ISS Proposes Changes to 2013 Proxy Voting Policies

by Wilson Sonsini Goodrich & Rosati

Institutional Shareholder Services (ISS) recently issued a set of proposed changes to its proxy voting guidelines for the 2013 proxy season. The proposals include several noteworthy changes to ISS policies relating to voting recommendations on company say-on-pay and say-on-golden-parachute proxy proposals. We expect final ISS 2013 proxy voting guidelines to be issued in mid-November.

U.S. Management Say-on-Pay Proposals

Peer Group Selection. In response to criticism of its 2012 proxy season methodology, ISS is proposing a revised peer group selection method for its pay-for-performance test intended to make the group more reflective of the pay benchmarking peer group chosen by the subject company. In this test, ISS selects a peer group of 14-24 companies and compares the company's CEO total pay and shareholder return with those of the peer group. If a company satisfies this test, a separate test evaluating CEO total pay relative to the peer group median, and a separate quantitative test comparing alignment of CEO total pay and shareholder return, it gets a pass on the ISS secondary qualitative pay-for-performance analysis.

Under the new methodology, the ISS peer group would include peers drawn from the Global Industry Classification Standard (GICS) industry group of the company's selected peer group, subject to ISS size criteria, as well as those from the company's own GICS group. The methodology also prioritizes peers closely related in terms of industry that are in the company's peer group and that have chosen the company as a peer. This change responds to criticism that the current method produces inappropriate peer groups because it focuses solely on companies in the same GICS group as the subject company. ISS estimates that the average company will have more than 80 percent of its peer selections drawn from the company's eight-digit GICS group or the eight-digit GICS groups of its selected peers. This is in contrast to the current methodology, under which only an average of 40 percent of the ISS-selected peers were from the subject company's eight-digit GICS group. Improving the peer group comparison may make it easier for some companies to pass the ISS initial quantitative pay-for-performance evaluation.

Realizable Pay. The ISS is proposing a comparison of realizable pay to grant-date pay as part of the qualitative pay-for-performance test for large-cap companies. The policy states that realizable pay includes cash and equity-based grants and awards made over a performance period measured by equity values for earned awards, or target values for ongoing awards, calculated using the stock price at the end of the performance period. ISS explained that this change responds to the favorable reaction of investors to the growing practice of companies disclosing alternative measures of pay beyond the grant-date amounts required in the summary compensation table.

Pledging of Company Stock. The pledging of company stock by officers and directors would be added to ISS's list of problematic pay practices. ISS evaluates problematic pay practices on a case-by-case basis in the context of the company's overall pay program in determining whether to recommend an "against" vote. According to ISS, pledging raises concerns of forced sales to meet margin calls that may negatively affect the company stock price. It also is used in hedging strategies that immunize the executive from economic exposure to holding company stock.

U.S. Management Say-on-Golden-Parachute Proposals

Under the Dodd-Frank Act, companies seeking shareholder approval for mergers or certain other transactions are required to obtain a separate advisory shareholder vote on potential "golden parachute" arrangements. ISS proposes to revise its current policy with respect to such votes to include existing change-in-control arrangements rather than focusing only on new or extended arrangements and to place more emphasis on multiple legacy problematic features in change-in-control agreements. ISS stated that while recent amendments to incorporate problematic features will tend to carry more weight in its analysis of whether to recommend votes against golden parachutes, the existence of multiple problematic practices will be closely scrutinized.

ISS's list of problematic features in change-in-control agreements includes (i) single- or modified single-trigger cash severance; (ii) single-trigger equity acceleration; (iii) excessive cash severance (greater than three times the base and bonus); (iv) excise tax gross-ups triggered and payable (as opposed to a provision providing excise tax gross-ups); (v) excessive golden parachute payments (on an absolute basis and as a percentage of transaction equity value); (vi) recent amendments that incorporate any problematic features (such as the foregoing) or recent actions (such as extraordinary equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or (vii) the company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote.

Board Response to Majority-Supported Shareholder Proposals

Currently, ISS will recommend a vote against or withhold from the entire board of directors (except new nominees, who should be considered on a case-by-case basis) if:

  • the board failed to act on a shareholder proposal that received the support of a majority of the shares outstanding the previous year; or
  • the board failed to act on a shareholder proposal that received the support of a majority of shares cast in the last year and one of the two previous years.

In an attempt to "hold directors accountable for failure to respond to a shareholder proposal that receives one year of a majority of votes cast," the proposed ISS policy would drop its current test in favor of a policy whereby ISS would recommend a vote against or withhold from the entire board (except new nominees, who should be considered on a case-by-case basis) if the board merely failed to act on a shareholder proposal that received the support of a majority of shares cast in the previous year.

Environmental and Social Non-financial Performance Metrics (Sustainability Metrics)

ISS is proposing to loosen its voting policy on shareholder proposals seeking to link executive compensation to environmental and social (sustainability) criteria. Rather than always recommending against such proposals, ISS will recommend on a case-by-case basis considering the following factors:

  • whether the company has significant and/or persistent controversies or violations regarding social and/or environmental issues;
  • whether the company has management systems and oversight mechanisms in place regarding its social and environmental performance;
  • the degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation practices; and
  • the company's current level of disclosure regarding its environmental and social performance.


If adopted, these ISS policy changes will affect proxy votes beginning next year. Public companies should be cognizant of ISS's evolving proxy executive compensation voting policies when designing and implementing compensation arrangements.

For More Information

If you have any questions regarding this alert, please contact any member of the employee benefits and compensation practice at Wilson Sonsini Goodrich & Rosati.

John Aguirre (650) 565-3603 Melody Barker (415) 947-2029
Jessica Bliss (650) 849-3470 Madeleine Boshart (415) 947-2057
Mark Cornillez-Ty (650) 849-3384 Stephen Francis (650) 849-3381
Brandon Gantus (415) 947-2138 Michael Klippert (650) 849-3276
Sriram Krishnamurthy (212) 497-7721 Scott McCall (650) 320-4547
Michael Montfort (202) 973-8815 Cisco Palao-Ricketts (650) 565-3617
Christa Sanchez (650) 849-3382 Roger Stern (650) 320-4818
David Thomas (650) 849-3261 Jackie Tokuda (650) 565-3904
Michelle Wallin (650) 565-3620    

Circular 230 Compliance: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this alert is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under the U.S. Internal Revenue Code, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

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.

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