Institutional Shareholder Services, Inc. (“ISS”) and Glass Lewis & Co. (“Glass Lewis”) have each released their 2017 policy updates. For ISS, the release of its policy updates marks a final milestone in its 2017 policy formulation process with additional FAQs to be published in December 2016. ISS’ few compensation related policy updates apply to the Equity Plan Scorecard and outside director compensation (e.g., director equity plans and director compensation ratification proposals). Glass Lewis did not have any updates to its compensation policies for U.S. companies. The ISS policy updates are available here and Glass Lewis policy updates are available here.
Please note that the ISS policy updates are in addition to the recent guidance that ISS will now include certain additional relative performance metric benchmarks in its 2017 research reports for informational purposes, and potentially for use in a qualitative assessment, under the CEO Pay-for-Performance Policy in the U.S. market (see our recent Client Alert on this topic for more information here).
Glass Lewis is also continuing its limited program to enable companies it covers to verify the data that Glass Lewis uses to perform its analyses, comparable to what ISS does with its Data Verification program. Similar to prior years, Glass Lewis is offering verification on a first-come, first-served basis, and issuers have 48 hours to review and provide comments and publicly available support. Enrollment ends January 6, 2017, if not before, in the US, Canada, UK, EU, Norway and Switzerland. Companies must release all proxy materials no less than 30 days before the shareholder meeting date.
Key ISS 2017 policy updates, followed by key Glass Lewis policy updates, are set forth below.
Pay-for-Performance Quantitative Screens (Europe, UK and Ireland)
ISS will conduct US-style Pay-for-Performance quantitative screens (peer group and absolute alignment) as part of its Europe, UK and Ireland compensation evaluations. The results of the screen will be taken into account as a contributing, but not determinative, factor within a qualitative review of remuneration practices. ISS will recommend against a compensation proposal if it fails to comply with one or a combination of several principles, including its principle of good stewardship of investor’s interests with respect to remuneration practices, as shown by the pay for performance screen.
Non-Executive Director Pay (US)
In connection with both director equity plan proposals and advisory proposals for shareholders to ratify director pay programs, ISS is broadening and harmonizing its framework for the qualitative portion of evaluating non-employee director pay. For director equity plans, ISS will first conduct a quantitative screen that includes estimated cost (as measured by Shareholder Value Transfer), three year burn rate relative to peers, and plan features. If the plan exceeds benchmarks for cost or burn rate, ISS will then holistically evaluate the plan in light of certain qualitative factors. Similarly, ISS will evaluate proposals for shareholders to ratify director pay programs (where the program itself wasn’t already evaluated) using the same qualitative factors. New factors include relative pay magnitude and meaningful pay limits. Others include director stock ownership guidelines, minimum three year vesting, balanced cash/equity mix, and detailed disclosure.
Cross-Border Executive Pay Assessments (U.S.-Listed Companies Incorporated Elsewhere)
For companies listed in the U.S. and incorporated in another country, ISS will use U.S. say-on-pay policy to evaluate compensation proposals. This aligns the voting recommendations on a pay proposal that are required to be submitted in multiple countries and eliminates contradictory results.
Non-Executive Director Initial Equity Grants (Canada)(TSX-listed companies only)
ISS will recommend against members of the committee responsible for director compensation if there are excessive inducement (one-time initial) grants (relative to standard market practice), performance-based equity or other problematic pay practices. ISS believes these can compromise the director’s judgment or independence or can appear problematic to shareholders.
Non-Executive Director Remuneration (Europe)
ISS will recommend against any grants of all forms of performance-based compensation, equity or cash, for non-executive directors, representing an expansion of the types of grants covered. Many European investors and corporate issuers already have an unfavorable view of the grant of any form of performance-based compensation to non-executive directors, and in some cases their voting policies reflect this, as ISS’s now does.
Equity Plan Scorecard (US)
ISS is adding “dividends payable prior to vesting” as a new factor in one of the three pillars used in its Equity Plan Scorecard approach to evaluating equity-based compensation plans. The analysis will now also consider whether, under the proposed compensation plan, the recipient will receive dividends on unvested shares, and will give credit accordingly. In ISS’ view, companies should pay dividends to recipients of equity under an equity plan only after the underlying shares are earned. Note, however, that ISS does not object to the accrual of dividends that are payable after the vesting of equity under such a plan.
On the existing factor for minimum vesting requirements, ISS will now require at least a one year minimum in order to get credit on that factor, except for up to a 5% carve out of shares issued under the plan.
ISS will also, in connection with plan amendments, supplement the Equity Plan Scorecard with an analysis of the overall effect of all proposed amendments on the plan.
Executive Remuneration (UK; Ireland)
With many UK and Ireland companies seeking shareholder approval of new remuneration policies in 2017, ISS has updated its policy to reflect an industry working group’s recommendations that companies consider pay models that are different from typical structures found in the past. ISS has added a statement to its policy that a greater level of certainty in the receipt of the award should be matched by a lower award level. ISS will recommend against a Remuneration Committee chair when serious issues are identified and raised over a number of years, which makes the chair accountable to shareholders. ISS will also consider the European Pay for Performance analysis in its evaluation.
Director Related Policies
Director Elections at Companies That Restrict Shareholders’ Right to Amend Bylaws
If a company’s charter imposes undue restrictions on shareholders’ ability to amend the bylaws, including prohibitions on the submission of binding shareholder proposals, share ownership or holding period requirements in excess of SEC Rule 14a-8 ($2,000/one year), ISS will recommend against the members of the governance committee of the company’s board. In ISS’s view, such restrictions amount to a material diminution in shareholders’ rights.
Director Overboarding (Europe)
ISS has clarified its position on directors who have multiple board appointments, stating that if an individual holds more than five non-chair non-executive positions, or a non-executive chair of a company and holds also more than (i) three non-chair non-executive director positions, (ii) more than one other non-executive chair position and one non-chair non-executive position, or (iii) any executive position, or an executive director who holds (i) more than two non-chair non-executive director positions, (ii) any other executive position, or (iii) any non-executive chair position, ISS may recommend a vote against such individual. ISS will not recommend against a director at a company where s/he serves as CEO.
Smaller Companies Board and Committee Composition (UK)
Beginning in the 2018 season, ISS will not recommend in favor of nominees up for election except where the audit and remuneration committees of the company are fully independent, with a minimum of two independent non-executives. ISS seeks to align its policy with the more rigorous standard of the relevant code for smaller listed companies in the UK.
IPO-Related Governance Policies
Adverse Governance Features, Including Dual-Class Stock (U.S.)
If an IPO company has adopted a charter or bylaw provision that is materially adverse to shareholder rights, or implemented a multi-class capital structure in which the classes do not have identical voting rights, ISS will recommend or vote against directors individually, committee members or the entire board (except new nominees, who will be considered case by case), considering the ability to change the governance structure, the ability to hold directors accountable through annual elections, or a reasonable sunset provision.
Director Related Policies
Director Overboarding (US)
GL generally will recommend against a director who serves as an executive officer of a public company, and also serves on more than two public company boards, or any director who serves on more than five public company boards. GL will consider a range of factors, including whether a company on whose board the director serves provides a sufficient rationale for their continued board service.
Board Evaluation (US)
GL reiterated that it favors a robust board evaluation process focused on assessment of performance and alignment of skills with company strategy, over age or tenure limits.
Governance Policies Post IPO or Spin
Director Elections at Companies That Restrict Shareholders’ Rights
GL will evaluate the governance documents of a newly public or newly spun-off company to determine whether shareholder rights are being severely restricted by anti-takeover devices, supermajority vote requirements, or the removal of rights to remove directors or call special meetings. If GL determines such restrictions exist, it will recommend against governance committee members or directors serving at the time such provisions were adopted.
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