The Advisors' Blog

I blogged last week on TheCorporateCounsel.net about ISS’s Annual Global Benchmark Policy Survey, which is open until next Thursday, September 21st at 5 p.m. Eastern. The survey’s lead question relates to non-GAAP adjustments to executive incentives. Here’s the intro:

U.S. companies routinely use non-GAAP metrics in their incentive pay programs, and the performance results (and consequently the payouts) can be significantly affected by the non-GAAP adjustments approved by the board. However, many companies do not disclose in the proxy statement a line-item reconciliation of non-GAAP to GAAP for incentive program metrics. Recent events resulting in increased investor scrutiny of non-GAAP adjustments include direct and indirect COVID-19-related impacts, adjustments related to the Russia-Ukraine conflict, and costs arising from litigation. A growing number of investors believe that disclosure of line-item reconciliation is needed to make an informed assessment of executives’ incentive pay.

The survey asks investors and others to weigh in on whether companies should always provide a line-item reconciliation whenever non-GAAP metrics are used, provide a reconciliation when the adjustments significantly affect payouts or significantly differ from GAAP, or provide a reconciliation only in unique circumstances.

ISS’s current focus on this issue aligns with a letter that the Council for Institutional Investors recently submitted to the SEC, which resurrects a 2019 petition that asked the Commission to adopt rules that would require more transparency about non-GAAP adjustments in executive compensation disclosures (see pg. 7). The SEC, including Former Corp Fin Director Bill Hinman, put the kibosh on that notion at the time, but CII has persisted via its comments on the SEC’s pay versus performance proposal, and this new letter. Now, based on ISS’s commentary, it’s possible that adjustments and related disclosures may become more of a factor in say-on-pay votes, regardless of SEC rulemaking. Companies may also want to think about whether they would be vulnerable to shareholder proposals on this topic.

All that said, it’s important to note that the policy survey is not a definitive sign that ISS will adopt a new approach on this matter. In addition to feedback from the annual survey, as ISS develops its 2024 voting policies, it will also gather input from investors, company directors, and others by hosting various regionally-based, topic-specific roundtable discussions and other engagements. ISS will then publish for public comment the key proposed changes to its voting policies for next year, before adopting and publishing the final policies that will apply to 2024 meetings.

When it comes to getting the votes you want during proxy season, if you want to look especially smart to your boss and save your company (and yourself) from time-consuming back & forth, the best thing you can do is sign up for our “Proxy Disclosure & 20th Annual Executive Compensation Conferences.” Our panel on “Navigating ISS & Glass Lewis” features a conversation with Rachel Hedrick – who is VP of US Executive Compensation Research at ISS – and Krishna Shah – who is Director of North America Executive Compensation at Glass Lewis – moderated by Davis Polk’s Ning Chiu. This is going to be a very practical session on the types of disclosures & practices that will (or won’t) help your cause on say-on-pay, compensation committee elections, and equity incentive plan approvals. Rachel & Krishna will bust some myths and share a few predictions for 2024.

The “Proxy Disclosure & 20th Annual Executive Compensation Conferences” are bundled together as one virtual event that runs September 20-22nd. That is next week!! Register now. You can sign up online, by emailing sales@ccrcorp.com, or by calling 1-800-737-1271. Here’s the full agenda – and all of our awesome speakers.

– Liz Dunshee