The Advisors' Blog

As Liz highlighted this spring, investors seem to be evaluating equity plan proposals more critically, and, more recently, I blogged that, per Glass Lewis, repricings may have been partly to blame. This recent Semler Brossy alert gives another reason for the low support (and high failure rates) among the Russell 3000 in 2023:

Importantly, the bar for passing ISS’ EPSC has meaningfully increased over the last decade, with a recent increase in 2023. S&P 500 companies needed a score of 53 in 2015, but now require a 59 in 2023. The threshold score for non-S&P 500 companies in the Russell 3000 is slightly lower than for S&P 500 companies, but the required threshold score has similarly increased over the last few years.

Negative returns in the 2022 equity markets and increasing interest rates have also likely increased shareholders’ attention around a company’s burn rate. For companies with a depressed share price, more equity is needed to fulfill the dollar amount of equity promised to their employees. And, with higher interest rates, the cost of equity has risen for companies. These two external factors occurring simultaneously—alongside tightening EPSC guidelines—made 2023 a challenging year for equity plan requests.

What does this mean for companies that may need to seek approval of a new plan or a plan amendment next year?

The good news is that passing ISS’ EPSC means there is very little risk of failing an equity plan vote. There are always benefits to conducting shareholder outreach, but this process will not be a “make or break” action if a share request is sized within EPSC guidelines. The downside to sizing a request within EPSC guidelines is that the next equity plan request could come sooner than wanted.

The alert goes on to suggest some steps to take if the share request is above EPSC guidelines, including: understanding how the requested size compares to your significant shareholder guidelines as well as whether you fall below investor burn rate/dilution “caps;” having talking points and hard data showing responsible share usage, appropriate governance provisions and benchmarking of equity grants; using outreach meetings to get feedback and show responsiveness; and clearly telling your story in the proxy proposal with historical and expected future burn rate and any other important context.

– Meredith Ervine