On October 22, 2013, Institutional Shareholder Services (“ISS”) announced two proposed changes to its 2014 U.S. proxy voting policy. ISS requested comments on the proposed changes, which can be submitted via e-mail to [email protected] by November 4, 2013. ISS will take the comments into account when issuing its 2014 proxy voting policies. It is important to note that ISS’s final U.S. policy updates for 2014, which are expected to be released in November, may reflect additional changes beyond the two on which ISS has solicited comments.
Companies should pay particular attention to the proposed policy change relating to majority votes on shareholder proposals and consider commenting. The proposed U.S. policy updates, which are available here, address the topics below.
Board Response to Majority-Supported Shareholder Proposals
ISS is proposing to change how it implements its previously-announced policy change on majority-supported shareholder proposals. In 2013, ISS had announced that, beginning in 2014, it will recommend votes against (or, when applicable, recommend withhold votes from) individual directors, committee members or the entire board, as appropriate, on a case-by-case basis if the board fails to act on a shareholder proposal that received more “For” than “Against” votes in the previous year.[1] For the 2013 and prior proxy seasons, ISS’s policy has been to recommend votes against directors only if the board failed to act on a proposal that (i) received the support of a majority of shares cast in two of the past three years, including the previous year, or (ii) received the support of a majority of shares outstanding in the previous year. At the time, ISS stated that its case-by-case analysis would take into account the following factors: (1) the subject matter of the proposal; (2) the level of support and opposition provided to the resolution in past meetings; (3) disclosed outreach efforts by the board to shareholders in the wake of the vote; (4) actions taken by the board in response to its engagement with shareholders; (5) the continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and (6) other factors as appropriate.
In its request for comments, ISS has proposed to add an additional factor to this case-by-case analysis. Specifically, ISS now also will consider the board’s expressed rationale for acting, or failing to act, on majority-supported shareholder proposals.
ISS also reiterated the following points with respect to its policy on majority‐supported shareholder proposals:
- ISS’s vote recommendations on director elections in connection with majority‐supported shareholder proposals will be implemented on a case-by-case basis; and
- ISS will apply its policy beginning in 2014 to shareholder proposals that received a majority of shares cast at 2013 meetings.
The proposed policy set forth in ISS’s request for comments reflects the results of ISS’s annual policy survey, available here, which ISS uses as part of its annual proxy voting policy formulation process. Out of a total of 535 responses (reflecting more than one response from the same organization), including responses from 128 institutional investors and 350 companies, 92% of companies and 40% of investors indicated that the board should be free to exercise its discretion to respond to a majority-supported shareholder proposal in a manner that it believes is in the best interest of the company and to disclose the rationale for any actions it takes.
ISS continues to lead the proxy advisory industry in transparency around proxy voting policies. ISS’s request for comments on this proposed policy change suggests that ISS will provide some degree of consideration to companies’ stated rationale for their approach to a particular issue, providing welcome recognition that good corporate governance is not a one-size-fits-all proposition. At the same time, the proposed new policy continues to represent a dramatic shift from ISS’s past approach, under which if a proposal was supported by a majority of the votes cast, but not by a majority of shares outstanding, a board would have an opportunity to engage with shareholders, develop a response, and evaluate whether that response was acceptable to a majority of shareholders voting at the next annual meeting, before facing the risk of a negative ISS recommendation on the election of directors. In many cases, boards in this situation would adopt reforms that were responsive to shareholders, although not fully implementing the shareholder proposal. Under the proposed new policy, once a majority of the votes cast have supported a shareholder proposal, boards will need to be mindful that their response must not only satisfy shareholders, but also that they may face a negative recommendation on their re-election based on ISS’s subjective evaluation of whether the company has both provided adequate disclosure around the company’s engagement effort and the basis for the board’s action (or inaction) and on whether ISS believes the company has acted sufficiently in responding to the prior year’s vote.
Pay-for-Performance Quantitative Screen
ISS also requested comment on a proposal to simplify the Relative Degree of Alignment (“RDA”) measure in its pay-for-performance analysis. ISS uses the pay-for-performance analysis as part of its voting recommendations on a number of compensation-related issues, including say-on-pay votes. The pay-for-performance analysis consists of both quantitative and qualitative measures, and the RDA is one of the quantitative measures.
Currently, the RDA measure uses a blended approach, calculating the degree of alignment between the company’s total shareholder return (“TSR”) rank and the CEO’s total pay rank within the peer group, as measured over one- and three-year periods (weighted 40%/60%, respectively). The proposed new methodology would calculate the degree of alignment using only a three-year period. ISS explains that the rationale behind this proposed change is that a single three-year measure provides a better view of sustained long-term pay and performance alignment. ISS also states that this change is not designed to increase or decrease the number of companies that are identified by the RDA measure as having potential pay-for-performance concerns.
[1] ISS generally treats a company as failing to act on a proposal if the company did not fully implement the proposal or, if the matter required a vote by shareholders, if the company did not propose action to implement the proposal at the next annual meeting.