ISS Proposes Changes to its Policies on Independent Chair Proposals and Equity Plan Proposals | Practical Law

ISS Proposes Changes to its Policies on Independent Chair Proposals and Equity Plan Proposals | Practical Law

Institutional Shareholder Services (ISS) released for comment proposed changes to its voting policies, including its US voting policies on independent chair shareholder proposals and equity plan proposals.

ISS Proposes Changes to its Policies on Independent Chair Proposals and Equity Plan Proposals

by Practical Law Corporate & Securities
Published on 16 Oct 2014 • USA (National/Federal)
Institutional Shareholder Services (ISS) released for comment proposed changes to its voting policies, including its US voting policies on independent chair shareholder proposals and equity plan proposals.
On October 15, 2014, Institutional Shareholder Services (ISS) released draft 2015 voting policies on select topics for public comment. Among other revisions, ISS is seeking feedback from companies, institutional investors and other interested parties on proposed changes to its US policies on:
  • Independent chair shareholder proposals.
  • Equity plan shareholder proposals.
ISS is accepting comments on the proposals until close of business on October 29, 2014. The draft policies include instructions on how to submit comments.

Independent Chair Shareholder Proposals

This proposed policy change would update ISS's policy on shareholder proposals for independent board chairs. The current policy is to recommend "for" independent chair shareholder proposals unless the company satisfies all of the following criteria:
  • It designates a lead director with clearly delineated and comprehensive duties, who is elected by the independent board members.
  • The board is at least two-thirds independent.
  • The key board committees are fully independent.
  • It has disclosed governance guidelines.
  • It has not exhibited sustained poor total shareholder return (TSR) performance, meaning a one and three-year TSR in the bottom half of the company's four digit industry group, unless the CEO has changed within that time.
  • It does not have any problematic governance issues.
ISS proposes to update the "Generally For" policy by adding new governance, board leadership and performance factors to the analytical framework and to consider all factors in a holistic manner when applying the new policy. New factors (which are not considered under the current policy) would include:
  • The absence or presence of an executive chair.
  • Recent board and executive leadership transitions at the company.
  • Director and CEO tenure.
  • A five-year TSR performance period.

Equity Plan Scorecard

This proposed policy change would update ISS's policy on equity plans to provide a more nuanced consideration of equity plan proposals. The current policy consists of a series of pass/fail tests to evaluate equity incentive plan proposals. The ISS proposed policy would use a "scorecard" model that considers a range of positive and negative factors. However, some highly egregious features (such as the authority to reprice options without prior shareholder approval) would continue to result in negative recommendations regardless of other factors.
Factors to be evaluated would fall under three main categories:
  • Plan Cost. The total potential cost of the company's equity plans relative to industry/market cap peers, measures by the company's estimated shareholder value transfer (SVT) in relation to peers. SVT would be calculated for both:
    • new shares plus shares remaining for future grants, plus outstanding unvested or unexercised grants; and
    • only new shares requested plus shares remaining for future grants.
  • Plan Features. Plan features such as:
    • automatic single-trigger award vesting on a change in control;
    • discretionary vesting authority;
    • liberal share recycling on various award types; and
    • minimum vesting period for grants made under the plan.
  • Grant Practices. Grant practices such as:
    • the company's three-year burn rate relative to its industry and market cap peers;
    • vesting requirements in most recent CEO equity grants;
    • the estimated duration of the plan based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years;
    • the proportion of the CEO's most recent equity grants and awards subject to performance conditions;
    • whether the company maintains a clawback policy; and
    • whether the company has established post-exercise/vesting share-holding requirements.
Under the proposal, scorecard factors and weightings would be keyed to a company's size and status, such as S&P 500, Russell 3000 (excludes S&P 500), Non-Russell 3000 and Recent IPOs or Bankruptcy Emergent companies.
A company's burn rate would also be part of the scorecard evaluation, based on a range relative to its peers rather than relying on companies to make future burn rate commitments. ISS would benchmark burn rates for index groups, such as the S&P 500, the Russell 3000 and the Non-Russell 3000.