ISS Updates Proxy Voting Guidelines

Institutional Shareholder Services Inc. (ISS), the largest proxy advisory, released 2012 updates to its U.S., Canadian, European, and international benchmark proxy voting guidelines.

The global updates are the result of an extensive consultation process that included outreach to and input from institutional investors and corporate issuers worldwide. ISS analysts will begin applying the updated policies to all publicly-traded companies with shareholder meetings on or after February 1, 2012. See ISS Policy Gateway and the updates.

One of the most significant updates is ISS’ revised U.S. pay-for-performance policy. During the policy process, both clients and issuers indicated, in particular, that pay-for-performance alignment should be viewed in a long-term context rather than the most recent year. In light of this guidance, ISS’ new approach will provide clients with a more robust view of the relationship between executive pay and company performance over a sustained time horizon.

Specifically, ISS will consider the relative alignment between the company’s total shareholder return and the CEO’s total pay rank within a peer group, as measured over one and three years, as well as absolute alignment (the alignment between CEO pay and a company’s share return over the prior five years). If alignment appears weak, further in-depth analysis will determine if there are mitigating factors. While I see their update as a positive step, I still don’t see any group other than the United States Proxy Exchange (USPX) addressing the continual ratcheting up of CEO pay, the “Lake Woebegone Effect.” I urge readers to apply USPX’s Shareowner Guidelines For Say-On-Pay Voting first and then apply more refined measures such as those used by ISS to those companies that pass USPX screens. We should not allow CEOs and NEOs to take an ever increasing share of corporate profits.

Other key policy updates include:

  • Board responsiveness to earlier say-on-pay votes: In line with investor feedback, ISS will make recommendations on a case-by-case basis on compensation committee members and the management say-on-pay proposal if the company’s previous say-on-pay resolution received less than 70 percent support from all votes cast, taking into account the company’s response; disclosure of engagement with major investors; specific actions taken to address the compensation issue(s) that caused the significant dissent; whether the issue(s) raised is recurring or one-time; and the company’s ownership structure. Cases where support was less than 50 percent will warrant the highest degree of responsiveness.
  • Proxy access: While the revised policy remains case-by-case, ISS will expand the factors that will be examined. ISS will consider various company-specific and proposal-specific aspects, including the ownership thresholds proposed (i.e., percentage and duration); the maximum proportion of directors that shareholders may nominate each year; and the method of determining which nominations should appear on the ballot if multiple shareholder groups submit nominations. This is probably about as good as we could have expected from ISS. USPX members will be submitting several proxy access proposals using our model text. Others will use different thresholds. I expect most will target companies with significant governance issues.
  • European equity compensation: ISS will adopt France-specific guidelines that include: an increased focus on performance criteria in line with local best practice; an increase in the allowable volume of capital that could be reserved for equity plans to 10 percent of share capital; and the introduction of a burn rate criterion to measure use of capital.
  • Board independence in Japan: ISS will recommend against a company’s top executive if the board does not include at least one outside director. In light of existing substandard industry practices, no negative recommendations under this policy will be made until 2013.

On December 6, at 2:30 p.m. GMT (3:30 p.m. CET), ISS will host a webcast to review its European policy updates. On December 7, at 11:00 a.m. EST, ISS will conduct a webcast to discuss its U.S. policy updates. These webcasts also will provide valuable insight about the key corporate governance issues facing investors and companies in 2012. To register for these webcasts, please click here.  Also in December, ISS will release its Global Policy Summary and Concise Guidelines.

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