2016-2017 ISS Policy Survey Results Synopsis
October 10, 2016
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ISS recently announced its findings from the 2016-2017 annual ISS policy survey, the second key milestone in benchmark policy development. 115 institutional investors, 270 corporate issuers, and 17 consultants/advisors to companies participated in this survey, representing a small uptick in response rate among both the institutional investor and corporate issuer community. One-third of investor responses came from institutions owning or managing at least $100 billion in assets.
Here are the key takeaways: - Both investors and issuers strongly favor using metrics other than TSR to measure pay-for-performance alignment. 79 percent of institutional investor respondents supported or strongly supported the idea, while only three percent were opposed or strongly opposed. Among issuers, 68 percent supported or strongly supported the idea, while only 11 percent opposed or strongly opposed.
- Capital productivity metrics are the most favored alternative pay-for-performance alignment metrics among investors. ROIC was the most broadly supported metric, with 47 percent of investor respondents favoring its use. Other return metrics, such as ROA or ROE, garnered 35 percent shareholder support, and earnings metrics and cash flow metrics were in a dead heat for third at 26 and 25 percent support, respectively.
- Institutional investors strongly support annual say-on-pay frequency. For say-on-pay frequency votes, a large wave of which is expected in 2017, two-thirds of institutional investor respondents favored annual say-on-pay frequency, while only 17 percent felt that the frequency should depend on company-specific factors, with the most commonly cited factors being financial performance and the presence or absence of recent problematic pay practices.
- Board refreshment matters to institutional investors. Board refreshment is a key concern for institutional investors, with 53 percent of institutional investor respondents disclosing that they feel that the absence of independent directors appointed in recent years is problematic.
- Long-tenured directors, even with refreshment, continue to be a source of investor concern. 68 percent of investor respondents saying that a high proportion of long-tenured directors is concerning, and 51 percent of investor respondents feeling that long tenured directors – regardless of proportion – is seen as problematic.
- For overboarding classification, a majority of institutional investors favor treating executive chairs under the CEO 3-board total limit. 64 percent of investors favor applying this stricter standard, rather than the 5-board non-CEO standard, to this rather limited number of executive chairs.
- Institutional investors strongly support taking action against directors at firms that are perceived to be taking advantage of Maryland law, many of which are REITs. 77 percent of investors favored taking action against directors at Maryland-based REITs that fail to opt out of shareholder-unfriendly provisions or Maryland REIT law. Similarly, 78 percent of institutional investors favor taking action against directors whom fail to opt out of shareholder-unfriendly provisions of the Maryland Unsolicited Takeover Act.
- Majority of institutional investors favor recommending against directors of IPO companies debuting with multi-class capital structures. 57 percent of respondents support adverse recommendations outright, while an additional 24 percent favor adverse recommendations in the absence of a reasonable sunset provision.
- Institutional investors believe inducement grants are acceptable to new non-executive directors, but preferred instrument varies (Canada). 33% of investors felt that time-based RSUs were appropriate in this capacity, 30% held that opinion on deferred shares, and 21% said option awards were an acceptable option. 21% of investor respondents had the view that inducement grants were not suitable for non-employee directors. Non-investors responded with the most support for time-based RSUs, followed by stock options and deferred shares; only 9% of non-investor responders felt that inducement awards were not acceptable.
Over the next several weeks, ISS will continue its policy-making process for policies that will be effective February 1, 2017. In late October, ISS will publish certain draft 2017 policy updates and open a comment solicitation period. ISS anticipates releasing final benchmark policy updates for proxy season 2017 in mid-November.
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