Review of RiskMetrics U.S. Draft Policy Updates for 2010 Proxy Season

RiskMetrics Group opened the comment period for its 2010 policy updates earlier this week, on October 26, 2009. The comment period will run through November 11, 2009, and offers issuers, institutional investors and industry constituents the opportunity to provide feedback on RiskMetrics’ draft policy changes.

Of the 10 proposed updates, four apply to U.S. issuers that are on the topics of poison pills, director independence and compensation. None represents a significant change to RiskMetrics' existing proxy policies, but issuers should be aware of the contemplated changes. The four U.S. policy updates under consideration are as follows:

A. Adoption or Renewal of Non-Shareholder Approved Pills

The proposed changes are geared to cause issuers to seek shareholder approval of poison pills, which are viewed by RiskMetrics’ institutional clients as the most problematic takeover defense. Specifically, in cases when issuers fail to seek shareholder approval:

1. And the pills have a term of less than 12 months, RiskMetrics will consider recommending a WITHHHOLD/AGAINST recommendation on the full Board on a case-by-case basis. RiskMetrics will take into account the issuer’s rationale for pill adoption, the issuer’s governance practices, and the feasibility of putting the pill to a shareholder vote considering the timing of the pill adoption in relation to the next shareholder meeting.
2. And the pills have a longer duration than 12 months, RiskMetrics will perform a review at least once every three years and may recommend WITHHOLD/AGAINST
    vote from the entire Board.
3. And if an “adverse” change is made to an existing pill, RiskMetrics will recommend a WITHHOLD/AGAINST vote. An example of an adverse change might be lowering of the pill’s threshold trigger.

B. Director Independence

RiskMetrics, which currently applies NASDAQ-based materiality test for transactional relationship for all companies, is proposing to bifurcate its materiality test such that it aligns more accurately for NYSE-listed companies. NYSE companies will be evaluated based on NYSE-based test of the greater of $1 million or two percent of the recipient’s gross revenues.
 
Additionally, RiskMetrics will look to clarify its characterization of certain transactional services that are deemed to be professional in nature.  RiskMetrics will define professional services as being “advisory” in nature, generally dealing with sensitive information or strategic issues, and involving fee-based payment structures.

C. Pay for Long-term Performance Alignment

RiskMetrics is proposing two changes to its pay-for-performance analysis:

1. The “Pay-for-Performance disconnect” policy may apply even if there is an unchanged or marginal decrease in CEO pay in conjunction with below median one- and three-year total shareholder returns. Currently, RiskMetrics considers pay-for-performance disconnect only in cases where CEO pay has increased.
2. In further evaluation of the pay-for-performance disconnect issue, RiskMetrics will now assess the alignment of CEO pay with total shareholder return over a longer-term period of at least five years.

The proposed changes are meant to provide RiskMetrics greater flexibility and focus on longer-term pay alignment in applying its policy, but the overall approach will remain the same as it has in recent years.

D. Pay Riskiness

In line with the various legislative and regulatory initiatives on pay riskiness, RiskMetrics is proposing to include an assessment of the riskiness of the issuer's pay practices as part of its “problematic pay practices” policy. This would include evaluation of practices like guaranteed bonuses, a single performance metric used for both short- and long-term plans, high amounts paid under severance packages or high pay opportunities relative to industry peers, among others. This is to allow RiskMetrics to highlight risky aspects of pay that may be of concern, as well as aspects that may mitigate such concerns such as clawback policies and long-term stock holding requirements.

Georgeson will monitor developments related to the proposed changes and advise clients and friends accordingly.  

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Georgeson has a team of experts who will continue to monitor this situation for you and who can advise you in connection with uncontested director elections and other broader reforms proposed to be introduced to the proxy system. If you have any questions, please feel free to contact your Account Executive or any of the following Georgeson executives:

David Drake, President
212-440-9861, ddrake@georgeson.com

Rachel Posner, Senior Managing Director & General Counsel
212-440-9921, rposner@georgeson.com

Rhonda Brauer, Senior Managing Director, Corporate Governance
212-805-7168, rbrauer@georgeson.com

Rajeev Kumar, Senior Managing Director, Research
212-440-9812, rkumar@georgeson.com