Institutional Shareholder Services (ISS) released its annual policy survey last week to obtain feedback from institutional investors, corporate issuers and other interested parties on possible changes to the proxy advisor’s benchmark voting policies for 2018. A copy of the ISS press release (which contains a link to the survey) can be found here.
Proxy advisor voting policies and recommendations can influence institutional investors’ policies and proxy voting, so companies are encouraged to review the survey. This year’s process includes two distinct surveys with different submission deadlines:
- First survey (Governance Principles Survey) raises initial, high level issues including pay ratios, gender diversity on boards, share buybacks and voting rights. Generally speaking, these are broad topics that ISS does not universally come across in most markets, or issues that are gaining more attention from a governance perspective. This first survey must be completed in order to review and participate in the more traditional second survey.
- Second survey (Policy Application Survey), the more policy-focused survey, covers topics more directly related to ISS vote recommendations for markets around the globe. Key compensation topics relevant to North American companies include greater ISS use of realizable pay, non-employee director pay and gender pay equity.
Compensation topics in the spotlight
As noted, both surveys include compensation topics relevant to North American issuers, primarily those in the U.S. Here’s a closer look at those topics:
- Pay ratio (first survey, global) – ISS notes the upcoming requirements to disclose the CEO pay ratio in the U.S, and proposed disclosure in the U.K and in the EU Shareholder Rights Directive, and seeks input on how organizations intend to analyze data on pay ratios. Separately, ISS asks how shareholders should use disclosed data on pay ratios.
- Outcomes-based performance measures (second survey, U.S and Canada) –This description groups the concepts of realized and realizable pay. ISS currently prepares and displays a realizable pay figure in its research reports as part of the qualitative review of executive compensation in limited circumstances. ISS seeks input on potentially greater use of such figures in its quantitative pay-for-performance review.
- Director pay (second survey, U.S. only) – Currently ISS identifies cases of high director pay compared with other companies in the same index and industry group. In our experience, this is done to identify outliers, though it has infrequently impacted vote recommendations on directors responsible for setting director pay programs. ISS is seeking input on the factors it should consider to determine if governance concerns exist around director pay magnitude and structure, and if/when negative vote recommendations should be issued.
- Gender pay equity (second survey, U.S. only) – As background, ISS notes the increased number of shareholder proposals asking companies to disclose a report on gender pay equity. This has largely been focused in certain industries, such as the technology sector, but has not been standard disclosure otherwise. ISS is seeking input on whether companies should disclose gender pay information and, if the view is not a blanket “yes”, what factors should be considered in determining whether to provide this disclosure (e.g., government regulations, industry/peer norm).
Interestingly, ISS is not seeking feedback on the use of additional financial metrics in its quantitative pay-for-performance test. This information was broadly displayed by ISS this year and sometimes used in its qualitative review when preparing say-on-pay vote recommendations. Similarly, there are no questions specifically related to ISS’ Equity Plan Scorecard methodology for evaluating equity compensation plans. ISS does not always include all areas of potential change in the survey, so voting policy changes could go beyond the listed issues. It may be the case that potential changes will be part of ISS’ fall open comment period or that additional feedback is not necessary for policy development.
Timing and next steps
Two separate submission deadlines reflect the bifurcated nature of ISS’ survey. The first survey is open to participation until the close of business (5:00 pm ET) on Thursday, August 31. Upon its completion, the second survey is then open to participation until the close of business (5:00 pm ET) on Friday, October 6. Survey results are expected to be released approximately three weeks after the close of each survey.
As part of the policy formation process, ISS will again host regional, topic-specific roundtables and conference calls to gather additional input. Like prior years, ISS will have an open comment period on certain draft policies. The roundtables typically serve as information-gathering sessions, while the open comment period provides an opportunity for market participants to provide feedback on the practical implementation of proposed policy changes.
At this early stage of the process, it’s too soon to predict which, if any, changes or updates will ultimately be adopted for 2018. Final policy updates are typically targeted for release in November, and final policies become effective for shareholder meetings taking place on February 1, 2018 or later.
As policies for shareholder voting on executive compensation issues continue to evolve, we encourage companies to stay abreast of these developments and to weigh in via the ISS policy survey and the broader policy formation process.
Brian Myers is a consultant with Willis Towers Watson’s executive compensation practice, based in Arlington, Va. Jim Kroll is a director in Los Angeles who leads Willis Towers Watson’s governance advisory practice for executive compensation. Email firstname.lastname@example.org, email@example.com, or firstname.lastname@example.org.