ISS Updates Its Proxy Voting Guidelines for 2018
Last week, Institutional Shareholder Services ("ISS") released certain policy updates for annual meetings occurring after February 1, 2018. Key updates for 2018 include: (i) updates to what constitutes a liberal change in control ("CIC") definition; (ii) extension of the Equity Plan Scorecard ("EPSC") to evaluate additional types of plan amendments; (iii) identification of new problematic pay practices; (iv) the impact of CEO pay ratio disclosures on ISS' review; (v) a new policy targeting excessive non-employee director ("NED") pay; (vi) revisions to the EPSC affecting minimum vesting, CIC vesting, stock ownership guidelines and other matters; (vii) addition of a new performance element (Financial Performance Assessment) to ISS' quantitative pay for performance screen; and (viii) a new policy and increased focus on board gender diversity.
Change in Control Definition. ISS updated what constitutes a liberal CIC (e.g., acquisition of common stock of 15% or less vs. the current 20%) and clarified that if a CIC is broadly defined so as to be triggered by ordinary course events (e.g., death or retirement), such definition may be considered to be liberal. ISS has also added that a CIC definition triggered by the addition of new directors who were not nominated by an incumbent board will not be deemed liberal. Companies should pay close attention to these changes as ISS may recommend a vote against a plan based solely on the fact it contains a liberal CIC definition, even if the plan would otherwise pass under the EPSC.
Plan Amendments. ISS will now use the EPSC score to evaluate proposals to extend a plan's term or to include full value awards as an award type where the plan authorizes only options/SARs. ISS will continue to use the EPSC to evaluate amendments increasing authorized shares or where the amendment is the first instance stockholders have to vote on the plan. ISS will typically evaluate other amendments based on their overall impact, following current practice. ISS has counseled companies to file full revised plans in connection with plan amendments; otherwise, ISS may recommend against the plan amendment.
Problematic Pay Practices. Significant pledging of company stock may lead to a vote recommendation against members of the board committee overseeing pledging or the entire board where significant levels of pledging raise concerns. Pledging was formerly considered in the context of governance failures. ISS has also identified the failure to include a say on pay/say on pay frequency ballot item when required by the SEC or the company's declared vote frequency as a problematic compensation practice and added (i) lifetime perquisites; (ii) multi-year guaranteed awards not tied to rigorous performance conditions; and (iii) liberal CIC definitions combined with single-trigger CIC benefits to the list of problematic pay practices most likely to result in adverse vote recommendations.
CEO Pay Ratio. ISS will display the median employee pay figure and CEO pay ratio in its research reports; however, these figures will not impact any vote recommendations at this time.
NED Pay Policy. ISS may recommend against the re-election of any director involved in setting excessive NED pay on a recurring basis (deemed to be two or more consecutive years) absent a compelling rationale or other mitigating factor. As the policy goes into effect in 2018, it will not influence voting recommendations until 2019.
EPSC. Half points can no longer be earned in connection with the CIC vesting, share holding and CEO vesting factors. Full points will now be awarded for the CIC vesting factor only if the plan limits acceleration of performance-based awards to actual performance and/or the fractional performance period and does not permit automatic or discretionary acceleration of time-based awards. To receive full points for the share holding factor, the holding period must be at least 12-months (or through the end of employment/retirement). No points will be awarded for holding requirements that lapse when stock ownership guidelines are met. Full points for the CEO vesting factor may only be earned for three-year vesting requirements (or if no time-based options or restricted shares have been granted in the prior three years). Further, the factor considering a company's discretion to accelerate vesting has been updated such that full points will only be earned when discretion is limited to cases of death and disability; broad discretion to accelerate upon a CIC will no longer result in any points being earned. ISS has also clarified that in order to receive points for the minimum vesting factor, a plan's language should preclude the possibility of awards vesting prior to one year from the grant date (e.g., no ratable vesting in year one or generic vesting descriptions such as "awards will vest over two years"). ISS has also increased the passing EPSC score for S&P 500 companies (only) from 53 to 55.
New Quantitative Pay for Performance Factor. Financial Performance Assessment ("FPA"), which compares a company's financial and operational performance over the long term against an ISS-selected peer group, has been added to ISS' quantitative pay for performance screen. FPA may only impact a company's overall quantitative concern level if the company is otherwise of medium concern or low concern bordering medium concern.
Board Gender Diversity. ISS has created a new policy concerning stockholder proposals on gender pay gap matters. Such proposals will be evaluated on a case-by-case basis considering the company's: (i) diversity and inclusion policies (and disclosures related thereto); (ii) compensation philosophy and use of fair and equitable compensation practices; (iii) involvement in any relevant and recent controversies, litigation or regulatory actions; and (iv) peer position on gender pay gap policies. ISS has similarly updated its director nominee review to emphasize board diversity. ISS reports will highlight lack of board gender diversity but such lack will not result in an adverse vote recommendation.
Miscellaneous. Additional changes in ISS policies for 2018 include, among other items, (i) updated say on pay frequency policy where companies should adopt a frequency that is at least as often as the option receiving a plurality of stockholder votes; (ii) no longer requiring disclosure of scheduling conflicts in a company's proxy statement for new nominees who attend less than 75% of board and committee meetings; (iii) revisions to the policy concerning stockholder proposals on climate change risk; (iv) adjustments to smooth TSR calculations; (v) updates to the pay-for-performance evaluation to include ranking of CEO total pay and company financial performance within its peer group, each measured over a three-year period; (vi) outline of additional disclosures and actions appropriate for companies receiving low say on pay support; (vii) allowing companies to exclude time-based restricted shares granted as consideration for an acquisition from their burn rate calculation if such shares are identified in a new table in the proxy statement; and (viii) adoption of a new policy to recommend a vote against all directors in every year that a long-term poison pill (e.g., term greater than one year) that has not received stockholder approval remains in effect, eliminating the current review structure that provides for pills adopted prior to November 19, 2009 to be grandfathered and generally exempts pills that a company commits to submit to a binding stockholder vote from review, among other items.
Glass Lewis Updates Its Proxy Voting Guidelines for 2018
Glass Lewis's ("GL") 2018 Proxy Paper Guidelines contain several key changes found in the areas of board gender diversity, dual-class share structures, board responsiveness, virtual stockholder meetings, and CEO pay ratio. GL also made clarifying edits to its Director Commitments and Pay for Performance policies.
Board Gender Diversity. While board gender diversity will be considered by GL in 2018, no voting recommendations will be based solely on the lack of board diversity. Beginning in 2019, however, GL will generally recommend against a company's nominating committee chair (and possibly other nominating committee members depending on other factors such as company size, industry and governance profile) if the company's board has no female members, absent a sufficient rationale or a commitment to address the lack of diversity.
Dual-Class Share Structures. GL disfavors dual-class share structures and favors allowing one vote per share. GL will typically favor any recapitalization proposal to eliminate a dual-class structure and will generally recommend against proposals to add a new class of common stock. GL will also consider the presence of a dual-class share structure in determining whether an indefinite restriction of stockholder rights exists following an IPO or spin-off.
Board Responsiveness. GL has clarified that companies should respond to proposals where 20% or more of stockholders vote contrary to management's recommendation, especially if the proposal involves director elections. Likewise, Board responsiveness is also deemed appropriate at companies with dual-class share structures where a majority of unaffiliated stockholders supported a stockholder proposal or opposed a management proposal. GL review of board responsiveness will generally be limited to publicly available disclosures and will cover (but not be limited to): any changes in board or committee membership, disclosure of related party transactions, meeting attendance or other responsibilities; any changes made to the company's governing documents; any press releases indicating the adoption of new or changes to existing company policies or reports; and any changes to compensation design. A company should describe any stockholder engagement on compensation issues in its proxy statement.
Virtual Stockholder Meetings. Beginning in 2019, GL will generally recommend a vote against governance committee members of a company that holds virtual-only stockholder meetings absent robust proxy statement disclosure assuring stockholders that they will be given participation rights similar to those they would have at an in-person meeting. In 2018, GL will look for such robust proxy disclosures; however, lack of such disclosure will not influence voting recommendations.
CEO Pay Ratio. GL will display the pay ratio as a data point in its Proxy Papers; however, it will not determinatively impact GL's voting recommendations.
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