Yesterday, ISS released a group of draft policy changes for comment – two of them relating to the US: a new “scorecard” approach to evaluating equity compensation plan proposals and independent board chair proposals. Here’s what Ron Mueller & Beth Ising of Gibson Dunn have blogged about them:
Today, proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) provided additional information on its plans to implement a new “scorecard” approach to evaluating equity compensation plan proposals at U.S. shareholder meetings and requested comments on its proposed policy change. This is one of two significant proposals ISS announced today that would impact U.S. companies for the 2015 proxy season, with the other proposed policy change relating to voting recommendations on independent chair proposals (which we discuss here). Companies considering seeking shareholder approval of equity plans at shareholder meetings in 2015 should consider these proposed changes now to the extent they want ISS to recommend votes “For” the equity plan.
Current ISS Approach to Equity Plan Proposals
ISS’s current approach uses a series of “pass/fail” tests. Specifically, ISS will recommend votes “Against” an equity plan if the total cost of the company’s equity plans including the proposed new plan is “unreasonable,” if the company’s three-year burn-rate exceeds the applicable burn rate cap determined by ISS, if the company has a pay-for-performance “misalignment” or if the plan includes certain disfavored features (e.g., if the plan permits repricing or includes a liberal change of control definition).
Companies seeking shareholder approval of a new equity plan or an amendment to an existing plan can often independently determine compliance with each of these factors except for cost. ISS evaluates the cost of a company’s plans using its proprietary shareholder value transfer (SVT) measure. ISS describes SVT as assessing “the amount of shareholders’ equity flowing out of the company to employees and directors.” ISS considers the SVT for a company’s plans to be reasonable if it falls below the company-specific allowable cap as determined by ISS using benchmark SVT levels for each industry. Thus, companies often engage the consulting side of ISS to determine the SVT of their plans and the number of additional shares that ISS would support for the new or amended equity plan.
New ISS Approach to Equity Plan Proposals
ISS previously announced its intention to implement a new “scorecard” approach to evaluating equity plan proposals at U.S. shareholder meetings. Today ISS provided more insights with the publication of its proposed new Equity Plans policy, which details ISS’s new Equity Plan Scorecard (“EPSC”). Under the proposed EPSC, ISS will determine its voting recommendations on equity plan proposals by determining an EPSC score for a company based on three broad categories of factors: (1) the total potential cost of the company’s equity plans relative to its peers; (2) the proposed plan’s features; and (3) the company’s equity grant practices. ISS has indicated that these scorecard factors and their relative weightings would be keyed to company size and status, with different weightings applicable to companies in the following categories: S&P 500, Russell 3000 (excluding the S&P500), Non-Russell 3000, and Recent IPOs or Bankruptcy Emergent companies.
With respect to the three categories that factor into a company’s EPSC score:
– Cost will continue to be evaluated on the basis of SVT in relation to peers. However, SVT will now be calculated for both (a) new shares requested, plus shares remaining for future grants, plus outstanding unvested and/or unexercised grants, and (b) only on new shares requested plus shares remaining for future grants.
– Plan features that will be evaluated under the EPSC include automatic single-triggered award vesting upon a change-in-control, discretionary vesting authority, liberal share recycling on various award types (which will no longer be a component of SVT), and minimum vesting periods for grants made under the plan, in each case as specified in the plan document itself rather than in practice through award agreements.
– With respect to company grant practices, ISS’s proposed EPSC will consider a company’s three-year burn rate relative to its peers (which will eliminate company “burn rate commitments” going forward), vesting requirements in the most recent CEO equity grants, the estimated duration of the plan (calculated based on the sum of shares remaining available and the new shares requested under the plan, divided by the average annual shares granted under the plan in the prior three years), the proportion of the CEO’s most recent equity awards subject to performance vesting (as opposed to strictly time-based vesting), whether the company maintains a clawback policy, and whether the company has established post-exercise/vesting holding requirements.
Although ISS has stated that certain highly egregious plan features (such as the ability to reprice options without shareholder approval) will continue to result in an automatic negative voting recommendation regardless of other factors, overall the EPSC will result in voting recommendations based on a combination of the above factors. This means that ISS may recommend votes “For” an equity plan proposal where costs are nominally higher than a company’s allowable cap when sufficient other positive plan features and company grant practices are present. Likewise, ISS may recommend votes “Against” an equity plan proposal even where costs are lower than a company’s allowable cap if sufficient other negative plan features and company grant practices are present.
Next Steps
ISS has invited comments on its proposed policy, and has specifically asked for feedback on: (1) whether any factors outlined above should be more heavily weighted when evaluating equity plan proposals; and (2) whether stakeholders see any unintended consequences from shifting to a scorecard approach. Comments may be submitted on or before October 29, 2014 via email to policy@issgovernance.com. For more information, here’s the ISS release discussing the proposed revisions.
We expect that corporate commenters will focus on the nature and extent of flexibility in the EPSC approach around plan features and past grant practices. For example, we understand that under the proposed scorecard, a plan will gain credit if it contains minimum vesting provision (for example, a minimum three year pro-rata vesting requirement), although companies may want flexibility to grant some awards free of any such restrictions. Thus, companies may wish to provide input to ISS on situations in which such grant practices may be warranted and should not result in negative weighting under the scorecard.
With respect to the proposed EPSC’s factors that take into account past grant practices, companies often propose new equity plans so that they can implement new grant practices in the future that were not feasible under their existing plans (for example, a company may wish to be able to implement a performance stock unit program, or increase the percentage of shares granted under such awards and correspondingly decrease its use of stock options). In those cases, overemphasis on past grant practices may be inappropriate. Thus, in order that ISS may consider such situations as it develops its EPSC methodology, companies may wish to provide comments to ISS regarding situations in which they have sought shareholder approval of a new plan so that they could implement new grant practices, as well as other situations in which past grant practices may not be indicative of future equity programs.
Companies that are developing new equity plans that they intend to submit for shareholder approval at their 2015 annual meetings may need to scramble to reflect ISS’s EPSC factors in their proposed plan if they want ISS to recommend votes “For” the plan. For example, even if a company’s SVT would not have exceeded ISS’s limits under its current voting policy, a “liberal share counting provision” under which shares retained to pay taxes again become available for grant under the plan may now contribute to a negative ISS voting recommendation on the plan. Likewise, the proposed EPSC methodology will contribute to more plans containing restrictions on how quickly equity awards are permitted to vest. It is worth noting, however, as ISS observes in its request for comments, that even though ISS historically has recommended votes “Against” approximately 30% of equity plan proposals each year under existing its policy, no more than 10 plan proposals have actually failed in any recent year. Nevertheless, ISS’s policies are based in part on feedback from its institutional shareholder clients, and thus companies will want to carefully consider the extent to which factors considered under the EPSC reflect emerging trends and shareholder-favored practices.
ISS’s final 2015 proxy voting policies are expected to be released in November and typically apply to shareholder meetings held on or after February 1. We expect that ISS will soon offer a new consulting product to help companies and their advisors analyze equity plans under the proposed new EPSC.
Here’s more from McGuireWoods’ Steven Kittrell from this blog: In our prior blog, we discussed the case for eliminating the Section 162(m) disclosures in proxy statements. Here is an alternative view of the subject:
It is worth looking back at the reasons for virtually every CD&A having a Section 162(m) disclosure. Here is a brief history:
– Before the 2006 revamp of the rules, the SEC had required discussion of a company’s Section 162(m) policy.
– The CD&A rules give as an example of possibly material information: “the impact of the accounting and tax treatments of the particular form of compensation”.
– In the adopting release, the SEC stated:
Regarding the example noting the impact of accounting and tax treatments of a particular form of compensation, some commenters urged that companies be required to continue to disclose their Internal Revenue Code Section 162(m) policy. The adoption of this example should not be construed to eliminate this discussion. Rather, this example indicates more broadly that any tax or accounting treatment, including but not limited to Section 162(m), that is material to the company’s compensation policy or decisions with respect to a named executive officer is covered by Compensation Discussion and Analysis. Tax consequences to the named executive officers, as well as tax consequences to the company, may fall within this example.
Most companies interpreted the CD&A rules to apply the prior “presumption” of materiality to the Section 162(m) disclosure and continued their prior practice of making a disclosure. What is the right approach now? If a company wants to eliminate the disclosure, the question is materiality. As with most materiality questions, there are different ways to look at it.
Virtually all companies where the deduction may be in question will adopt Section 162(m)-compliant compensation plans and then follow the Section 162(m) requirements in paying some compensation. The potentially most material aspects of Section 162(m) from a disclosure perspective are the requirement to use preapproved performance goals and the limits on grant sizes and types. Also, most companies will not give up a deduction without Section 162(m) being a part of the decision process. Does this mean that Section 162(m) was material in the decisions?
On the other hand, the actual tax savings from Section 162(m) as a number is not material for most companies. And it is difficult to maintain that the disclosure continues to be useful to shareholders, particularly given shareholder complaints about the growing length of the CD&A and the SEC’s past statements that the CD&A should avoid boilerplate disclosures.
If a company determines that the Section 162(m) disclosure should be maintained, it is worthwhile to look at the disclosure in light of the shareholder litigation. There may be tweaks to the disclosure that would reduce the likelihood of a Section 162(m) disclosure-related shareholder claim.
Any prior polls of this nature would have revealed that most folks believed that the SEC would have acted long ago. The latest group thinking was that it would happen this month based on the SEC’s Reg Flex Agenda issued in June (even though I blogged that the SEC’s statements were merely aspirational). So what is the new thinking? SEC Chair White recently testified that it was her “hope and expectation” that the SEC would adopt the pay ratio rules by the end of this year. Do you think that will happen? This site has a poll for you to weigh in…
We just wrapped up the 2015 edition of the Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise & Reporting Guide.” For those that want to access it online, it’s now posted on this site. For those that want a hard copy, it was just sent to the printers.
How to Order a Hard-Copy: Remember that a hard copy of the 2015 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately – however, CompensationStandards.com members can obtain a 40% discount by trying a no-risk trial to the hard copy now. This will ensure delivery of this 1350 page comprehensive Treatise soon after it’s done being printed in about a month.
From our conference last week, here are some statistics about clawback proposals:
– 13 proposals submitted; 1 excluded through the no-action process (company submitted a conflicting proposal), 3 voted on and 9 withdrawn through negotiations
– Most of these proposals were to enhance existing clawback policies
– Most submitted by New York City or UAW Pension Fund, but Chevedden submitted at one company
– Obtained >30% vote at the two companies that the proposals argued did not have a strong clawback
Some other things that practitioners have been doing related to clawbacks are:
– Adopting ones for those companies that did not have them
– In light of the success of John Chevedden’s “hold til retirement” shareholder proposal (the most common executive compensation shareholder proposal in 2014), considering whether share deferrals should be used as a means to satisfy this and to serve as a recoupment/clawback
– Reviewing existing and proposed new executive compensation programs to identify which ones clearly are, may be or clearly are not likely to be subject to the SEC’s rules.
– Bimal Patel, Head of ISS’ Policy Steering Committee
Investors indicate little tolerance for unilateral boardroom adoption of fee-shifting, dissident director compensation, and other bylaw amendments that diminish shareholder rights, according to results of ISS’ recently released annual global policy survey. ISS received more than 370 total responses to this year’s survey, of which 105 were institutional investors, nearly one-third of whom manage assets in excess of $100 billion. Roughly 70 percent of these respondents were based in the U.S., with the remainder divided between the U.K., Continental Europe, Canada, and the Asia-Pacific region.
ISS also received responses from 255 members of the corporate issuer community (including corporations, consultants/advisers to issuers, and other organizations representing issuers), nearly 90 percent of whom were located in the U.S. The survey, conducted between July 17 and Sept. 5, covered a range of issues, including: pay for performance; board accountability; boardroom diversity; equity plan evaluation; risk oversight and audit; cross-market listings; and environmental and social performance goals.
“The aim of our yearly survey is to ensure that ISS’ policies reflect local best practices, create dialogue around important issues, and serve the proxy voting needs of our institutional clients worldwide,” said Dr. Martha Carter, ISS’ Global Head of Research & Policy. “We’re extremely pleased at the breadth, depth, and diversity of responses in this the 10th year that ISS has solicited the opinion of governance market constituents in formulating its benchmark voting policies.”
Key findings from this year’s survey include:
– Investors indicate little tolerance for unilateral boardroom adoption of bylaw amendments that diminish shareholder rights. With regard to evaluating board accountability where a board adopts without shareholder approval a material bylaw amendment that diminishes shareholders’ rights, 72 percent of investors indicate the board should never adopt bylaw/charter amendments that negatively impact investors’ rights without shareholder approval, while 20 percent choose “it depends.” Nearly one-half (44 percent) of issuer respondents, meanwhile, indicate the board should be free to unilaterally adopt any bylaw/charter amendment(s) subject to applicable law.
– ISS plans to implement a “balanced scorecard” approach to evaluating plan proposals for U.S. companies that gives weight to various factors under three broad categories related to the proposal: (1) cost, (2) plan features, and (3) company grant practices. With respect to how the plan cost category should be weighed in a scorecard, 70 percent of investors indicate weights ranging from 30 to 50 percent, with a 40 percent weighting cited most often. Sixty-two percent of investors suggest weightings from 25 to 35 percent for plan features; and 64 percent indicate weights ranging from 20 to 35 percent for grant practices. Weightings suggested by issuers were also quite dispersed, but generally skewed somewhat higher with respect to cost, and somewhat lower for plan features and grant practices compared to investors.
– Although a quarter of investor respondents do not focus on pay magnitude, most appear to be concerned about this issue in addition to how CEO pay is determined. When asked whether there is a threshold at which the magnitude of CEO pay warrants concern even if the company’s performance is positive (e.g., outperforming peer group), 60 percent of investor respondents answer in the affirmative. Notably, 50 percent of issuer respondents selected the response “No, my organization does not consider the magnitude of CEO compensation when evaluating pay practices; other aspects (such as company performance and pay structure) are considered more important.”
– For European markets where shareholders are offered say-on-pay proposals or other executive compensation related items, 83 percent of investors indicate that a European pay for performance quantitative methodology, including the use of peer group comparisons, would be useful as a factor in such evaluations. Of investor respondents answering in the affirmative on the use of peer groups as a factor in evaluating a company’s compensation practices, 87 percent indicate that they would like to see a comparison to cross-market industry sector peer groups.
– A majority of all respondents (60 percent of investors and 75 percent of issuers) indicate that they consider overall diversity (including but not limited to gender) on the board when evaluating boards. Notably, 17 percent of investor respondents and 7 percent of issuer respondents indicate that they do not consider gender diversity at all when evaluating boards.
– Investors focus on boardroom oversight subsequent to incidents when evaluating the board’s role in risk oversight. Over the past few years, shareholders’ investments have been impacted by a number of well publicized failures of boardroom risk oversight. When evaluating the board’s risk oversight role, a majority of shareholders indicate that the role of the company’s relevant risk oversight committee(s), the board’s risk oversight policies and procedures, boardroom oversight actions prior to incident(s), boardroom oversight actions subsequent to incident(s), and changes in senior management are all either “very” or “somewhat” important to their voting decision on directors. Boardroom oversight action subsequent to an incident garners the highest percentage (85 percent) as a “very important” factor whereas only 46 percent indicate that changes in senior management are “very important.”
– Investors and issuers differ on the appropriateness of quantitative E&S performance goals. When asked when it is appropriate for a company to utilize quantitative E&S performance goals, a majority of both investor and issuer respondents, 57 percent and 75 percent, respectively, indicate a preference for case-by-case analysis (“it depends”). Of those investor respondents who choose “it depends,” a significant majority indicate that it considers if a company’s performance on a given environmental or social issue shows a negative trend or if the company has experienced significant controversies (89 percent); if the company has operations with significant exposure to potential regulatory or financial impacts (92 percent); and if the practice has become an industry norm (90 percent). A slight majority (51 percent) indicate that it depends only if/when the quantitative goals are required by government regulations. Notably, 39 percent of investor respondents indicate that it is appropriate for a company to always utilize quantitative E&S performance goals compared with only 7 percent of issuer respondents.
ISS’ survey marks the commencement of its annual policy formulation process, which typically culminates in November with the release of final policies applicable to global shareholder meetings occurring on or after Feb. 1 of the following year. In October, ISS is expected to release draft policies that will be subject to a public consultation period before they are finalized.
A few days ago, ISS released its 2014-2015 policy survey results. 21 pages of interesting data (ie. key findings and detailed survey responses). Here’s analysis from Davis Polk’s Ning Chiu…
Back in May, I blogged about a flap over Coca-Cola’s equity compensation plan. Showing how shareholder engagement works, the company announced this morning that its Compensation Committee has adopted “Equity Stewardship Guidelines” for the company’s equity plan.
Perhaps just as interesting is that the Compensation Committee Chair pushed out a blog on the company’s “Unbottled” blog about the announcement.
This looks to be a pretty innovative approach to explaining how shares under the equity plan will be used responsibly, while addressing the criticism about the plan. In addition to including a burn rate commitment that is expected to make the plan last its full term of 10 years, the Guidelines provide that Coca-Cola will include information on actual dilution, burn rate and overhang in their proxy statement each year. Plus they will continue to minimize dilution through share repurchases and encourage an open dialogue with shareholders about compensation. I look forward to seeing what they do in their next proxy statement…
All of the video archives from our two days of executive pay conferences are now posted…
Today is the “Say-on-Pay Workshop: 11th Annual Executive Compensation Conference”; yesterday was the “Annual Proxy Disclosure Conference” – and the video archive of that Conference is already 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 the 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 talking points and 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 Pacific.
– 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 the CLE list.
Today is the “Tackling Your 2015 Compensation Disclosures: Annual Proxy Disclosure Conference”; tomorrow is the “Say-on-Pay Workshop: 11th 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 the 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 talking points and 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 Pacific.
– 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 the CLE list.