On October 26, 2017, Institutional Shareholder Services (ISS) released certain proposed changes to its 2018 U.S. voting policies for comment. The proposals relate to non-employee director compensation, poison pills and gender pay gap shareholder proposals and are summarized below.
The full proposed voting policies may be found on ISS’s website. ISS is soliciting comments on its proposed voting policies through November 9, 2017, and expects to announce final changes to its voting policies during the second half of November.
- Non-Employee Director Compensation
ISS has proposed a new policy that would explicitly provide for adverse vote recommendations for board committee members who are responsible for approving or setting non-employee director compensation when there is a pattern (i.e., two or more consecutive years) of “excessive” non-employee director pay without a compelling rationale or other mitigating factors. Because the new policy requires two or more consecutive years of excessive pay, ISS indicated that there would be no impact on vote recommendations for directors in 2018 as a result of the proposed policy (i.e., 2017 would be the first year measured under the policy).
The proposed policy did not specify quantitative metrics or otherwise indicate how ISS intends to determine whether non-employee director pay is excessive. However, ISS’s current practice for identifying what it considers to be non-employee director pay outliers is to review director pay relative to other companies with the same broad-based index and four-digit GICS industry group. Additionally, ISS’s policy survey for 2017-2018 identified these comparisons as the most important factors for both investor and non-investor respondents in determining whether the magnitude of non-employee director pay presents a governance concern. As a result, we would not be surprised to see ISS employ one or both of these relative metrics to determine whether non-employee director pay is excessive.
Going forward, ISS indicated that the impact for boards was expected to be minimal as the policy is focused on “extreme director pay outliers.” Nevertheless, the introduction of a voting policy focused on non-employee director compensation is notable given that non-employee director compensation has historically not been factored into ISS’s voting recommendations.
- Poison Pills
ISS proposed to alter its current voting policy on director elections at companies that maintain a poison pill with a term longer than one year, which ISS considers a long-term poison pill. Under the new policy, ISS would recommend votes against all board nominees, every year, at companies that maintain a long-term poison pill that has not been approved by shareholders. Previously, ISS had grandfathered companies that had put their poison pill in place on or before November 19, 2009, and, for companies where all board members were elected annually, had only recommended against board nominees once every three years. In addition, companies with a newly adopted poison pill previously could potentially avoid adverse recommendations by committing to submit the poison pill to a binding shareholder vote at the next annual meeting. ISS has proposed eliminating all of these exceptions.
ISS proposed generally maintaining its existing policy with respect to the adoption of short-term poison pills, except that it proposed placing greater focus on the company’s rationale for adoption and lesser focus on the company’s governance and track record of accountability to shareholders than it does currently in its case-by-case analysis. Renewals and extensions of short-term poison pills without shareholder approval would continue to be treated in the same manner as the adoption of a long-term poison pill.
ISS has not proposed any changes to its current voting policies regarding shareholder approval or ratification of a poison pill, whether adopted to preserve net operating losses or for other reasons. As a result, we expect ISS’s existing voting policies on these topics to remain in place.
- Gender Pay Gap Shareholder Proposals
ISS proposed a new policy regarding what it characterized as gender pay gap shareholder proposals. Under the proposed new policy, ISS will make voting recommendations on a case-by-case basis on shareholder proposals requesting reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account the following factors:
- the company’s current policies and disclosures related to its diversity and inclusion policies and practices, its compensation philosophy and fair and equitable compensation practices;
- whether the company has been the subject of recent controversy or litigation related to gender pay gap issues; and
- whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers.
Currently, ISS does not have a specific policy with respect to these types of shareholder proposals. As a result, these proposals have been analyzed under ISS’s global policy for social and environmental issues, which provides that recommendations will be made on a case-by-case basis taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder value and considering a number of other factors, such as: whether the proposal is more appropriately dealt with through legislation or government regulation; whether the proposal is unduly burdensome; whether sufficient information is already available or the request would require disclosure of proprietary information that could place the company at a competitive disadvantage; and how the company’s approach compares to industry standard practices. ISS indicated that the proposed new policy on gender pay gap shareholder proposals provides more specificity regarding its approach, but is not a major shift from its current policy.
It is notable that the proposed 2018 policy changes released by ISS did not include any changes with respect to its quantitative pay-for-performance policy, which is a critical component of its voting policies relating to executive compensation. In ISS’s policy survey for 2017-2018, a full summary of which may be found on ISS’s website, ISS indicated that it was considering making changes to this methodology to take into account realized pay. A majority of both investor and non-investor respondents supported the use of realized pay in ISS’s quantitative pay-for-performance policy, indicating that it could mitigate concerns regarding pay-TSR misalignment or excessive pay. ISS’s decision not to release a proposed policy change relating to its quantitative pay-for-performance policy makes it less likely that such a change will be adopted for 2018; however, ISS is not required to release all proposed policy changes for comment and still could decide to make changes to this policy without seeking further comments.