The Advisors' Blog

– Ed Hauder, ExeQuity

Recently, Fidelity issued its 2011 Proxy Voting Guidelines. As promised, they are a significant departure from past guidelines in the area of equity plan proposals. Where in years past Fidelity looked to dilution as the guiding principle along with assorted other concerns in determining its vote on equity plan proposals, it has now replaced that with 3-year average burn rates:

– 1.5% for Large Caps–companies in the Russell 1000 Index
– 2.5% for Small Caps–companies not in the Russell 1000 Index
– 3.5% for Micro Caps–companies with a market cap under US$300 million

Here is what I believe to be true about the new Fidelity guidelines (thanks to Reid Pearson at Alliance Advisors for sharing what he had learned with me as well):

– The new guidelines, including the burn rate policy for equity plan proposals, is effective immediately;
– Fidelity will not use a multiplier for full-value awards, i.e., options granted during the fiscal year + full value awards granted during the fiscal year / weighted average common shares outstanding (this is the “Traditional Burn Rate” in my Burn Rate Calculator available under Reference Materials -> Excel Tools; this is also reported on ISS’s Proxy Reports as the “unadjusted burn rate”);
– Fidelity will be considering mitigating factors to permit them to support a plan when a company has burn rates that exceed the burn rate caps (similar to what Fidelity did with its prior dilution caps). But, Fidelity is still working out the details.

I think there are a few open questions on the new Fidelity guidelines as well. For example, since Fidelity will look at historic burn rate, will it look at prospective burn rate at all in terms of the size of the share request and how many years it might last? Does that matter to Fidelity? One would assume that exceptions will have to made for extraordinary situations that cause a spike in burn rates from typical practice, but what will Fidelity be looking for in order to approve such exceptions?

Will Fidelity make allowances to its general burn rate caps for companies in various industry groups that have historically had higher burn rates (technology and biotech come to mind)? If not, what will this mean for these companies’ ability to gain shareholder approval of equity compensation plan proposals and continue to make use of equity awards as part of their compensation packages? We’ll have to wait and see how Fidelity ends up developing these guidelines further to see what the practical implications will be for share requests.