Today, ISS released its final 2013 proxy voting policy updates. Key changes in the corporate governance and executive compensation areas for US companies include:
- Share Hedging/Pledging: Hedging of company stock in any amount (through covered call, collar, or other derivative transactions) and “significant” pledging of company stock by directors and/or executives will be considered failures of risk oversight that could lead to against/withhold votes against individual directors or the board as a whole in extraordinary circumstances (rather than, as originally proposed, to against votes on a company’s say-on-pay proposal). In assesing whether share pledging should lead to against/withhold votes, ISS will consider the relevant facts and circumstances, including specifically (i) whether the company has an anti-pledging policy; (ii) the magnitude of pledged shares as percentage of total outstanding shares or market value or trading volume and the trend in this magnitude over time; and (iii) whether the company excludes pledged shares from any stock ownership guidelines it maintains.
- Majority-Supported Shareholder Proposals: Whether a proposal has received majority shareholder support will begin to be evaluated on the basis of votes cast at the last meeting (as opposed to total shares outstanding) — thus making it easier for a proposal to receive majority support — and “responding” to the proposal will generally mean full implementation of the proposal.
- Pay-for-Performance Evaluation: A company’s self-selected peers will be factored into ISS’s peer group methodology (however there will not be a complete overlap), and, for large cap companies only, a comparison of “realizable pay” to grant date pay may be included as part of the qualitative evaluation of pay-for-performance alignment when the quantitative analysis indicates a pay-for-performance disconnect. ISS is defining “realizable pay” as the actual value of earned awards and the target value of unearned awards granted in the relevant period based on a company’s share price at the end of the period. However the “realizable” value of stock options and SARs will be based on their updated black scholes value (rather than their intrinsic value).
- Legacy Golden-Parachute Agreements: Existing change-in-control arrangements (not just new or extended arrangements) with named executive officers will be included in ISS’s analysis of say-on-golden-parachute proposals and arrangements with multiple problematic features (such as 280G tax gross ups or single trigger payments) will receive added scrutiny.
The addition of share hedging in any amount as a problematic practice, coupled with the SEC’s forthcoming rules regarding disclosure of companies’ share hedging policies under the Dodd Frank Act, should lead companies that don’t currently have an anti-hedging policy to consider adopting one.