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Environmental and Social Metrics Added to ISS QualityScore

Along with its four pillars for governance which score companies on a one to ten scale, ISS has launched Environmental & Social (E&S) QualityScore to measure corporate disclosure on environmental and social issues.  Similar to the Governance QualityScore, the measures are relative based on peer companies within a specific industry group.

An initial set of 1,500 companies is being covered globally, including Energy, Materials, Capital Goods, Transportation, Automobiles & Components, and Consumer Durables & Apparel.   It is expected that by Q2 2018, an additional 3,500 companies across 18 industries will be included.  The scores will be part of the companies’ proxy voting reports, but like all of the QualityScores, will not impact the vote recommendations.
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ISS Launches Corporate Profile Products for Investors that Includes More Focus on Individual Directors, a Board Skills Matrix and QualityScore Analysis

Recently, ISS announced a new product for investors, called corporate due diligence profiles, that contains a historical review of past ISS recommendations and vote results, measurements of company governance and compensation practices against QualityScore best practices with red flags indicating deviations, as well as charts of each director’s tenure against the TSR at the public companies where that director serve.

We understand from ISS that the product was designed to meet investor demands in reviewing companies for possible shareholder engagement and seeking more insight on individual directors.  While the overall data is not new, as the report aggregates information primarily from prior ISS reports and QualityScore into new formats, companies will likely want to be aware of they are being perceived by investors.
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ISS Releases Additional Guidance on 2018 Policy Updates

As discussed in a November post, ISS recently published its 2018 policy updates, effective for meetings held on or after February 1, 2018. Last week, the proxy advisory firm released further guidance in the form of three revised policy supplements.

  • Pay-for-Performance Mechanics ISS’ December Pay-for-Performance Mechanics whitepaper describes a revised methodology for 2018 pay-for-performance evaluations. Key 2018 updates include: (a) the introduction of the Financial Performance Assessment secondary quantitative screen; (b) changes to the pay-for-performance quantitative screens for S&P 500 companies; and (c) TSR smoothing for quantitative pay-for-performance screens.
    • Financial Performance Assessment.  The most notable change to ISS’ pay-for-performance methodology is the new quantitative Financial Performance Assessment, which compares a company’s financial and operational performance against its ISS peer group.

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Glass Lewis Updates Its Policy Guidelines

The board should take action when director elections or say-on-pay votes receive less than 80% support, according to the Glass Lewis updated policy guidelines:

Board responsiveness.  Glass Lewis believes that boards should respond to any ballot item that receives more than 20% approval or dissent votes by shareholders, including say-on-pay, director elections and shareholder proposals. While the policy covers all three types of matters, the guidelines emphasized that it is particularly applicable for say-on-pay proposals and director elections. We urge Glass Lewis to recognize that it is highly common for shareholder proposals to receive more than 20% support, and taking negative action against all of those boards would cast a very broad and unwieldy net.
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ISS Policy Updates for 2018 Focus on Few Issues

ISS has issued its policy updates, effective for meetings held on or after February 1, 2018.

The updates are more limited in their scope compared to past seasons.  ISS conducted a two-part survey process this year for the first time.  We understand that many of the issues raised in the first survey were intended to be longer-term considerations, and did not result in updated voting guidelines for next year.  These include the appropriateness of capital structures other than one-share, one-vote, board gender diversity, and virtual or hybrid meetings.

We also understand that pay ratio disclosure will be noted, but does not inform any voting recommendations for 2018.  
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ISS Requests Public Comments on a Few of the Policies to be Updated for 2018

ISS is seeking public comment on three policies that will impact U.S. companies with the comment period to close on November 9.  It will release final policy updates, which will contain more than just these three changes, that will impact the 2018 season in the second half of November.  We previously reported on the issues that were raised in two separate surveys here and here.

The key changes under consideration for the three policies now subject to comment include:

Non-Employee Director Compensation.  Under the proposed new policy, ISS would recommend against the board committee members who are responsible for setting or approving non-employee director compensation when there are two or more consecutive years of “excessive” pay without a rationale or other mitigating factors. 
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ISS Survey Results Focus on Possibility of Adverse Recommendations for Non-Employee Director Pay and Use of Realizable Pay in Say-on-Pay Analysis

In ISS’ secondary survey results announced yesterday, the focus was primarily on compensation.  We previously discussed the larger survey results here.  Final policy updates that apply to the 2018 season should be issued in November.

Non-employee Director Pay.  The highest paid non-employee directors in 2017 received more than $2 million in annual compensation, compared to $260,000 for the median S&P 500 director.  Investors who responded to the survey believe that non-employee director pay programs should be analyzed by comparing the pay received against (ranked by preference):  the 4-digit GICS industry group, the relevant stock market index peers and all companies.  
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Glass Lewis Will Not Incorporate Pay Ratio Data into Say-On-Pay Analysis in 2018

As year-end companies begin preparing to disclose pay ratio information in their 2018 proxy statements, Glass Lewis announced that it does not intend to make the ratio a part of the proxy advisor’s assessment of how investors should vote on say-on-pay “at this time” because it is not material for the analysis of the structures that companies use to pay their NEOs and the disclosures of those pay decisions.  The information will be included in the Glass Lewis reports as a data point since shareholders may consider it useful insight into a company’s practices.

The firm notes the two sides of the argument on the importance of the pay ratio. 
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ISS Survey Results Provide Investor Sentiments on Hot Topics, Including Pay Ratio and One Share-One Vote, and May Influence Next Year’s Voting Guidelines

ISS received 602 responses from 572 organizations, including 121 institutional investors, on its governance survey.  Key findings on the governance principles survey are set forth below.  ISS also asked more detailed questions in a supplemental survey, which is still open until October. These survey responses may inform ISS’ voting policies, and updates are generally issued in November.

One-Share, One-Vote.  Among investors, 43% indicated that they find unequal voting rights never appropriate for public companies in any circumstances.   Another 43% said unequal voting rights structures may be acceptable for newly-public companies if they are subject to automatic sunset requirements, or at other public companies if the capital structure is put up for periodic reapproval by the holders of the low-vote shares.
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The Drivers that Continue to Dog Say-on-Pay

Although the failure rate for 2017 say-on pay results achieved an all-time low of just 1.3%, the number belies the fact that more than 2,000 say-on pay proposals have either received negative recommendations from ISS or less than 70% support, or both, since say-on-pay resolutions started in 2011.

Approximately 12% to 14% of companies run into problems every year.  As companies have become more proactive with shareholder engagement, the number of companies that received “against” recommendations from ISS and still achieved more than 70% support has increased in the last three years, while the number of companies with those negative recommendations that received less than 70% favorable votes have fallen. 
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ISS Detailed Benchmark Survey Focuses on Governance Debates Largely Surrounding Pay Topics – Part II

For US companies, the detailed portion of the ISS benchmark survey targets compensation matters, along with one question on poison pills:

Short-Term Poison Pills. ISS asks whether it should continue its approach of examining poison pills with less than a one-year term on a case-by-case basis when voting on director elections or whether they are generally acceptable.

Using Realizable Pay for Say-on-Pay Analysis. For several years ISS has calculated and presented a realizable pay metric as part of its qualitative say-on-pay analysis. ISS believes the measure helps show the difference between target bonus/non-equity incentive and what is actually paid in short term programs and for long term programs, the actual payouts and forfeitures as well as the impact of stock price movements.
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ISS Benchmark Survey for Next Season Focuses on Recent Governance Debates – Part I

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.

The press release announcing the survey along with the links for downloading and filling it out are here. New policies for the upcoming proxy season are generally issued in November.
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Company Protests ISS Policy on Draft Reports in Vote No Campaigns

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 a result, according to a letter the company sent to ISS which it made public, ISS determined that the company would not be provided with a draft voting report.
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ISS Updates Executive Compensation and Equity Plan FAQs

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.
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ISS Policy Updates for 2017

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. 
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ISS Data Verification for QuickScore (QualityScore) Opens for Limited Period

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.

QualityScores cover U.S. 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.
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ISS Publishes Draft 2017 Voting Policies for Comment

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.
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ISS Releases Survey Boards That Will Inform 2017 Policy Changes

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.
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ISS Issues Policy Survey for 2017 Season

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.
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ISS Responds to Proposed Legislation Governing Proxy Advisers

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.”
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Proposed Legislation on Oversight of Proxy Advisory Firms

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.”
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ISS Issues FAQs on Voting Policies, Including Proxy Access

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.” 
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Plurality Carve-Out in Majority Voting Standards

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.
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Window Period Opens for Updating ISS and Glass Lewis About Changes to Peer Group Selection

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
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