Institutional Shareholder Services (ISS) has posted its 2013 U.S. corporate governance policy updates. Consistent with the draft policies released previously, the key policy changes are related to peer group methodology, the use of realizable pay, say on parachutes and pledging of company stock. The final voting policies released today do not provide much more information than what was in the draft policy release (see “ISS Seeks Comments on Draft 2013 Voting Policies, Executive Pay Matters, October 17, 2013). However, ISS has indicated that FAQs will be released in December that will address any open questions. The revised policies will apply to all U.S. companies with shareholder meeting dates on or after February 1, 2013.
Here’s an overview of the key changes:
Peer Group Methodology
The updated peer group methodology maintains ISS’s focus on identifying companies that are reasonably similar to the subject in terms of industry profile, size and market cap. ISS is revising its methodology to now consider companies’ self-selected peer groups and the GICS classifications of those peers in order to identify and prioritize GICS industry groups beyond the company’s own GICS classification. Other proposed changes include slightly relaxed size requirements, especially for very large or small companies, and potentially no longer using assets at certain financial companies in favor of revenues. The specific process ISS will use to develop the peer group remains undefined. More detail may be provided in the FAQs to be released in December.
Use of Realizable Pay
ISS plans to add a comparison of realizable pay to its continuing analysis of grant-date pay opportunity as part of the qualitative evaluation of pay-for-performance alignment. This policy appears to apply only to large-cap companies.
ISS has defined realizable pay as “the sum of relevant cash and equity-based grants and awards made during a specified performance period being measured, based on equity award values for actual earned awards, or target values for ongoing awards, calculated using the stock price at the end of the performance measurement period. Stock options or stock appreciation rights (SARs) will be re-valued using the remaining term and updated assumptions, as of the performance period, using a Black-Scholes option pricing model” (emphasis added).
Say on Parachutes
Consistent with the draft policies, ISS will examine the features of both new and existing agreements when making say-on-parachute voting recommendations. The implication here is that if any existing agreements contain problematic provisions (e.g., excise tax gross-ups, single-trigger cash severance, single-trigger equity vesting, etc.), ISS may issue a negative voting recommendation. Previously, this review would have been conducted only for new or materially amended agreements. ISS further indicates that “Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis. However, the presence of multiple legacy problematic features will also be closely scrutinized.”
Pledging of Shares
Pledging of shares or the use of company stock at any amount as collateral for a loan remains a concern for ISS. However, based on feedback provided during the comment period, ISS will now consider pledging on a case-by-case basis outside of the pay practices review. “Significant” pledging (to be defined) will be considered a risk oversight issue and deemed to fall under the board’s oversight role. As such, potential negative vote recommendations will be focused on the election of directors (rather than in the say-on-pay context). As part of its review of executives or directors who have pledged company stock, ISS will consider:
- Disclosure in the proxy statement of an anti-pledging policy prohibiting future pledging
- Number of shares involved as compared to total common shares outstanding, market value or trading volume
- Disclosure of progress, or lack thereof, in reducing the overall magnitude of the practice
- Disclosure in the proxy statement that pledged shares do not count towards stock ownership and/or holding requirements.
ISS does distinguish the practice of hedging, a strategy to offset or reduce the risk of assets or equity, from pledging shares as collateral for loans. ISS notes that hedging severs the alignment with shareholders and will be considered a problematic practice warranting a negative vote recommendation on directors.
Copies of the ISS 2013 U.S. policies, as well as updates to Canadian, European and International policies, can be found here. Watch Executive Pay Matters for updates as ISS clarifies its 2013 policies.
Josh Steinfeld is a senior executive compensation consultant in Towers Watson’s Chicago office and Brian Myers is an executive compensation consultant in the firm’s Arlington, Virginia office. Both are members of Towers Watson’s corporate governance advisory practice. Email firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.