ISS Revises Policies and Requests Comment

The proposed policy changes will affect certain ISS recommendations regarding boards, compensation, and environmental and social proposals.

Proposed Board Policies

• Board Response to Majority-Supported Shareholder Proposals. One of the key changes under consideration would strengthen ISS' policy to hold directors accountable for failure to respond to shareholder proposals that receive a majority of votes cast in the previous year. ISS' current policy recommends a vote against or withhold from a company's directors if the board failed to act on a shareholder proposal that received the support of a majority of the votes cast in the prior year and one of the two previous years. Under the new policy, ISS would recommend a vote against or withhold from the entire board (except new nominees, considered on a case-by-case basis) if the board failed to implement a shareholder proposal that received the support of a majority of the votes cast in the previous year. As a result, regardless of how many outstanding shares are voted on a proposal, if a majority of the votes cast are cast in favor of the proposal, the board would be expected to implement the proposal the very next year in order to avoid an ISS recommendation of voting against or withholding votes from the board.
• Director Over-Boarding and Board Tenure Exceeding Nine Years. These proposed policies, which would recommend voting against directors who sit on more than six public company boards and, in certain circumstances, would cause a director to be classified as non-independent if the director served on a board for more than nine years, affect directors of Hong Kong and Singapore companies only.
• Board Nominee Disclosure. ISS is proposing to recommend against the election of directors at all companies if nominee names are not disclosed in a timely manner prior to the meeting, which is common practice in some countries. This policy would include a one-year grace period for Poland and non-index Turkish companies.

Proposed Compensation Policies

• Management Say-on-Pay Proposals. ISS is proposing that three additional criteria be used in its evaluation of and recommendations regarding management say-on-pay proposals:

1. 1. Company peer group. ISS is proposing to add a company's self-selected peers to the current criteria it uses when comparing a company to its peer group, which includes looking at company size and market capitalization constraints.
   2. Realizable pay and grant date pay. ISS is also proposing to incorporate a comparison of realizable pay to grant date pay as part of its qualitative evaluation of pay-for-performance alignment.
   3. Pledging of shares. Finally, ISS is proposing the addition of the pledging of shares as a factor that may lead to negative recommendations under its existing problematic pay practices evaluation.

• Say on Golden Parachute Proposals. ISS is also considering updating its policy on golden parachute proposals to include using existing change-in-control arrangements maintained with named executive officers in its analysis and recommendations, rather than focusing only on new or extended arrangements, and placing further scrutiny on multiple legacy problematic features in change-in-control agreements. ISS believes these policy changes will likely result in additional recommendations against golden parachute proposals.
• Pay for Performance. Finally, ISS is recommending using a new methodology to measure potential long-term pay-for-performance alignment for management of Canadian companies, based on certain quantitative and qualitative factors. ISS will use the new methodology in its case-by-case review of executive pay and practices at companies listed on Canadian indexes for all management say-on-pay resolutions. Based on this methodology, ISS will generally recommend against management say-on-pay proposals and/or equity-based incentive plans and/or recommend against/withhold on compensation committee members if there is significant long-term discrepancy between CEO pay and company performance.

Proposed Changes to Environmental and Social Policies

ISS is proposing linking its recommendations on executive compensation to sustainability (environmental and social) criteria and, instead of generally recommending against these types of proposals, will make recommendations on a case-by-case basis. Four modifications to ISS' existing analysis of proposals addressing environmental and social non-financial performance metrics have been proposed.

1. Significant/Persistent Controversies. ISS is proposing to consider whether a company has significant and/or persistent controversies or violations regarding social and/or environmental issues.
2. Management and Oversight. ISS is proposing to review whether a company has management systems and oversight mechanisms in place regarding its social and environmental performance.
3. Comparison to Industry Peers. ISS is also proposing to compare a company's incorporation of non-financial performance criteria to the degree to which the company's industry peers have incorporated similar non-financial performance criteria in their executive compensation practices.
4. Current Disclosure Level. Finally, ISS is proposing to consider a company's current level of disclosure regarding its environmental and social performance in its analysis.

These proposed policies could result in increased ISS support of environmental and social non-financial performance proposals, depending on the scope of the proposal and the company's particular circumstances.

For additional information, the 2013 draft policies and comment procedures are described at http://www.issgovernance.com/policycomment2013.