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ISS 2015 POLICY SURVEY RESULTS SUMMARY
October 6, 2014
As part of its annual policy formulation process, each year ISS seeks feedback from institutional investors, public companies and consulting and legal communities on emerging corporate governance, executive compensation and other issues.
More than 370 total responses were received, including 105 individual institutional investors and 255 members of the corporate issuer community (including consultants/advisors).
The survey, conducted between July 17, 2014 and September 5, 2014, was structured around several high-level themes including:
- Pay for performance;
- Board accountability;
- Boardroom diversity;
- Equity plan evaluation;
- Risk oversight and audit;
- Cross-market listings; and
- Environmental and social performance goals.
For more information about the survey and to view more detailed survey responses, please click here.
Pay for Performance
CEO pay limits relative to company performance resonate with investors
In response to whether there is a threshold at which the magnitude of CEO pay warrants concern even if the company’s performance is positive (e.g., outperforming peer group), 60% of investors indicated a concern. Support for alternative solutions varied as 27% favored relative proportional limits based on the degree of outperformance versus the company’s peer group; 19% favored absolute limits on CEO compensation regardless of performance; and 14% advocated for proportional limits on compensation in relation to absolute company performance.
In determining excessive pay magnitude, methods such as comparisons to median CEO pay at peer companies, CEO compensation to pay of other NEOs, and proportion of CEO pay to corporate earnings or revenue have all garnered support.
Positive changes in succeeding year may be a mitigating factor for pay-for-performance concerns for the year in review
When evaluating say-on-pay, 63% of investors (and 34% of issuers) indicate that positive changes to pay programs can somewhat mitigate pay-for-performance concerns. In contrast, 52% of issuers (versus just 14% of investors) indicate that they can substantially mitigate concerns.
Of those investors who indicate that positive changes to pay programs can somewhat or substantially mitigate pay-for-performance concerns, 90% expect disclosure of specific details of such positive changes (e.g., metrics, performance goals, award values, effective dates) in order for the changes to be considered.
European investors and issuers diverge on peer group comparisons in evaluating compensation practices
For European markets, 83% of investors indicate that a European pay for performance quantitative methodology, including the use of peer group comparisons, would be useful as a factor in such evaluations. A significant majority (87%) of investors would also like to see a comparison to cross-market industry sector peer groups. Regarding other factors of comparison, 74%, 83%, and 85% indicate that they would favor local market peer groups, regional peer groups (i.e., Europe-wide), and cross-market peer groups based on company size/capitalization, respectively.
However, 58% of issuers indicate peer group comparisons are not appropriate to gauge each individual company’s compensation practices.
Mixed views on the relationship between goal-setting and target award values
43% of investors (and only 3% of issuers) indicate that if performance goals are significantly reduced from one performance period to the next, target award levels should be commensurately modified to reflect the expected lower level of performance. By contrast, two-thirds of issuers (and 26% of investors) indicate that the compensation committee should have broad discretion to set both goals and target awards at levels deemed to be appropriate under the circumstances. In addition, 25% of issuers (and 19% of investors) indicate that performance goals should be set independently of target awards, which must be maintained at competitive levels in order to attract and retain top quality executives.
Unilateral Adoption of Bylaws
Investors indicate little tolerance for unilateral boardroom adoption of bylaw amendments that diminish shareholder rights
72% of investors indicate that a board should never adopt bylaw/charter amendments that negatively impact investors’ rights without shareholder approval. Other investor respondents say “it depends,” selecting from a list of factors (directors’ track record, level of board independence, other governance concerns, the type of bylaw/charter amendment, and the vote standard for amendments by shareholders) which appear to be relevant in evaluating board accountability. Specifically, more than 85% of investors view each of those factors as relevant.
Conversely, nearly one-half (44%) of issuers indicate that boards should be free to unilaterally adopt any bylaw/charter amendment(s) subject to applicable law, while 34% of issuers say “it depends.”
Investors and issuers diverge on pre-IPO adoption of shareholder unfriendly provisions
63% of investors indicate that directors should be held accountable if shareholder unfriendly provisions are adopted prior to a company’s IPO. When determining whether to hold directors accountable, 21% of investors indicate “it depends,” with common responses including the type of provisions and whether directors are willing to address the issues after the IPO. On the other hand, 62% of issuers do not believe directors should be held accountable for pre-IPO actions.
Investors and issuers take big picture approach on boardroom diversity
60% of investors and 75% of issuers indicate that they consider overall diversity (including but not limited to gender) on the board when evaluating boards. Meanwhile, 17% of investors and 7% of issuers indicate that they do not consider gender diversity at all when evaluating boards.
Investors indicate that they would weigh a combination of plan features and grant practices as or more heavily than plan cost alone in a scorecard approach to evaluating U.S. equity-based compensation proposals
ISS plans to implement a “balanced scorecard” approach to evaluating plan proposals for U.S. companies that gives weight to various factors under three broad categories: (1) Cost, (2) Plan Features, and (3) company Grant Practices. With respect to how the plan Cost category should be considered in a scorecard, 70% of investors indicate weights ranging from 30% to 50%. 62% of investors suggest weightings from 25% to 35% for Plan Features; and 64% indicate weights ranging from 20% to 35% for Grant Practices. Weightings suggested by issuers were quite dispersed, but generally skewed somewhat higher with respect to Cost, and somewhat lower for Plan Features and Grant Practices, compared to investors.
Use of performance conditions is a very important factor for investors when voting on equity-based remuneration proposals in markets where levels of disclosure are generally poor
When assessing proposals to implement equity-based remuneration plans benefitting executives in markets where levels of disclosure are generally poor, all factors (pricing conditions, vesting periods, dilution, performance conditions, and plan administration features) are “very” or “somewhat” important to a majority of investors in their voting decision. Use of performance conditions is at the top of the list, deemed by 76% of investors as a factor to be “very important.”
Investors focus on boardroom oversight subsequent to incidents when evaluating the board’s role in risk oversight
Over the past few years, shareholders’ investments have been impacted by a number of well publicized failures of boardroom risk oversight. When evaluating the board’s risk oversight role, a majority of shareholders indicate that the role of the company’s relevant risk oversight committee(s), the board’s risk oversight policies and procedures, boardroom oversight actions prior to incident(s), boardroom oversight actions subsequent to incident(s), and changes in senior management are all either “very” or “somewhat” important to their voting decision on directors. Boardroom oversight action subsequent to an incident garners the highest percentage (85%) as a “very important” factor whereas only 46% indicate that changes in senior management are “very important.”
Investors consider disclosures concerning selection and tenure of audit firms to be very important when voting on auditor ratification and audit committee members
A slim majority of investors identify disclosures of the relevant factors the audit committee considers when selecting or reappointing an audit firm and the tenure of the current audit firm (53% and 51%, respectively) as “very” important factors in making informed voting decisions on auditor ratification and the reelection of audit committee members.
Investors and issuers provide mixed responses regarding policy selection treatment for cross-market companies
An increasing number of companies incorporate in one market but list in another (or multiple) geographic region. For example, some U.S.-based companies have inverted (reincorporated in non-U.S. markets with more favorable corporate tax regimes) and many non-U. S. companies have listed in the U.S. When asked how ISS should generally evaluate such companies, 47% of investors indicate that ISS should evaluate mainly under its policy guidelines for the main market of coverage, but for individual ballot items that arise from other regimes apply the policy of the market whose stock exchange rules or corporate statutes require the proposal to appear on the ballot. Other investor responses are split between evaluating entirely under ISS policy guidelines for main market of coverage (23%) and evaluating case-by-case depending on the nature of the proposal (24%).
Issuer responses are similar to those of investors with 41% indicating that ISS should evaluate mainly under its policy guidelines for main market of coverage, but for individual ballot items that arise from other regimes apply the policy of the market whose stock exchange rules or corporate statutes require the proposal being on the ballot; 29% indicate that ISS should evaluate entirely under its policy guidelines for the main market of coverage; and 26% indicate case-by-case, depending on the nature of the proposal.
Environmental & Social (E&S) Performance Goals
Investors and issuers differ on the appropriateness of quantitative E&S performance goals
When asked when it is appropriate for a company to utilize quantitative E&S performance goals, a majority of both investors and issuers, 57% and 75%, respectively, indicate a preference for case-by-case analysis (“it depends”). Of those investors, 89% consider if a company’s performance on a given environmental or social issue shows a negative trend or if the company has experienced significant controversies; 92% consider if the company has operations with significant exposure to potential regulatory or financial impacts; and 90% consider if the practice has become an industry norm. A slight majority (51%) indicate that it depends only if/when the quantitative goals are required by government regulations.
In contrast, with respect to issuers who select “it depends,” 65% indicate that only if/when the quantitative goals are required by government regulations and just under one-half (49%) indicate that it depends if a company’s performance on a given environmental or social issue shows a negative trend or if the company has experienced significant controversies.
Notably, 39% of investors indicate that it is appropriate for a company to always utilize quantitative E&S performance goals compared with only 7% of issuers. In the absence of quantitative goals, a significant majority of investors and issuers indicate that both company disclosure of a robust set of E&S policies, oversight mechanisms, and related initiatives, and/or company disclosure of E&S performance data for a multiyear period can be mitigating factors.