Adam Emmerich is a partner in the corporate department at Wachtell, Lipton, Rosen & Katz focusing primarily on mergers and acquisitions and securities law matters. This post is based on a Wachtell Lipton firm memorandum by Mr. Emmerich, Eric S. Robinson, Jeannemarie O’Brien, David E. Kahan, Gordon S. Moodie and Justin S. Rosenberg. The RiskMetrics GRIds system has been previously discussed on the Forum in a series of posts, which are available here; Another aspect of the RiskMetrics system – its independence from a company’s ownership structure – is discussed in a study by the Program titled The Elusive Quest For Global Governance Standards, which is available here.
As discussed in our memos of March 16, 2010 and May 13, 2010, RiskMetrics has recently released the guidelines for calculations under its Governance Risk Indicator (GRId) rating system. The GRId instructions include over 50 pages of compensation questions, the answers to which result in a stand-alone Compensation GRId rating.
The Compensation GRId questions and scoring generally reflect the substantive positions in RiskMetrics’ corporate governance policies and proxy voting guidelines, but in some cases are more punitive. For example, the proxy voting guidelines penalize excise tax gross-ups only in new or materially amended agreements, but the Compensation GRId deducts even for existing agreements with gross-ups. More significantly, the rigid scoring system by its nature codifies the level of emphasis on particular issues. While we do not think the one-size-fits-all GRId approach provides a useful picture of governance practices, most public companies will, given the prominence of RiskMetrics, find it useful to familiarize themselves with the GRId guidelines and identify areas where points can be scored with little risk of substantive harm. For example, in a number of cases addressing an issue in the annual proxy statement may increase a company’s score.
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