISS does with this for its 2021 policy updates.

The survey is open through August 21, 2020. ISS expects a public comment period on its proposed 2021 policy updates in October 2020.

Link to ISS Announcement, which contains a link to the survey:

SEC Issues Final Rules on Proxy Voting Advice

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On July 22, 2020, the U.S. Securities and Exchange Commission met and adopted final rules, Exemptions from the Proxy Rules for Proxy Voting Advice, SEC. Rel. 34-89732, in a 3-1 vote. These final rules will become effective 60 days after publication in the Federal Register. Of course, that presumes that a lawsuit isn’t filed against the SEC and these final rules by an interested party (such as ISS which filed such a lawsuit with the SEC’s earlier guidance affecting proxy voting advisory firms).

The final rules codify the SEC’s view that proxy voting advice generally constitutes a solicitation under the proxy rules. The SEC Press Release clarifies that the availability of two exemptions often used by proxy voting advice businesses to the proxy rules depends on compliance with tailored and comprehensive conflicts of interest disclosure requirements. The exemptions also require compliance with two principles-based requirements designed to ensure that:

(1) companies that are the subject of proxy voting advice have such advice made available to them in a timely manner, and

(2) clients of proxy voting advice businesses are provided with an efficient and timely means of becoming aware of any written responses by companies to such proxy voting advice.