Executive Summary – Key Policy Changes

Board of Directors

  • Unequal Voting Rights Clarification: Policy now explicitly covers both "common" and "preferred" shares with superior voting rights
    • New exceptions: Convertible preferred shares voting on "as-converted" basis and limited-duration enhanced voting rights with "mirrored voting"
  • Dual-Class Structure: New provision addresses proposals to create preferred stock with superior voting rights
    • Generally recommend against unless shares are convertible or have limited duration/applicability with mirrored voting

Executive Compensation

  • Pay-for-Performance (P4P) Methodology – Extended Evaluation Period:
    • TSR and CEO pay alignment extended from 3 years to 5 years
    • CEO pay rankings vs. financial performance extended from 3 years to 5 years
    • CEO pay multiples assessed over 1-year and 3-year periods (previously 1 year only)
  • Time-Based Equity Awards: New flexibility for companies using time-based equity with extended vesting/retention requirements
  • Board Responsiveness to Low Say-on-Pay Support:
    • Updated to address situations where companies engage but cannot obtain specific shareholder feedback
    • Companies can demonstrate responsiveness through positive pay program changes even without feedback
  • Non-Employee Director (NED) Pay – Strengthened Policy:
    • May recommend against directors for problematic NED pay across non-consecutive years (not just consecutive)
  • Equity Plan Scorecard
    • New overriding Factor: "Against" recommendation if plan lacks sufficient positive Plan Features, even with passing overall score

Social & Environmental Shareholder Proposals

Policy Shift: Moving from "vote for" to "case-by-case" evaluation for four key topics:

  1. Climate Change/GHG Emissions
  2. Diversity – Equality of Opportunity
  3. Human Rights
  4. Political Contributions

Introduction

On November 25, 2025, ISS Governance published updates to its U.S. benchmark proxy voting policies. The new policies are applicable to all U.S. company meetings held on or after February 1, 2026.

The 2026 Benchmark Policy Guidelines, including a summary of the changes, are available on ISS's website. ISS has made significant revisions this year, particularly around executive compensation evaluation. The updates are summarized below:

Board of Directors

ISS has updated certain policies listed below to clarify that unequal voting rights structures are considered problematic whether the shares with superior voting rights are classified as "common" or "preferred".

1. Problematic Capital Structures – Unequal Voting Rights

In conjunction with clarifying the inclusion of “preferred” shares under this policy, ISS has included two additional exceptions where ISS will not recommend withhold/against votes on directors:

  • Convertible preferred shares that vote on an "as-converted" basis
  • Situations where enhanced voting rights are limited in duration and applicability, such as where they are intended to overcome low voting turnout and ensure approval of a specific non-controversial agenda item and "mirrored voting" applies

The policy also clarifies that preferred shares with voting rights only on items affecting their class are not considered problematic.

2. Dual Class Structure

ISS has added a new provision addressing proposals to create preferred stock with superior voting rights. ISS will generally recommend against such proposals unless:

  • The preferred shares are convertible into common shares and vote on an "as-converted" basis prior to conversion, or
  • The enhanced voting rights have limited duration and applicability and the shares are voted in a way that mirrors common share votes

The inclusion of above exceptions reflects ISS’s recognition that certain limited-duration or convertible preferred structures with enhanced voting rights may serve legitimate corporate purposes without creating the same governance concerns as permanent dual-class common stock structures.

Compensation

Executive Pay Evaluation – Pay for Performance (P4P)

ISS is making significant changes to its quantitative pay-for-performance methodology, extending the evaluation period.

Peer Group Alignment:

  • Alignment between company TSR rank and CEO pay rank will be measured over a five-year period (previously three years)
  • Rankings of CEO total pay and company financial performance will be measured over a five-year period (previously three years)
  • CEO pay multiples relative to peer median will be assessed over one-year and three-year periods (previously one year only)

ISS states that this change emphasizes sustained value creation and smooths out short-term fluctuations, better aligning with investor preferences for long-term performance assessment.

Note that Glass Lewis is also revising its P4P methodology, extending the evaluation period from three to five years. With both proxy advisors moving toward longer-term performance evaluation frameworks, companies should prepare for P4P evaluations that emphasize five-year performance alignment rather than three-year alignment.

Time-Based Equity Awards with Long-Time Horizon

ISS has revised its qualitative P4P analysis to provide more flexibility regarding equity pay mix. The updated policy:

  • Explicitly includes "vesting and/or retention requirements for equity awards that demonstrate a long-term focus" as a positive factor
  • Clarifies that "realized pay" outcomes may be considered alongside realizable and granted pay

Many institutional investors have expressed concerns about performance-based equity programs and preference for time-based equity with extended vesting and/or retention requirements. The policy update provides flexibility whereby companies using predominantly time-based equity will not automatically face negative scrutiny if they implement sufficiently long-term vesting and/or retention requirements. Companies using time-based equity should emphasize extended vesting periods and/or post-vesting retention requirements in proxy disclosure.

Compensation Committee Communications and Responsiveness

ISS has streamlined its policy by eliminating duplicative text that appeared in both the Board of Directors and Compensation sections. The Compensation section now cross-references the factors detailed in the Board of Directors – Responsiveness section – rather than repeating them.

Board of Directors – Responsiveness to Low Say-on-Pay Support

ISS has updated its policy to address situations where companies engage with shareholders but are unable to obtain specific feedback:

  • If a company discloses meaningful engagement efforts but was unable to obtain specific feedback, ISS will assess company actions taken in response to the say-on-pay vote as well as the company's explanation of why such actions are beneficial for shareholders
  • The policy now explicitly lists additional factors including:
    • Significant corporate activity (such as a recent merger or proxy contest)
    • Any other compensation action or factor considered relevant to assessing board responsiveness

The above change addresses recent SEC guidance regarding 13-G versus 13-D filing status, which may make it more difficult for issuers to receive shareholder feedback. The update allows companies to demonstrate responsiveness through positive pay program changes even without specific shareholder feedback. Companies with low say-on-pay support should document engagement efforts even if unable to obtain specific feedback, clearly explain the rationale for compensation decisions and how changes benefit shareholders.

Problematic Compensation Practices: High Non-Employee Director (NED) Pay

ISS has strengthened its policy on excessive NED compensation to address problematic practices identified since the policy's 2019 implementation:

  • ISS may now recommend against directors for problematic NED pay identified across non-consecutive years rather than only consecutive years
  • Adverse recommendations may be warranted in the first year for egregious NED pay decisions, even without a prior pattern
  • The policy now explicitly identifies problematic practices including:
    • Particularly large NED pay magnitude relative to industry peers or that of company’s executive officers
    • Performance awards, retirement benefits, or excessive perquisites for NEDs

Non-employee director compensation increases have been minimal over the recent years despite expanded board responsibilities including diversity initiatives, human capital management, cybersecurity, and AI oversight. This ISS policy update addresses cases where NED compensation practices deviate significantly from these market norms, particularly when coupled with problematic features like performance awards or retirement benefits that are uncommon for non-employee directors.

Equity-Based and Other Incentive Plans (Equity Plan Scorecard)

ISS has added two new factors to its Equity Plan Scorecard framework.

Plan Features Pillar:

  • New scored factor: Cash-denominated award limits for non-employee directors (considered best practice)

For 2026, this factor will only apply to S&P 500 and Russell 3000 companies.

Overriding Factors:

  • New negative overriding factor: An equity plan will receive an "Against" recommendation if it lacks sufficient positive features under the Plan Features pillar, even if it achieves an overall passing score

This change is to address cases where plans receive very poor or zero Plan Features scores but still pass overall. For 2026, this overriding factor will only apply to S&P 500, Russell 3000, and non-Russell 3000 EPSC models.

Social and Environmental Shareholder Proposals

Policy Shift: From "Vote For" to "Case-by-Case"

Based on feedback received from its clients, ISS is changing its approach on environmental and social shareholder proposals, moving from a generally supportive "vote for" policy to a "case-by-case" evaluation on four key topics:

  • Climate Change/Greenhouse Gas (GHG) Emissions
  • Diversity - Equality of Opportunity
  • Human Rights
  • Political Contributions

Except in the case of political contribution proposals, ISS also mentions decline in shareholder support as the reason for this change. Change in regulatory landscape, evolution in relevant company practices and improved disclosure were the other catalysts indicated for the change in the case of climate change and diversity proposals.

Companies should review their current governance practices, compensation programs, and E&S disclosures against these updated policies in advance of their 2026 annual meetings. ISS’s comprehensive 2026 policy voting guidelines, reflecting these updates, are expected to be released in early December, with updated FAQs anticipated by mid-December 2025.