ISS and Glass Lewis both recently released updates to their 2017 voting policies. The changes should not have a significant impact for most public companies, however they warrant review as many of the new policies will be applied on a company-by-company basis, depending upon facts and circumstances. In addition, ISS has updated certain compensation-related policies as well as its pay-for-performance methodology. The full details of ISS’s policy updates can be accessed at www.issgovernance.com/file/policy/2017-americas-iss-policy-updates.pdf
ISS Director-Election Related Policy Updates
ISS has updated its policies on director elections (i) at companies that restrict shareholders’ right to amend the bylaws; (ii) at newly public companies with shareholder-adverse corporate governance provisions, including multi-class capital structures; and (iii) in situations where a director is “overboarded.” In addition, ISS updated its policies on say-on-pay proposals at cross-market companies and on capital authorization requests in the context of stock splits or stock dividends.
ISS Compensation-Related Policy Updates
Equity-Based and Other Incentive Compensation Plans
ISS recommends voting case-by-case on certain equity-based compensation plans depending on a combination of certain plan features and equity grant practices, evaluated using their Equity Plan Scorecard (EPSC) approach. Beginning in 2017, ISS will add an evaluation of the payment of dividends on unvested awards as a plan feature. ISS will only give credit for plans that expressly prohibit, for all award types, the payment of dividends before the vesting of the underlying award. In addition, equity plans must specify a minimum one-year vesting period for all award types under the plan in order to receive full points for this factor.
ISS adopted a new policy in light of recent management proposals to ratify non-employee director compensation. In evaluating such proposals, ISS will consider eight quantitative factors relating to the director compensation and will examine the magnitude of director pay relative to similar companies. In addition, ISS has updated and broadened the factors it will consider when examining equity plans for non-employee directors.
ISS Pay-For-Performance Methodology Updates
Following feedback from institutional investors and other constituents to its 2017 policy survey, ISS will add financial measures to supplement its legacy (and continued) use of total shareholder return (TSR) as a key metric for assessing corporate performance in the context of evaluating executive compensation. ISS will present in its reports relative evaluations of return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth.
ISS’ benchmark policy proxy research reports will include a new standardized comparison of the company’s CEO pay and financial performance ranking relative to its ISS-defined peer group. Financial performance will be measured by a weighted average of these financial metrics and the metrics and weightings will be based on the company’s four-digit GICS industry group. While this information will not impact the quantitative screening results in the pay-for-performance analysis during the 2017 proxy season, it may be referenced in the qualitative review and its consideration may mitigate or heighten identified pay-for-performance concerns.
Glass Lewis Voting Policy Updates
Glass Lewis released more moderate updates to its policies, including (i) updating its voting policy in situations where a director is “overboarded”, (ii) clarifying that it favors a robust board and individual director evaluation process as opposed to relying solely on age or tenure limits, and (iii) increasing scrutiny and potential votes against directors in connection with problematic IPO corporate governance practices. You can view Glass Lewis’s updated policy guidelines at www.glasslewis.com/wp-content/uploads/2016/11/2017_Guideline_US.pdf