Dealing with ISS and Other Proxy Advisory Firms this Proxy Season

by Snell & Wilmer
Contact

Set forth below are summaries of key ISS and Glass Lewis policy updates that will take effect for the 2013 proxy season.

ISS Policy Updates

Pay-for-Performance Evaluation

  • Revised Peer Group Methodology. ISS modified its peer group methodology to consider a public company’s self-selected peer group, recognizing that the peer groups historically used by ISS sometimes omitted competitors of the subject company and/or included companies that were not appropriate for pay-related comparisons. ISS also “slightly relaxed” its size requirements (primarily affecting very small and very large companies), although the firm stressed that it will continue to emphasize similarities in industry profile, size and market capitalization when formulating peer groups for purposes of its pay-for-performance quantitative analyses.
  • Analysis of “Realizable” Pay. In 2012, ISS observed more companies disclosing “realizable” total compensation in addition to the “grant date fair value” amounts required under SEC rules. In providing such additional disclosure, public companies attempt to show not only the Compensation Committee’s intent when it makes executive compensation decisions, but also how that compensation is subsequently affected by gains or losses in the company’s stock price. Beginning in 2013, ISS will include “realizable pay” in its qualitative analysis for large capitalization companies. Such pay will consist of the sum of cash and equity awards for the applicable performance period, with equity awards (whether actually earned or based on target future achievement) being valued using the stock price at the end of the performance period. Stock options and stock appreciation rights (SARs) will be valued using a Black Scholes model. ISS noted that its consideration of “realizable pay” could mitigate—or exacerbate—an individual company’s pay-for-performance concerns arising from the preliminary quantitative analysis.

“Majority-Supported” Shareholder Proposals

  • Historical Standard; Investor Feedback. Historically, ISS recommended a vote against the full board of directors if it failed to act on a shareholder proposal that received the support of a majority of the shares outstanding in the last year, or a majority of the shares cast in the last year and one of the two previous years. In a 2012 survey of institutional investors, ISS observed that 86 percent of respondents would expect a public company’s board to implement a shareholder proposal approved by a majority of the votes cast at the previous annual meeting (even if less than a majority of the shares issued and outstanding).
  • 2013 Transition Rule. In response to that feedback, and to provide for more flexibility in its recommendations, pursuant to a transition policy effective for the 2013 proxy season, ISS will recommend a vote against individual directors, committee members or the full board (as appropriate) if the board failed to act 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.
  • 2014 Proxy Season and Beyond. In the 2014 and future proxy seasons, ISS will recommend a vote against individual directors, committee members or the full board (as appropriate) if the board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year.
  • Case-by-Case Application; FAQ. ISS noted that the policy will be applied on a case-by-case basis.

Pledging and Hedging

  • Pledging “Significantly” Problematic. In 2012 surveys conducted by ISS, 49 percent of institutional investors and 45 percent of public company respondents indicated that they view pledging of shares by directors and executives as significantly problematic. Nevertheless, ISS’ proposal to consider pledging a “problematic pay practice” for purposes of a public company’s say-on-pay proposal was met with criticism from both audiences.
  • ISS Approach; Focus on Risk Oversight. Taking into account the criticism, ISS decided to take a case-by-case approach to determining whether share pledging represents a significant concern for shareholders. If it does, ISS will consider the share pledging to be a failure of risk oversight for which the board is accountable (i.e., instead of recommending a vote against the company’s say-on-pay proposal, ISS might decide to recommend a vote against the full board or individual directors).

Glass Lewis Policy Updates

Board Responsiveness to Negative Shareholder Votes

For the 2013 proxy season, Glass Lewis formalized its historical policy of scrutinizing a board’s response to a shareholder vote of at least 25 percent (excluding abstentions and broker non-votes) in opposition to management’s recommendation on any proposal. Previously, the written policy applied only to say-on-pay votes. Any such negative shareholder vote will trigger a detailed analysis of the issues giving rise to the vote and the board’s response, including through Glass Lewis’ review of the proxy statement and other public disclosures explaining the response. Ultimately, Glass Lewis will consider whether it believes the board’s response was proper and use that judgment as a factor in determining its voting recommendations with respect to the directors standing for election at the annual meeting.

Equity Compensation Plans (Share-Counting)

Glass Lewis has added “inverse full-value award multipliers” to the list of “overarching principles” that it uses when evaluating equity compensation plans. In other words, according to Glass Lewis’ principles, “plans should not count shares in ways that understate the potential dilution, or cost, to common shareholders,” for example, by counting options as less than one share granted for purposes of determining how many shares remain available for additional awards under an equity compensation plan. Currently, few public companies use that approach to share-counting, so the new policy is not expected to have a significant practical impact on future proposals relating to equity compensation plans.

Role of Committee Chair

Glass Lewis generally holds the chair of each committee primarily responsible for the committee’s actions. Accordingly, in connection with adverse committee-specific recommendations, Glass Lewis’ policy is to recommend a vote against the committee chair (rather than all members of the committee). If there is no committee chair, or if the committee chair is not standing for re-election as a director at the annual meeting, the policy is to recommend a vote against the senior member of the committee. Previously, if committee seniority could not be determined, the “no” vote recommendation applied to the longest-serving director who was a member of the committee. For 2013, that policy has been changed, such that Glass Lewis will now recommend a vote against all committee members in the absence of a chair if seniority cannot be determined.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Snell & Wilmer | Attorney Advertising

Written by:

Snell & Wilmer
Contact
more
less

Snell & Wilmer on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.