| ISS Releases Survey for 2017
Policy Updates
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| | From our friends at Gibson Dunn:
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Institutional Shareholder Services (“ISS”) today launched its annual global policy survey. Each year, ISS solicits comments in connection with the review of its proxy voting policies. At the end of this process, in November 2016, ISS will announce its updated proxy voting policies applicable to 2017 shareholders’ meetings. ISS will publish the results from the policy survey and use them to inform its voting policy review.
The survey includes questions on several governance and compensation matters relevant to U.S. companies, as follows:
- Pay-for-performance analysis. ISS applies a quantitative screen as the first step in evaluating say-on-pay proposals. Currently, this screen is based on TSR (total shareholder return), relative to a peer group over a three-year period, and on an absolute basis over a five-year period. The survey asks whether ISS should incorporate additional financial metrics into the quantitative screen as a better way of assessing the alignment between pay and performance, and what metrics to include, such as measures tied to revenue, earnings, return (such as return on assets or return on equity), cash flow, economic profit or other benchmarks.
- Board refreshment. The survey asks about factors involving director tenure that may be viewed as raising concerns about a board’s refreshment and nominating process, including the absence of new directors who were appointed in recent years, “lengthy” tenure (which the survey describes as average tenure of more than ten or 15 years, a “high proportion” of directors with long tenure (which the survey describes as three-quarters of the board with service of ten years or more). ISS has previously solicited comment on whether it should revise its voting policies on director elections to take into account director tenure, but has not yet done so.
- “Overboarding” of executive chairs. The survey asks whether executive chairs—that is, separate chairs who are not independent, but are not the company CEO—should be subject to the same limit on outside board service as public company CEOs or the higher limit applicable to other directors. Under current ISS policies, public company CEOs (and other executives) are subject to a lower limit than other directors: two outside boards in addition to their own. Other directors are subject to a total limit of five outside boards beginning in 2017, down from six as a result of changes ISS made to its voting policies for this year. Currently, executive chairs fall under the higher limit. For 2016, ISS had proposed reducing the limit for public company CEOs to one public company board besides the CEO’s own. Although ISS did not make this change, and has not requested comment on it as part of this year’s policy survey, this remains an issue where changes could be made for 2017.
- “Say-on-frequency.” Most public companies will hold their second “say-on-frequency” vote in 2017 to solicit shareholder feedback on how often to hold their say-on-pay votes, as this is required every six years. In light of this, the survey asks whether companies should hold say-on-pay votes every one, two or three years and what factors, if any, may bear on the frequency that is appropriate, including things like company size, financial performance, the presence or absence of “problematic” pay practices and prior shareholder support for say-on-pay.
- Dual/multiple-class stock structures. The survey requests comment on whether ISS should oppose the election of directors at newly public companies if a company goes public or emerges from bankruptcy with multiple classes of stock that have unequal voting rights.
- Multiple say-on-pay votes for international companies. For companies (such as those incorporated in the U.K. and listed in the U.S.) that are conducting multiple say-on-pay votes due to the applicable legal requirements of different jurisdictions, the survey asks how ISS should approach evaluating these say-on-pay proposals.
- REITs and other Maryland companies. The survey asks whether ISS should consider opposing directors at REITS and other Maryland companies that do not allow shareholders to amend the bylaws or where the board of directors has adopted certain governance practices without shareholder approval, including classifying the board, giving the board exclusive authority to set its size or requiring a majority of shares to request a special meeting of shareholders.
It is important to note that the ISS annual policy survey does not necessarily address every topic that may be covered by ISS’s new proxy voting policies applicable to 2017 shareholders’ meetings. In past years, ISS has revised its proxy voting policies on issues that were not covered by its annual survey. Nevertheless, the policy survey is an important indication of possible changes and provides interested parties an opportunity to express their views. It also provides an opportunity to comment on other proxy voting policies.
The ISS policy survey closes on Monday, August 29 at 5:00 p.m. ET. Public companies and others are urged to submit their views by completing the survey as ISS considers the support expressed for the various alternatives set forth in its survey in developing its policies. ISS then will open a comment period on its proposed 2017 policy updates before releasing the final 2017 policy updates in November. More information on ISS’s policy development process is available at the ISS policy gateway, available here. The ISS policy survey is available at here.
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