On October 15, 2014, Institutional Shareholder Services Inc. (ISS) requested comments by October 29, 2015, on its draft voting policy changes for 2015 on select topics. Both of the proposed updates for the U.S. are designed to implement more integrated methods for evaluating (i) equity incentive plan proposals and (ii) independent chair shareholder proposals. ISS expects to release final policies on or around November 7, with the policies taking effect for meetings held on or after February 1, 2015. The proposed changes are described below and are available by clicking here.
1. Equity Plan Scorecard
ISS is proposing to use a “scorecard” evaluation model that considers a range of positive and negative factors in determining whether to give a negative recommendation rather than relying on the series of “pass/fail” tests applied in the existing policy. While some egregious factors (e.g., authority to reprice options without shareholder approval) will continue to result in a negative recommendation regardless of other positive factors, consideration of all of the scorecard factors will allow for a more holistic methodology in determining whether a “For” or “Against” recommendation is warranted. The proposed scorecard approach is not designed to increase the number of negative recommendations ISS issues, but ISS has not provided any guidance on the weightings of the various scorecard factors.
The scorecard factors would fall under one of the following categories:
Plan Cost: The total potential cost of a company’s plans relative to industry/market cap peers, measured by the company’s estimated “Shareholder Value Transfer” (“SVT”) in relation to its peers. SVT would be calculated for both (i) the sum of new shares requested, shares remaining for future grants, and outstanding unvested/unexercised grants and (ii) the sum of new shares requested plus shares remaining for future grants. This dual cost approach would eliminate ISS’ current option overhang carve-out policy.
Plan Features: Automatic single-triggered award vesting upon a change in control; discretionary vesting authority; liberal share recycling on various award types (this would eliminate liberal share recycling from SVT calculations); and minimum vesting period for grants under the plan.
Grant Practices: The company’s three-year burn rate relative to industry/market-cap peers (this would eliminate company burn rate commitments); vesting requirements of most recent CEO equity grants; estimated duration of the plan based on annual grant practices and shares remaining available plus new shares requested; proportion of the CEO’s most recent equity grants subject to performance conditions; the existence of a clawback policy; and the existence of post exercise/vesting share retention requirements.
Scorecard weightings and factors would be keyed to a company’s size and status (e.g., S&P 500, Russell 3000 (excluding S&P 500), Non-Russell 3000, and recently completed IPOs or bankruptcies). Burn rate benchmarks would be calibrated for respective index groups and the relevant GICS industry classification would be used within each index group.
2. Independent Chair Proposal
ISS is also proposing to use a more comprehensive and integrated approach for evaluating independent chair shareholder proposals. Under its current policy, ISS generally recommends a vote in favor of shareholder proposals for independent chairs unless the company counterbalances the combined chairman/CEO position with all of the following six criteria:
- the independent board members elect a lead director with clearly delineated and comprehensive duties
- at least two-thirds of the board is independent
- the key board committees are fully independent
- the company has disclosed governance guidelines
- the company has not exhibited sustained poor “total shareholder return” (TSR) performance (defined as one- and three-year TSR in the bottom half of the company’s four digit industry group, unless there has been a change in the CEO position during such time)
- the company does not have any problematic governance issues.
ISS proposes to update the existing analytical framework by adding new governance, board leadership and performance factors, including:
- the absence/presence of an executive chair
- recent board and executive leadership transitions at the company
- director and CEO tenure
- a longer (five-year) TSR performance period.
Under the new methodology, ISS would consider all of the factors as a whole and a single factor that could have previously resulted in a particular recommendation might now be mitigated by the existence of other factors. Based on the application of the proposed approach to 2014 shareholder proposals, ISS expects that the new methodology will result in a higher level of recommendations in favor of shareholder proposals for an independent chair.