Proxy Advisory Firms Update

more+
less-

This year, our proxy advisory firm update focuses on ISS, which issued policy updates on November 21, 2013 that will take effect for annual meetings held on or after February 1, 2014. In connection with announcing its updated voting guidelines for the 2014 proxy season, ISS also announced changes in its policy development process, which will now include a new “benchmark consultation period” ending on February 14, 2014. More information about that process, as well as the results of ISS’ 2013 policy survey (which ISS considered in formulating its updates for 2014), is provided below. Here is a brief summary of “what’s new” for 2014:

Governance Issue

Old Policy

New Policy

Key Changes

Board Responsiveness (to Shareholder Proposals)

Notes About 2013 Survey:

• In 2013, 84 shareholder proposals received support from a majority of the shares outstanding or of a majority of the votes cast. Of those, 73 proposals have been partially or fully implemented.

• “Comply or explain” – 40% of institutional investors indicated the board should be free to exercise its discretion and disclose the rationale for its actions (92% of issuers took this position in the survey); 36% indicated the board should take specific action to address the proposal.

Vote against or withhold from individual directors, committee members or the entire board as appropriate if the board fails to act (i.e., full implementation of proposal or management proposal in next proxy statement) on a shareholder proposal that received the support of (i) a majority of the shares outstanding the previous year or (ii) a majority of the shares cast in the last year and one of the previous two years.

Vote case-by-case on individual directors, committee members or the entire board as appropriate if the board fails to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year.

Factors to be considered:

• Disclosed shareholder outreach efforts in wake of vote;

• Rationale provided in proxy statement for level of implementation;

• Subject matter of proposal;

• Level of support and opposition for resolution in past meetings;

• Actions taken by board in response; level of engagement with shareholders;

• Continuation of underlying issue as a voting item on ballot; and

• Other appropriate factors.

• Implemented majority of votes cast in previous year only as policy threshold.

• Clarified that board’s rationale is a factor in the case-by-case analysis of less than full implementation.

• Emphasizes fact-specific, case-by-case nature of analysis.

Executive Compensation (Pay-for-Performance)

ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. For companies in the Russell 3000 index, the analysis considers:

• Peer group alignment, including (i) degree of alignment between company’s Total Shareholder Return (TSR) rank (40%) and CEO’s total pay rank (60%) within specified peer group, over one- and three-year periods and (ii) multiple of the CEO’s total pay relative to the peer group median; and

• Absolute alignment of trends in CEO pay and company TSR over the prior five years.

Additional qualitative factors may be examined if the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment.

ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. For companies in the Russell 3000 index, the analysis considers:

• Peer group alignment, including (i) degree of alignment between company’s annualized TSR rank and CEO’s annualized total pay rank with specified peer group, each over a three-year period and (ii) multiple of the CEO’s total pay relative to the peer group median; and

• Absolute alignment of trends in CEO pay and company TSR over the prior five years.

Additional qualitative factors may be examined if the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment.

• Changed calculation of first peer group alignment measure to annualized “relative degree of alignment” for three-year measurement period.

• Previous standard, which also included a one-year measurement period, resulted in over-emphasizing most recent year (since it was included in both measurement periods).

• Annualized calculation based on three-year measurement period also reduces the extent to which results may be skewed by the timing of equity awards.

Social/Environmental Issues (Lobby)

Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect and grassroots) activities, policies or procedures, considering:

• Company’s current disclosure of relevant policies and oversight mechanisms;

• Recent significant controversies, fines or litigation regarding the company’s lobbying-related activities; and

• Impact that the public policy issues in question may have on the company’s business operations, if specific public policy issues are addressed.

Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect and grassroots) activities, policies or procedures, considering:

• Company’s current disclosure of relevant lobbying policies, and management and board oversight;

• Company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage in lobbying activities; and

• Recent significant controversies, fines or litigation regarding the company’s lobbying-related activities.

• Updates intended to clarify ISS policies and “better communicate” the factors that ISS considers in evaluating these types of proposals.

• Specifically addresses executive and board oversight with respect to lobbying activity.

• Specifically addresses trade association activity.

Human Rights Risk Assessment

None.

Vote case-by-case on proposals requesting that a company conduct an assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process, considering:

• Degree to which existing relevant policies and practices are disclosed, including information on the implementation of these policies and any related oversight mechanisms;

• Company’s industry and whether the company or its suppliers operate in countries or areas where there is a history of human rights concerns;

• Recent, significant controversies, fines or litigation regarding human rights involving the company or its suppliers, and whether the company has taken remedial steps; and

• Whether the proposal is unduly burdensome or overly prescriptive.

• During 2013 proxy season, new shareholder proposals were filed relating to a company’s assessment of its risks related to human rights issues.

ISS adopted the new policy to provide guidance on these resolutions in the future, since existing policy does not address shareholder proposals on human rights beyond policy disclosure or adoption, which require the consideration of different factors.

OTHER NOTES ABOUT 2013 ISS SURVEY RESULTS

ISS conducted its annual survey from July 31, 2013 to September 13, 2013, seeking input from institutional investors as well as corporate issuers to inform its 2014 policy formulation process. In addition to the results described above under “Board Responsiveness,” the following results were notable:

  • In survey questions focusing on the U.K. and other markets with established corporate governance codes regarding director tenure, 74% of institutional investors indicated that long director tenure is problematic, either because it can diminish a director’s independence over time or interfere with a board’s ability to refresh its membership (or both). On the other hand, 84% of issuers indicated that a director’s tenure should not be presumed to indicate anything problematic.
  • In evaluating equity compensation plans using a holistic approach, 75% of institutional investors indicated that performance conditions on awards is a “very significant” factor (64% and 57% indicated that the cost of the plan and other plan features, respectively, are also “very significant”). Plan cost and other plan features are “somewhat significant” from the perspective of 54% and 61% of issuers, respectively.

NEW “BENCHMARK CONSULTATION PERIOD”

As part of its effort to shift from a seasonal to a continual policy formulation process, ISS announced on November 21, 2013 that it was opening a new “benchmark consultation period” and inviting comments on several policy topics. For U.S. issuers, the following topics will remain open for comments until February 14, 2014:

Policy Topic

Current ISS Policy

Potential Policy Directions

Director Tenure

U.S. proxy voting policy does not consider director tenure in its classification of directors or as a key factor in determining vote recommendations on director elections.

• Consider a mix of director tenures on board as a key factor when determining a vote recommendation on members of the nominating committee (e.g., if average tenure and/or individual director’s tenure exceeds a specified level).

• Classify directors with lengthy tenures as non-independent and apply existing board-related voting polices as they relate to director independence.

• Maintain status quo.

Director Independence

Currently, ISS classifies directors into three categories:

• Inside directors;

• Affiliated outside directors (takes into account previous employment, material transactions and family relationships); and

• Independent outsiders.

• ISS is considering a more facts and circumstances, case-by-case approach to analyzing director independence for 2015 and beyond.

• Areas of focus are former CEOs, family relationships and professional relationships.

Independent Chair Shareholder Proposals

Generally recommend a vote for independent chair shareholder proposals unless the company maintains a counterbalancing governance structure (e.g., robust lead director position and no governance or performance concerns such as TSR relative to peer group).

• Generally vote for all independent chair shareholder proposals as a matter of best practice but consider company-specific circumstances (e.g., size, length of time as public company, CEO transition) on a case-by-case basis.

• Always vote for all independent chair shareholder proposals.

• Maintain status quo.

Auditor Ratification

Vote for proposals to ratify auditors unless any of the following apply:

• An auditor has a financial interest in or association with the company (and is therefore not independent);

• There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor reflective of the company’s financial position;

• Poor accounting practices are identified that rise to a serious level of concern, such as fraud; or

• Fees for non-audit services (“other fees”) are excessive.

• Update policy to consider auditor tenure as a factor in determining the vote recommendation on proposals to ratify auditors.

• Maintain status quo.

To the extent that ISS adopts policy changes in any or all of the areas subject to the “benchmark consultation period,” the new policies would not take effect until the 2015 proxy season (at the earliest).

CONNECT