ISS PUBLISHES ANNUAL POLICY SURVEY RESULTS

Summary by Veritas Executive Compensation Consultants

10/5/15

Last week, ISS announced its findings from the 2015-2016 annual ISS policy survey, the second key milestone in benchmark policy development.  This year, 109 institutional investors, 257 corporate issuers, and 20 consultants/advisors to companies participated in the survey.  The findings from the policy survey can be found here, and below is a synopsis of the policy survey results.  Here are the key takeaways:

  • Investors generally favor stricter “overboarding” thresholds for CEOs and other directors;
  • Investors support ISS’ current proxy access responsiveness policy;
  • Investors support broadening the list of items covered by “unilateral reductions in shareholder rights” and holding directors accountable until rights are fully restored;
  • Investors want clear reconciliation of adjustments used in non-GAAP compensation metrics;
  • Investors do not favor performance-based equity compensation for directors;
  • Investors want longer “cooling-off” periods for former executives and service providers before considering those directors to be independent;
  • Investors are increasingly skeptical about the benefits of renewing NOL pills; and
  • Investors seek disclosure by externally managed companies of the relevant compensation payments and practices of the external manager. 

 Over the next several weeks, ISS will continue its policy-making process for policies that will be effective February 1, 2016.  There are two approximate dates you should circle on your calendar concerning ISS policy development. The first is October 26, which is when ISS will publish certain draft 2016 policy updates and solicit comment.  Second, ISS anticipates releasing final benchmark policy updates for proxy season 2016 on November 18.

Below are more detailed notes on the results of the policy survey.  

2015-2016 ISS Policy Survey Results Synopsis:

Compensation-related survey questions:

1. Adjusted performance metrics:  How should non-GAAP or other adjusted performance metrics be viewed in a compensation performance metric, and what types of adjustments to reported or GAAP metrics are appropriate for compensation purposes?

a.  81% of investors agreed that adjusted metrics are sometimes acceptable, depending on the nature and extent of the adjustments and the degree to which disclosure of their purpose is transparent.  Of those 81%, two-thirds believe that non-GAAP metrics are acceptable as long as performance goals and results are clearly disclosed and reconciled with comparable GAAP metrics in the proxy statement, and the reasons for the adjustments are adequately explained.

2. Director compensation:  What types of equity compensation are appropriate for non-executive directors?  Are performance shares or stock options appropriate for director compensation?

a.  71% of investors believe that stock in lieu of cash for a director’s retainer or meeting fees is acceptable, but only 37% believe that performance-vesting equity is acceptable.

3. Externally-managed issuers:  How should ISS treat say-on-pay resolutions for externally-managed issuers where there is limited or no disclosure regarding executive compensation payments or practices?

a.  71% of investors surveyed indicated that ISS should recommend a vote against a say-on-pay proposal filed by an externally-managed issuer with minimal (or no) disclosure about executive compensation payments or practices on the part of the external manager.

 

Governance-related survey questions:

1. Overboarding:  What constitutes an acceptable number of directorships for directors, should there be restrictions placed on other classes of directors other than active CEOs (active CFOs and law firm partners, for instance), and should there be any exceptions? 

a.  For directors who are not sitting CEOs, 34% of investors believe that a four-directorship limit is appropriate; 18% believe that five is acceptable, and 20% believe that six (the status quo in ISS benchmark policy) is acceptable.  16% said “it depends/other” with a plurality suggesting a three-directorship limit.

b.  For sitting CEOs, 48% of investors believe that two seats (including the CEO’s own company) is an appropriate limit, while 32% believe that three total (the status quo in ISS benchmark policy) is appropriate.

2. Proxy access:  What restrictions in board-implemented proxy access rights, deviating from those requested in a majority supported shareholder proposal, would investors find problematic enough to potentially warrant an “against” or “withhold” vote for directors?

a.  Survey responses on proxy access are generally in line with the ISS benchmark voting policy adopted for 2015.

b.  72% of investors think ISS should issue negative recommendations impacting director elections if management adopts a higher-than-3% requirement, with that figure rising to 90% if the threshold exceeds 5%.  90% of investors surveyed believe negative recommendations are warranted if the ownership requirement exceeds 3 years.

c.  76% of investors surveyed believe negative directors recommendations are warranted if the aggregation limit is fewer than 20 shareholders.

d.  79% of investors believe that ISS should issue negative recommendations if a cap on nominees is less than 20% of the existing board size (rounded down).

3. Director accountability for unilateral bylaw amendments:  What unilateral bylaw amendments do investors find objectionable, and how long should directors be held accountable?

a.  Surveyed investors found a wide range of reductions in shareholder rights objectionable; those include classifying the board (92%), establishing supermajority voting requirements for charter/bylaw amendments (89%), diminishing the right to call special meetings or act by written consent (85%), adopting fee shifting (78%), implementing dissident director nominee compensation restrictions (77%), and increasing advance notice requirements (64%). 

b.  A majority of investors surveyed – 57% – believe that directors should be held accountable (through withhold vote recommendations) until shareholder rights are fully restored.

c.  ISS did not seek input on unilateral adoption of exclusive forum provisions. In a similar question on last year’s policy survey, institutions expressed the least concern about unilateral adoption of exclusive forum provisions of any of the actions on that list. 

4. Pre-IPO bylaw amendments:  How should boards of companies that have recently had their IPO be held accountable for shareholder rights-limiting bylaw amendments adopted before the IPO?

a.  A plurality of investors (48%) believe that a pre-IPO company should not adopt bylaw/charter amendments that negatively impact shareholders’ rights before becoming public, but a large minority (32%) believe pre-IPO companies should be free to adopt whatever provisions they deem appropriate, so long as they are clearly disclosed prior to the IPO.

5. Director independence for former executives:  When should the clock start on the 5-year cooling off period for former executives serving as directors to regain ISS’ “independent” designation, and should a cooling-off period also apply to former service providers to the company (outside counsel or auditor, for instance)?  

a.  A plurality (46%) of investors believe the 5-year clock should begin after the individual retires from the board as well as from all executive posts.

b.  82% of investors surveyed believe that former employees providing significant professional services to the company should also be subject to some cooling-off period.

6. Capital allocation and share buybacks:  What five-year historical financial metrics would investors find helpful in evaluating the appropriateness of certain capital allocation decisions (including share buybacks) made by the board?

a.  At least 85% of investors surveyed believe that additional information on share buybacks, dividends, capital expenditures, and cash balances would help assess capital allocation decisions, share buybacks, and the efficacy of board stewardship.

7. Net Operating Loss (NOL) poison pills:  How do investors believe companies should use NOL pills, what features would investors find broadly objectionable, and how often should they be renewed?

a.  Investor skepticism on NOL pills is growing.  21% believe that NOL pills should not be renewed or extended, 35% believe a duration of three years is too long between renewals, and 17% say it depends, while only 27% believe a three-year term is appropriate.  This is compared against companies, 61% of whom believe that three years is appropriate.

b.  Many investors believe that certain governance features present when a company proposes a poison pill could trigger them to vote against the pill; at least 75% of investors surveyed believe that those include (in decreasing order of objection) unequal voting rights, supermajority voting requirements, no ability to act by written consent or to call a special meeting, having a classified board, or a recent history of proxy contests.  

8. Controlled companies:  Do investors treat controlled companies differently than non-controlled companies for proxy voting or engagement purposes?

a.  56% of investors distinguish between controlled and non-controlled companies when making investment decisions and proxy voting decisions.

b.  91% of investors characterized their engagement with controlled companies as less constructive/productive than engagements with non-controlled companies.

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