ISS has launched its benchmark policy survey, which helps formulate policies that guides the proxy advisory firm’s voting recommendations. For the first time, the policy has two parts: a high-level survey covering what it believes to be fundamental and high-profile topics that closes on August 31; and a more expansive version to drill down on key issues that closes on October 6. In addition to the surveys, ISS also seeks input through roundtables and other outreach.
Mylan recently publicly protested what may be a little known ISS policy that impacts the provision of draft reports to S&P 500 companies.
CalSTRS, the New York City Comptroller’s office, the New York State Comptroller’s office and PGGM jointly launched a campaign asking the company’s investors to withhold support for six of the company’s board candidates up for election and the say-on-pay vote, filing exempt solicitation materials that show up under the company’s Edgar documents.
As described in our recent memorandum, ISS will be using other financial and operational metrics in addition to TSR in evaluating say-on-pay. In a recently updated FAQ on its executive compensation policies, this is called the Relative Pay and Financial Performance Assessment.
ISS will introduce this assessment for companies in the Russell 3000E beginning with meetings on or after February 1, 2017. The Russell 3000E Index includes the 4,000 largest publicly traded U.S. companies. According to the updated FAQ, a company’s proxy report will include a standardized comparison of CEO pay and a company’s financial and operational performance rankings relative to the ISS-defined peer group.
Right on the heels of the Glass Lewis policy updates, ISS has also issued its updates that will apply to meetings held on or after February 1, 2017. Similar to Glass Lewis, the ISS policy updates are generally not significant for existing public companies. However, there are several new and revised policy changes related to equity plans, including on director compensation. These policy updates are quite technical in their details, and warrant a careful examination and thoughtful disclosure to ensure that the plans are appropriately evaluated within the correct policy framework.
Overboarding. Similar to Glass Lewis, ISS also deferred its new overboarding policy until this season.
ISS has launched its data verification from October 31, 2016 to November 11, 2016 for the underlying data used in QuickScore (to be rebranded as QualityScore). The data is also used by ISS in formulating its research reports that investors obtain to make voting decisions.
All requested changes must be accompanied by a publicly disclosed source. QualityScores will be published on November 21. Requests for changes can also be made after that time.
Yesterday ISS published its draft 2017 voting policies for public comment. Any updated policies will apply to meetings held on or after February 1, 2017. Comments are due by 6:00 p.m. EST on November 10. The final release of the 2017 updates is expected the week of November 14.
Only a few of the topics that were addressed in the ISS survey, which we previously discussed here, are covered by the draft policy. Most notably, while it is possible that the final version of the 2017 policy updates will go beyond those put forth for public comment, the draft does not include key issues that were the subject of the survey questions, including board refreshment and tenure, overboarding for executive chairs, say-on-pay frequency and financial metrics used in pay-for-performance assessments.
ISS has just released the results of its survey on potential policy changes. We previously discussed the survey questions here. The global survey attracted 439 responses, from 417 organizations. 120 of the respondents were institutional investors, representing 115 organizations, including 73 asset managers or investment managers, 16 mutual funds, 15 government or state-sponsored pension funds, three foundations/endowments, three insurance companies (investment side), two alternative asset managers, and two labor union pension funds. Six responses were received from investor coalitions or consultants or NGOs with an investor perspective. 270 corporate issuers also took part in the survey.
In late October, ISS will release draft policies that will be subject to a public comment period before they are finalized.
ISS has issued its policy survey for the 2017 proxy season. The responses to the survey questions from interested parties inform the firm’s changes to its policies in making voting recommendations at meetings. Not all questions in the survey become new policies. In addition, new policies are sometimes created without related questions first being asked in the survey, but that has not been the case in several years for major policy amendments.
Compared to prior years, the questions in this survey that portend possible changes to ISS voting policy generally suggest more muted updates and less dramatic overhauls. U.S. public companies should be aware of the following survey questions that may become future voting policies:
Board Refreshment and Tenure.
In a strongly worded statement, Gary Retelny, President and CEO of ISS, testified before the House Committee on Financial Services about the Proxy Advisory Firm Reform Act. We previously covered the Act’s requirements here.
ISS believes that advisers themselves have become a proxy for the debate over the role of shareholders in the companies that they own, and that the proposed legislation heads in the wrong direction by turning away from an “investor-centric” federal regulatory regime to a “bureaucratic maze” that would ultimately allow corporations and their representatives to “pressure proxy advisers to back management positions.” According to ISS, proxy advisers have become an “outsized target in obsessive efforts by a small number of corporate managers and their representatives to discourage institutional investors from using their voice in the corporate governance debate.” Those individuals are trying to make it harder for investors to cast informed voting decisions by making it more expensive, cumbersome and time-consuming, so that if “information is equivalent to oxygen for proxy votes,” then “entrenched managers seek to cut off its supply.”
The firm annually covers more than 39,000 shareholder meetings in over 110 developed and emerging markets worldwide, and also implements custom voting policies for investors.
The Proxy Advisory Firm Reform Act, introduced by Congressman Sean Duffy (R-Wisconsin), is on the agenda for a hearing on Tuesday by the House Financial Services Committee.
Under the proposed legislation, proxy advisory firms must register with the SEC and provide information that would be made public about their procedures for advising their clients, including whether and how they consider the size of a company when making decisions. Not surprisingly because it is a constant source of criticism, the application must describe any potential or actual conflicts of interest. This includes whether they engage in consulting services and the amount of those revenues, as well as a list of their 20 largest clients and how they prevent such clients from having “undue influence.”
The registration could be denied if the SEC believes a firm does not have adequate financial or management resources to consistently deliver services “with accuracy and integrity” and to materially comply with their own procedures.
On Friday ISS issued new and updated FAQs to their proxy voting policies. Most notably, ISS indicated that it will evaluate a board’s implementation of proxy access in response to a shareholder proposal that received majority support by examining whether the major points of the shareholder proposal are being implemented.
In a nod to the complex nature and the evolving standards for proxy access bylaws, ISS will also examine the numerous additional provisions of the bylaws that were not part of the shareholder proposal. With respect to these types of provisions, ISS will examine whether they “unnecessarily restrict the use of a proxy access right.” Any vote recommendations driven by a board’s implementation of proxy access may pertain to individual directors, nominating/governance committee members, or the entire board.
Ethan Allen’s seven nominees for the company’s board received overwhelming support in the recent proxy contest against the six candidates proposed by Sandell Asset Management.
The contest received some unusual attention, as noted in this WSJ article, after ISS criticized the company for using majority voting for the election of directors as a “potential entrenchment device.” Over 40% of the Russell 3000 companies require directors to be elected by a majority of the votes cast. However, in a contested election, most often the standard reverts back to plurality, meaning that nominees who receive the most number of votes are elected regardless of whether they obtained a majority.
Beginning today, ISS is accepting updates to companies’ self-selected compensation benchmarking peers, if those companies have annual meetings scheduled between February 1, 2016 and September 15, 2016. Submissions are due by 8:00 p.m. EST on Friday, December 11, 2015.
Companies that have made changes to their peer group since the 2015 proxy statement should be aware that ISS uses the disclosed peers as an input into its own peer group selection process. No submissions are needed if there were not any changes to the information in the 2015 proxy statement.
The process requires filling out an online form, as explained here, but also confirming the submission by sending ISS an electronic copy on company letterhead along with your name, email address and company name, to email@example.com.
ISS has issued its updates to its proxy voting guidelines effective for meetings on or after February 1, 2016.
The policy update is quite brief and does not address many of the questions asked in the survey period during the ISS consultation period. Proxy access is only discussed in this update in the context of an actual contested election, while the survey questions had targeted specific bylaw terms.
For its overboarding policy, in 2016, ISS will note in its reports if a director is serving on more than five (5) public company boards. Starting in February of 2017, ISS will recommend against directors who sit on more than five (5) public company boards.
ISS has launched its annual data verification period starting today, November 2nd. From now until 8pm EST on November 13, companies can review and confirm the data used by ISS for QuickScore and in formulating its research reports that investors obtain to make voting decisions.
QuickScore covers US companies in the S&P 500 and Russell 3000. Companies that do not have a login already can request one at the email address listed here.
For screening purposes, and not for scoring, QuickScore will now track whether companies permit proxy access, including the following requirements: (a) the percentage of share holding; (b) the number of years of continuous ownership; (c) the number of shareholders allowed to form a group; and (d) the number or percentage of board seats for proxy access nominations.
ISS has issued its voting policies for public comment, which are due by 6:00 p.m. EST on November 9. The comments will be published (unless otherwise requested). ISS will consider the comments in forming the final policies to be applied to meetings on or after February 1, 2016. Final policies are scheduled to be released on November 18.
Only a handful of policy matters that were addressed in the ISS public survey, which we previously discussed here, are raised for comment. That does not mean these will be the only changes made in the 2016 policies. For example, no comments have been specifically requested on how ISS should assess whether boards were responsive to proxy access shareholder proposals that passed during 2015, but the final policies are likely to indicate the factors that ISS will examine.
ISS has released the results of its survey, which will govern changes to its policies beginning with annual meetings after February 1, 2016. A draft of the updated policy will be issued on October 26, and final policies in November. 412 responses to the survey were received, with 114 identifying as institutional investors. Below is a summary of certain of the survey questions and the responses noted by ISS.
Proxy access. The types of “material restrictions” in proxy access provisions adopted by companies where a proxy access shareholder proposal passed in 2015, that would be considered problematic enough to recommend against directors.
ISS counts Tempur Sealy as among the 28 proxy contests during the first six months of 2015, the busiest period for contests since 2009, even though the dissidents waged a “vote no” campaign instead of nominating alternative director candidates. The overall dissident “win rate” calculated by ISS decreased from 67% for all of 2014 to 46% for the first six months of 2015, particularly where the targeted company had a market cap above $1 billion. The firm believes that these results were affected by the absence of notable “heavyweights” in contests owing in part to settlements.
At Tempur Sealy, according to news reports, H Partners missed the company’s advance notice deadline to nominate its own slate and chose instead to urge investors to withhold votes for three of the company’s nominees, including the CEO, the chairman of the board and the chairman of the nominating and corporate governance committee.
Changes to charters and bylaws by boards, director and executive compensation, proxy access, director independence and overboarding are the key topics of focus in the ISS survey for the 2016 proxy season. The survey responses from investors, issuers and others help inform ISS policy formulation for the 2016 season, and will have an impact on how the proxy advisory firm makes recommendations, especially on director elections. The survey closes on September 4th at 5:00pm.
ISS is evaluating equity plan ballot proposals under a new “scorecard” approach this season, which we previously discussed here. Through May 12, ISS has supported 85.9% of equity plan proposals covered under its S&P 500 and Russell 3000 models, higher than in past years. In 2014, of the 808 companies in those indexes that were reviewed, a little over 80% received favorable recommendations for their plans.
About 300 companies evaluated this year met the minimum thresholds. The primary reasons the plans faced “against” recommendations include excessive plan costs, which were often reason alone to warrant a negative view.
In terms of vote results, only 11% of companies that have held meetings received less than 80% of votes in favor, a significant decrease from the prior year.
T. Rowe Price’s proxy voting policies explains that its Proxy Committee develops the firm’s positions on major proxy voting issues. The Proxy Committee comprises portfolio managers, investment analysts, operations managers and internal legal counsel, and relies upon its own research, independent research provided by ISS and Glass Lewis, and information presented by companies’ management and shareholder groups, in establishing policies.
Recommendations set by the Proxy Committee are distributed to the firm’s portfolio managers as voting guidelines. For T. Rowe Price, the portfolio managers decide ultimately how to vote on the proxy proposals of the companies in their portfolios. When portfolio managers cast votes that are counter to the Proxy Committee’s guidelines, they are required to document their reasons in writing to the Proxy Committee.
Under its existing policy, ISS will recommend against the election of boards of directors who adopt bylaw or charter amendments that they view as materially diminishing shareholder rights without obtaining shareholder approval.
In a recent set of FAQs, ISS has clarified that some unilaterally adopted bylaw amendments are not considered materially adverse. Although the proxy advisory firm will evaluate them on a case by case basis, the adoption of exclusive forum provisions when the venue is the company’s state of incorporation, or director qualification bylaws that require disclosure of third-party compensation arrangements, are unlikely to affect ISS’ recommendations for the board.
The FAQs issued by ISS on its new Equity Plan Scorecard (EPSC) model indicate that the revised model will consider, and score, a range of positive and negative factors, rather than use a series of “pass/fail” tests. As we previously discussed, about 1,200 equity plan proposals were subject to shareholder approval in the first half of 2014, with average support at 89%. ISS recommended against at least a quarter of the proposals, although only eight actually failed to pass (including two ISS favored).
The general mix of ISS recommendations for plans is expected to remain largely the same under the EPSC model, although the recommendation for a particular plan may differ.