Way back in late April, ISS updated its U.S. Procedures & Policies (Non-Compensation) FAQ. Generally, ISS publishes its proxy voting guidance in November or December, as it did in 2020, well in advance of the proxy drafting season for companies with a calendar year fiscal year. I cannot recall ISS publishing proxy voting guidance in the middle of proxy season. Additionally, the FAQs address several compensation-related issues including its policy on stock ownership guidelines, which it updated. Previously, ISS had encouraged stock ownership guidelines, especially for directors, but not required any specific level of investment is mandated. Among the factors considered by ISS in determining whether to recommend a “For” vote on director compensation plans, ISS had listed “Director stock ownership guidelines with a minimum of three times the annual cash retainer” as a relevant factor. Thus, ISS generally appeared to favor a 3X ownership guideline for directors, although ISS does not specifically “mandate” such a requirement.
The April FAQs include two statements on stock ownership guidelines:
18. Director and Executive Stock Ownership – what types of equity grants are included?
Not all shares disclosed in the proxy are included in ISS’ equity ownership tables. Unexercised options and unvested stock awards are not included. Deferred awards that are no longer forfeitable are included.
19. Has ISS changed its approach to Stock Ownership Guidelines?
ISS has updated its approach to Stock Ownership Guidelines, to account for the fact that a small number of companies’ guidelines allow some types of equity awards that are not actually owned shares to be counted towards the goals. If the guidelines allow for the inclusion of unearned performance awards or unexercised options (or any portion thereof, such as the current “in the money” value) towards meeting the guidelines, the company will no longer receive credit for having stock ownership guidelines.
As indicated, ISS is particularly interested in companies stock ownership guidelines that count unvested performance shares and unexercised stock options. According to the NASPP/Deloitte Consulting 2020 Domestic Stock Plan Administration Survey, one-third of companies that grant performance awards count the unearned awards towards ownership levels, and more than a quarter of companies that grant stock options count at least a portion of unexercised options towards ownership levels.
This fall might be a good time for all companies to review their officer and director stock ownership guidelines.