On October 16, 2012, proxy advisory firm Institutional Shareholder Services (ISS) issued for comment proposed changes to its U.S. voting policies for 2013. ISS’s proposed changes focus primarily on compensation-related matters. Of particular note in that regard is a modest revision to ISS’s approach to peer group selection for purposes of its pay for performance analysis. ISS also proposed a change that highlights its concern with companies’ responsiveness to majority-supported shareholder proposals.
Peer Groups. During the last two proxy seasons, ISS has been heavily criticized for its methodology on selecting comparative peer groups for purposes of recommending “For” or “Against” companies’ say on pay proposals. Its current proposal acknowledges this criticism. ISS proposes to use a company’s self-selected peers disclosed in its proxy statement as an input in its peer group methodology, subject to size and market capitalization constraints. The revised methodology would incorporate information about a company’s self-selected peer group in order to identify a larger pool of potential peers based on the company’s and its self-selected peers’ GICS industry groups. It would then prioritize and select the peers based on similarity of industry (as measured by a numerical identifier). The methodology would also prioritize peers that are in a company’s self-selected group and that have also chosen the company as a peer. By not implementing a more objective, or perhaps more transparent, methodology for constructing its peer groups, ISS appears to have left itself open to further criticism that its judgments about peer group selection are off the mark too often. Whether ISS’s revised approach avoids that pitfall will depend on the peer group results generated by the new methodology in the upcoming proxy season.
Realizable Pay. If a company fails ISS’s quantitative tests for pay and performance alignment, ISS conducts a qualitative review of the company’s pay practices to determine its voting recommendation on company say on pay proposals. ISS proposes to add a comparison of realizable pay to grant date pay as part of that qualitative evaluation. This proposal recognizes the trend toward supplemental disclosure of realizable pay, as contrasted with the grant date value of pay components mostly reflected in the Summary Compensation Table, in company proxy statements.
Stock Pledges. Pointing to concerns of investors and companies alike with pledging of stock (due to potential violation of insider trading policies, negative impact on company stock upon foreclosure and isolation of executives or directors from economic exposure to the company’s stock through hedging or other monetization strategies), ISS proposes to include pledging of stock as a factor for a negative recommendation under the existing problematic pay practices evaluation.
Golden Parachutes. The Dodd Frank legislation imposed a new say on parachute voting requirement, effective generally for transactions occurring after April 25, 2011. In recommending for these votes, ISS proposes to enhance its scrutiny of change-in-control arrangements implemented prior to that date, rather than focusing primarily on new or extended arrangements.
Environmental/Social Factors and Pay Proposals. ISS proposes to change its position on proposals urging the use of environmental and social factors in setting executive pay from “generally vote against” to “case-by-case.” It perceives a trend towards incorporating environmental and social non-financial performance metric into executive compensation, particularly for companies operating in industries with greater environmental risk.
Majority-Supported Proposals. Citing institutional investors’ expectations and evolving practice, ISS proposes to recommend an “Against” or “Withhold” vote for the entire board of directors (except new nominees, who would be considered on a case-by-case basis) if a board failed to act on a shareholder proposal that received the support of a majority of votes cast in the previous year. The current policy recommends an “Against” or “Withhold” vote against the entire board (other than new nominees, who are considered on a case-by-case basis) if the board fails to act on a proposal that received support from a majority of the shares outstanding in the previous year, or from a majority of the shares cast in the previous year and one of the two prior years.