A few days ago, ISS announced the latest release of its governance ratings product – which also was renamed to “QualityScore” from “QuickScore.” Here’s the 139-page technical document. Not much new in the executive pay area – here’s one:
Does the company employ at least one metric that compares its performance to a benchmark or peer group (relative performance)? This factor will consider whether the company has a pre-established metric in any short- or long-term incentive plan that is measured relative to an external group such as a peer group, index or competitors.
In addition to board diversity and board refreshment areas being added, one area that appears to have been updated involves proxy access – with subscribers now being able to view the details of a company’s proxy access bylaw provision.
Last year, ISS included a question on proxy access, but that was “zero weighted” & was included for informational purposes only. This year, it counts. The QualityScore will give credit to a company for having proxy access – but the existence of any “problematic provisions”- e.g. counting mutual funds under common management as separate shareholders under the aggregation limit, requiring a pledge to hold shares past the annual meeting date, providing the board with broad & binding authority to interpret the proxy access provision or combinations of other problematic provisions – could be deemed sufficient to “nullify the proxy access right” & result in no credit being given. See this Gibson Dunn blog for a larger summary of the changes.
As noted in this blog from Davis Polk’s Ning Chiu, the data verification period began yesterday – and runs through November 11th. QualityScores will be published on November 21st.
By the way, with this rebranding to “ISS QualityScore,” it now has made more name changes than Jefferson Airplane. My favorite was GRid 2.0…although CGQ was nice…
Here’s an excerpt from this blog by Allen Matkins’ Keith Bishop:
Companies often include a choice of law provision in their equity and other compensation plans. Some companies include a choice of law in the award agreement, either in lieu of, or in addition to, the plan document. Specifying applicable law helps to ensure that plans are consistently interpreted and applied. Uniformity may be particularly important for companies with employees in multiple jurisdictions. Occasionally, I see award agreements or plan documents that also include a choice of forum clause. Companies often specify Delaware law and courts even when they have no employees in Delaware – apparently because the they are incorporated in Delaware.
A recently enacted California statute will soon cast a shadow on these provisions. New California Labor Code Section 925 will prohibit an employer from requiring an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:
– Require the employee to adjudicate or arbitrate outside of California a claim arising in California.
– Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.
Any provision of a contract that violates this statute will be voidable by the employee. If a provision is rendered void at the request of the employee, the matter must be adjudicated in California and California law must govern the dispute. In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees. The law will apply to any contract entered into, modified, or extended on or after January 1, 2017. There is an exception for contracts with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement.
Section 925 doesn’t expressly invalidate contractual provisions specifying non-California law. Such provisions are voidable (not void) and only when they deprive the employee of the substantive protection of California law with respect to a controversy arising in California.
This legislation started life as a “spot bill”. A “spot bill” makes trivial changes to a statute as a placeholder for future substantive changes. The author amended the bill to prohibit choice of law and forum provisions in consumer contracts. After a Senate Judiciary Committee informational hearing in March, the author amended the bill again to add similar prohibitions in employment agreements. Later, the consumer contract prohibitions were dropped.
On October 11, the New York Department of Financial Services (the “NYDFS”) issued guidance, announced in a press release by Governor Andrew Cuomo, emphasizing that its regulated banking institutions must ensure that any incentive compensation arrangements tied to employee performance indicators are subject to effective risk management, oversight and control.
The NYDFS release provided that the guidance was prompted by the recent joint enforcement actions by the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the Los Angeles City Attorney’s Office against Wells Fargo Bank for unsafe or unsound sales practices, including the unauthorized opening of deposit or credit card accounts. According to the NYDFS, the action against Wells Fargo demonstrates that misaligned incentive compensation, coupled with a lack of effective oversight and internal risk controls, may harm customers and adversely affect a banking institution’s safety and soundness.
Yesterday, ISS released draft policy changes for comment in 15 areas spanning the globe (based on these survey results from constituents) – the deadline for comment is November 10th. It’s expected that ISS will release its final policies in late November (although burn rate thresholds & pay-for-performance quantitative concern thresholds are typically announced through updated FAQs in mid-December; here’s info about the ISS policy process).
For US companies, there are several significant proposals to be aware of:
Director elections:
1. Director election vote recommendations for directors at companies that impose undue restrictions on shareholders’ ability to amend bylaws:
– ISS proposes to amend its director election policy to include a provision to issue adverse vote recommendations on governance committee director elections where companies have placed “undue” restrictions on shareholders’ ability to amend the company’s bylaws.
– Examples of these restrictions include the outright prohibition on the submission of binding shareholder proposals, or share ownership requirements or holding periods in excess of SEC Rule 14a-8.
– Adverse vote recommendations will continue until the restrictions are completely lifted.
2. Director election vote recommendations for directors that have taken unilateral board actions or maintain unequal voting rights:
– ISS proposes to clarify its director election policy to state that, upon a company holding an IPO with a multi-class capital structure with unequal voting rights or other problematic governance provisions, ISS will generally issue adverse director vote recommendations unless there is a “reasonable” sunset provision on the unequal structure or the problematic provisions.
– The key change is that ISS will no longer consider the results of shareholder votes on problematic features when issuing vote recommendations; instead, ISS will only consider the inclusion of “reasonable” sunset provisions.
US-listed cross-market companies (companies listed in the US, but incorporated outside):
1. General share issuance proposals at companies listed in the US, but incorporated outside the US:
– ISS proposes to recommend in favor of general share issuance authorities up to 20 percent of currently issues capital, as long as the duration of the issuance authority is reasonable and clearly disclosed.
2. Executive compensation proposals at companies listed in the US, but incorporated outside the US:
– ISS proposes to implement, on a case-by-case basis, US policy in the evaluation of all compensation proposals on the ballots of companies listed in the US, but incorporated elsewhere.
– For proposals where there is no applicable US policy, the ISS policy from the country requiring the ballot item will be used.
– For clarification, say-on-pay proposals from most markets will be evaluated under the US Management Say-on-Pay voting policy.
Here’s news from this memo from Frederic W. Cook & Co.:
The Financial Accounting Standards Board (FASB) on October 5, 2016 directed its staff to draft a proposed Accounting Standards Update (ASU) for vote by written ballot that would narrow the scope of modification accounting in FASB Accounting Standards Codification (ASC) Topic 718 (Topic 718). The proposed change would be beneficial for companies and compensation professionals because it would permit some changes to outstanding share-based payment awards to escape the complexities and potential incremental costs of accounting for modifications under Topic 718.
A member asked that I conduct a poll on how long it will take FASB to generate a draft – since they sometimes move like a glacier. What’s your guess?
Today is the “Say-on-Pay Workshop: 13th Annual Executive Compensation Conference”; yesterday was the “Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference” (video archive is now posted). Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Flash Player). Here are the “Course Materials,” filled with 180 pages of talking points & practice pointers.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Central.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
Today is the “Tackling Your 2017 Compensation Disclosures: Proxy Disclosure Conference”; tomorrow is the “Say-on-Pay Workshop: 13th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Flash Player). Here are the “Course Materials,” filled with 180 pages of talking points & practice pointers.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Central.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
Yesterday, the Nasdaq posted this new FAQ #1269 regarding shareholder approval of plans (also see this Mike Melbinger blog about it):
Question: Is an amendment to an equity compensation plan to increase the withholding rate to satisfy tax obligations, such as from the minimum tax rate to the maximum tax rate, considered a material amendment?
Answer: Generally, an amendment to increase the withholding rate to satisfy tax obligations would not be considered a material amendment to an equity compensation plan. Allowing the holder of an award to surrender unissued shares to pay tax withholdings is similar to settling the award in cash at market price, and neither creates a material increase in benefits to participants nor increases the number of shares to be issued under the plan.
This type of change also is not an expansion in the types of awards provided under the plan. This analysis is the same regardless of whether the plan allows the shares surrendered for tax withholdings to be added back to the pool of shares available for issuance as future awards. Accordingly, an amendment to an equity compensation plan to increase the withholding rate to satisfy tax obligations would not be considered a material amendment to the plan.