United States: ISS Issues Final 2014 Voting Policy Updates

On November 21, 2013, Institutional Shareholder Services (ISS) released its final 2014 voting policy updates. Consistent with the draft policies previously released, the key changes relate to ISS's quantitative CEO pay-for-performance analysis and its evaluation of board responsiveness to majority-supported shareholder proposals. Other changes were to modify the factors considered in evaluating shareholder proposals requesting details on a company's lobbying activities and to establish a policy regarding proposals requesting that a company conduct an assessment of the human rights risks in its supply chain or operations or publish a report on its risk assessment process. These new policies will be effective for companies holding their annual shareholder meetings on or after February 1, 2014. ISS anticipates posting FAQs in December 2013 covering any open questions relating to the revised policies.

QUANTITATIVE ANALYSIS FOR CEO PAY-FOR-PERFORMANCE

ISS uses a number of pay-for-performance metrics to evaluate the alignment between executive compensation and performance. Among them is the quantitative relative degree of alignment (RDA) measurement, which compares a company's total shareholder return (TSR) rank with its CEO total pay rank within the company's peer group over the previous one- and three-year periods (weighted at 40 percent and 60 percent, respectively). If the RDA and the absolute alignment test, another quantitative measure, indicate CEO pay-shareholder return misalignment, ISS then looks to a factor-based qualitative analysis to finalize its position on a company's pay-for-performance policies.

The final 2014 voting policy does away with the previously used prior one-year period comparison. Accordingly, ISS will limit the analysis to the preceding three-year period (or shorter period if pay and performance data are not available for all three years), weighting each of the three years equally. ISS credits the revision to feedback from investors and other constituents and its view that a single three-year measurement period will smooth the impact of periods of market volatility and the timing of equity award grants, and provide a more accurate assessment of long-term pay and performance alignment.

According to the proposed policy updates released in late October, ISS does not expect the revision to change materially the number of companies that raise concerns under the RDA test, noting that back-testing indicates that less than 7 percent of U.S. companies would show significant differences in RDA test results as a result of the change.

BOARD RESPONSIVENESS

ISS also modified the substantial changes it set forth in its 2013 policy update regarding board responsiveness to majority-supported shareholder proposals. In its 2013 policies, ISS made three key changes to its approach in this area:

  • Starting in 2014, ISS will initiate a review of boards failing to act on shareholder proposals that receive one year of a majority of votes cast, rather than the prior, less aggressive, triggers of either two years of a majority of votes cast in a three-year period, or one year of a majority of shares outstanding;
  • Adopted a case-by-case approach, including a list of factors for analysts to consider, for assessing whether a board acted appropriately on a shareholder proposal; and
  • Provided analysts with broader discretion when determining which directors to hold accountable if the degree of responsiveness is found to be insufficient.

The 2014 update substantially implements the 2013 policies with a couple of changes. First, the 2014 policy softens the 2013 revision recommending a vote against directors, committee members or the entire board for a failure to act on a majority-supported proposal by instead assessing recommendation of a vote against on a case-by-case basis. Further, ISS will now also consider "the board's rationale as provided in the proxy statement" as one of the factors in its case-by-case analysis of whether the board failed to act appropriately. This addition effectively introduces a "comply or explain" framework. ISS predicted in the proposed policy updates that this updated case-by-case evaluation could affect approximately 80 U.S. companies in 2014.

LOBBYING AND HUMAN RIGHTS

Finally, the 2014 update addresses ISS's analysis of two specific subject-matter proposals: (1) requests for information on lobbying activities and (2) requests for assessments of or reports on human rights risks. The lobbying revision slightly updates the factors to be considered in the case-by-case analysis of lobbying disclosure proposals. New for 2014, the human rights risk policy recommends a factor-supported, case-by-case vote on human rights risk assessment or reporting proposals.

NEW BENCHMARK POLICY CONSULTATION PERIOD

In conjunction with the release of the 2014 policy updates, ISS also opened a first-ever policy consultation period, through which ISS is inviting comment on various ISS policies for consideration of long-term policy adjustments. Through this consultation period, ISS explains, it is "seeking market feedback with the goal of shifting [its] process from a seasonal to a continual focus on policy development." The following topics evaluated in ISS's U.S. company analysis are open for comment: director tenure, director independence, independent chair shareholder proposals, auditor ratification and equity-based compensation plans. The consultation period closes in February 2014. Further information on the topics open for consultation and the commenting process may be accessed here.

CONCLUSION

The 2014 updates generally seek to afford companies a broader and more flexible assessment of their pay-for-performance and shareholder proposal practices. The pay-for-performance analysis revisions could result in a more consistent evaluation, avoiding arbitrary swings in a company's rank among its peers. Similarly, companies facing majority-supported shareholder proposals may be able to mitigate an adverse result under the revised qualitative board responsiveness test by carefully evaluating and articulating their rationales for less than full proposal implementation in their proxy statements. Issuers, investors and other constituents should also consider taking advantage of the new opportunity to guide ISS's long-term policy approaches by providing feedback on the topics opened for comment during the consultation period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions