Proxy advisory firm ISS has updated its policies and recommendation criteria for 2015 annual meetings. The updates build upon ongoing outreach to companies and investors on such matters as pay for performance; board accountability; boardroom diversity; equity plan evaluation; risk oversight and audit; cross-market listings; and environmental and social performance goals.
Changes to ISS’ analytical framework for equity-based compensation plans “were many years in the making,” the update says. “The catalysts for this effort are the same market forces (new accounting standards, greater use of performance-based awards, and growing plan complexity) that have spurred significant changes in equity plan design and administration by corporations in recent years.”
The ISS "scorecard" model considers a range of positive and negative factors, rather than a series of pass/fail tests, to evaluate equity incentive plan proposals. The total score will generally determine whether ISS recommends for or against the proposal. The will provide for “more nuanced consideration of equity plan proposals,” the firm says. Considerations include tracking best practices in equity compensation and an analysis of correlations with total shareholder return performance and plan proposal vote results.
Plans associated with negative features (ability to re-price stock options without shareholder approval) or practices (pay-for-performance disconnects driven by excessive equity grants) will receive a negative recommendation. While “some highly egregious features” will continue to result in negative recommendations regardless of other factors (such as the authority to re-price options without seeking shareholder approval), recommendations will largely be based on a combination of factors related to cost, plan features, and grant practices. For example, a plan where cost is nominally higher than a company's allowable cap may receive a favorable recommendation if sufficient positive factors are present. Conversely, a plan where cost is nominally lower than the allowable cap may ultimately receive a negative recommendation if a preponderance of scorecard factors is negative.
ISS also clarified its approach to shareholder resolutions that demand board chairman independence. These were the most prevalent type of shareholder proposal offered for consideration at U.S. annual meetings in 2014. As of Oct. 31, 63 proposals came to a shareholder vote, up from 59 resolutions throughout the same time period in 2013.
ISS' current policy is to generally recommend for independent chair shareholder proposals unless the company satisfies all of the following criteria:
The company designates a lead director, who is elected by and from the independent board members with clearly delineated and comprehensive duties.
The board is at least two-thirds independent.
The key board committees are fully independent.
The company has disclosed governance guidelines.
The company has not exhibited sustained poor TSR performance.
This "generally for" policy will be updated by adding new governance, board leadership, and performance factors to the analysis. New factors, not explicitly considered under the current policy, include the absence/presence of an executive chair, recent board and executive leadership transitions at the company, director/CEO tenure, and a longer TSR performance period.
ISS will release a complete set of updated policies in December. In January, it will evaluate new U.S. shareholder proposals anticipated for 2015 and update its Summary Proxy Voting Guidelines accordingly. Information on additional changes can be found here.
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