ISS Updates Proxy Voting Policies, Requests Peer Group Changes

Holly J. Gregory is a corporate partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post is based on a Weil Gotshal alert; the complete publication, including appendicies, is available here.

On November 21, 2013, Institutional Shareholder Services Inc. (ISS) released updates to its proxy voting policies for the 2014 proxy season, effective for meetings held on or after February 1, 2014. [1] In addition, ISS has requested that companies notify it by December 9, 2013 of any changes to a company’s self-selected peer companies for purposes of benchmarking CEO compensation for the 2013 fiscal year.

This post provides guidance to US companies on how to address ISS policy changes and also highlights recent developments regarding potential regulation or self-regulation of proxy advisory firms.

The amendments to ISS proxy voting policies for the 2014 proxy season relate to:

  • Board responsiveness to shareholder proposals that receive a majority vote in favor
  • Pay-for-performance evaluation
  • Shareholder proposals relating to lobbying disclosure
  • Shareholder proposals relating to human rights risk assessments

The policy revisions relating to board responsiveness to majority-supported shareholder proposals and pay-for-performance evaluation reflect ISS’ policy changes as proposed. [2] ISS did not preview the policy changes regarding lobbying disclosure and human rights risk assessment shareholder proposals.

Last week, ISS also announced the opening of a new consultation period relating to certain potential longer term policy changes, including in relation to director tenure, audit firm tenure and independent chairs. [3]

Changes to ISS Proxy Voting Policies

1. Board Responsiveness

Recall that last year, ISS had revised its policy relating to board responsiveness to shareholder proposals in two important respects:

  • For the 2013 proxy season and beyond, in instances where the board failed to act on a shareholder proposal that received either support of (a) the majority of shares cast the previous year and also one of the two years prior to that, or (b) the majority of shares outstanding the previous year, it was ISS policy to recommend against individual directors, committees or the entire board as it deemed appropriate based on the circumstances, rather than automatically recommend against all directors
  • Effective for 2014, ISS announced that a broader view of board non-responsiveness would apply: if a shareholder proposal receives a majority of shares cast at a single shareholder meeting, ISS will evaluate how the company responded

For the 2013 proxy season, ISS judged “responsive” to generally mean “full implementation” of the shareholder proposal. If the board’s response to the proposal involved less than full implementation, ISS would consider the following factors in determining its recommendation:

  • Subject matter of the proposal
  • Shareholder support and opposition to the proposal at prior meetings
  • Board outreach to shareholders after the vote (as disclosed)
  • Board actions in response to engagement with shareholders
  • Continuation of the underlying issue as a voting item on the ballot (as either a shareholder or management proposal)
  • Other factors as appropriate

Policy Revisions

ISS has emphasized that, for 2014, vote recommendations on director elections following majority-supported shareholder proposals will be made on a fact-specific case-by-case basis. ISS has expanded the list of factors to be considered to include the board’s rationale with respect to the level of implementation, as disclosed in the company’s proxy statement. ISS FAQs include examples of how ISS would treat certain actions taken in response to shareholder proposals on particular topics. [4]

What To Do Now?

  • The ISS policy changes announced in 2012 that become effective in 2014 add significant pressure on boards to act in line with shareholder viewpoints, even where the vote result is non-binding. In this environment, it is important for boards and their counsel to apply the engagement techniques honed in the context of say-on-pay to shareholder proposals generally. This is especially critical prior to the annual meeting where a shareholder proposal relates to a topic that is likely to garner significant shareholder support, as well as where a shareholder proposal received majority support at last year’s annual meeting. In particular, boards should:
    • Engage with their largest shareholders to gather viewpoints, explain the company’s rationale and seek support
    • Consider ways of addressing shareholders’ expressed views that the board believes are in the company’s best interests
    • Be prepared to negotiate with shareholder proposal proponents
    • Consider enhanced solicitation efforts with respect to management proposals and director nominees, particularly where there may be circumstances or reasons to believe that a proposal and/or one or more directors may receive a significant negative vote
    • Include disclosure in the proxy statement with respect to shareholder engagement efforts and any action taken in response to a majority-supported shareholder proposal, including why the board believes its response is in the best interests of the company and why the board’s viewpoint may be different to that of a majority of shareholders
  • Boards will need to be especially careful to ensure that they continue to apply fiduciary judgment with respect to matters that receive a majority of votes cast on issues for which shareholders do not have decision rights. Directors retain legal responsibility as fiduciaries for those decisions and cannot simply defer to the viewpoints of a majority of voting shareholders.

2. Pay-for-Performance Evaluation—Relative Degree of Alignment

In making say-on-pay vote recommendations, ISS starts with an analysis of a company’s pay practices and performance relative to an ISS-selected peer group. Under ISS policy applicable to 2013, the analysis considered:

  • The relative degree of alignment (RDA) between the company’s total shareholder return (TSR) rank and the CEO’s total pay rank within a peer group, as measured over one-year and three-year periods (weighted 40/60)
  • The multiple of the CEO’s total compensation relative to the peer group median
  • The absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years

In the event that the quantitative analysis above demonstrates “significant unsatisfactory long-term pay-for-performance alignment,” ISS also reviewed various qualitative factors.

Policy Revisions

For 2014, ISS has modified its pay-for-performance evaluation methodology with respect to relative degree of alignment. The other factors are unchanged.

According to its revised methodology, ISS will use a single, annualized RDA measure for the three-year measurement period by calculating the difference between the company’s TSR rank and the CEO’s total pay rank within a peer group, as measured over a three-year period (or as many full fiscal years that the company has been publicly traded and disclosed compensation data). Each year of TSR will be weighted equally and calculated to produce the annualized TSR, thus providing a “smoother performance measure” that is less prone to being overwhelmed by periods of volatility (particularly in relation to the most recent year, which is most heavily weighted under the existing methodology).

What To Do Now?

  • Consider whether the company may be at greater risk of ISS identifying a pay-for-performance misalignment under its revised policy (which may be exacerbated if the impact of good performance in the most recent year is “smoothed” and therefore less heavily weighted) and consider discussing with ISS and large shareholders in advance of the proxy season.
  • Review existing compensation disclosures and practices in light of the qualitative factors listed in ISS’ policy. For example, companies in the S&P 500 should consider including realizable pay disclosure where appropriate, to facilitate ISS’ calculation of realizable pay.

3. Lobbying Disclosure

Under its policy applicable to the 2013 proxy season, ISS made case-by-case recommendations on proposals requesting information on a company’s direct, indirect and grassroots lobbying activities, policies or procedures. ISS said it considers, among other things, the company’s disclosure of relevant policies and oversight mechanisms, and recent significant controversies regarding lobbying-related activities.

Policy Revisions

ISS has expanded the list of factors to include:

  • Executive level oversight of lobbying activity (in addition to board oversight)
  • Disclosure regarding trade associations or other groups the company supports, or is a member of, that engage in lobbying activities

What To Do Now?

  • Consider whether it would be appropriate for the company to disclose additional information about the company’s political activities (including involvement in trade associations and other groups that engage in lobbying).

4. Human Rights Risk Assessment

New Policy

ISS has adopted a new formal policy to vote case-by-case on proposals requesting that a company conduct an assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process. ISS says it will consider:

  • The company’s disclosure of existing relevant policies and practices, including information on implementation and any related oversight mechanisms
  • The company’s industry and whether the company or its suppliers operate in countries or areas where there is a history of human rights concerns
  • Company or supplier involvement in recent, significant controversies, fines or litigation regarding human rights, and any remedial steps taken
  • Whether the proposal is unduly burdensome or overly prescriptive

What To Do Now?

  • Consider whether it would be appropriate for the company to disclose additional information about its policies and practices relating to assessment and mitigation of human rights risks.

Reminder: Updating Peer Groups—December 9, 2013 Deadline

ISS considers a company’s self-selected peers when constructing the peer group that ISS uses to evaluate pay-for-performance. ISS has requested that companies notify it by 5:00pm EST on December 9, 2013 of any changes to a company’s self-selected peer companies for purposes of benchmarking CEO compensation.

ISS has clarified in FAQs that it is seeking updated peer groups used for benchmarking CEO compensation for the fiscal year ending prior to the company’s 2014 annual meeting (i.e., the peer group used for 2013 compensation decisions). However, if a company anticipates making changes to its peer group for 2014, ISS has indicated that an updated peer group would be helpful “if the anticipated 2014 changes are due to business events that have made companies in the 2013 peer group no longer relevant (e.g., significant business changes, mergers, spinoffs, or bankruptcies).” [5]

Note, however, that even though ISS has said that it will take into consideration a company’s self-selected peers, the FAQs clarify that a company’s self-selected peers may not always appear in the ISS peer group, even if they meet ISS’ size constraints (for example, if inclusion would lead to over-representation of a particular industry in the ISS peer group).

What To Do Now?

  • If changes have been made to the company’s self-selected peer group, updated peer group information should be provided to ISS via its web form, available at Note that ISS expects that the list of companies provided to it will match the list of benchmarking peers that are disclosed in the 2014 proxy statement. If there are any differences, ISS has stated that it may “apply additional scrutiny to this variance as part of its pay-for-performance analysis.” [6]

General Guidance for Preparing for 2014 Proxy Season

ISS typically provides companies that are in the S&P 500 with prior warning if it intends to issue a negative vote recommendation. Companies then have a very narrow time window (48 hours) in which to engage with ISS on the issue. Companies that are not in the S&P 500 generally do not receive such prior warning. We encourage all companies to become familiar with the more than 40 circumstances in which ISS may recommended a negative vote regarding director re-election (set forth in the Appendix), or on other proposals that may be included in their proxy statement. Companies may also wish to contact their analyst at ISS in anticipation of or shortly after proxy statement filing to talk through any issues that could cause ISS to issue a negative vote recommendation.

In addition to the steps discussed above, we recommend:

  • Reviewing the company’s corporate governance and compensation practices for potential vulnerabilities under ISS’ policy updates (for example, how shareholder proposals fared at the previous annual meeting)
  • Assisting the company in developing outreach tactics to engage with key institutional investors on governance-related matters, especially if the company had a majority-supported shareholder proposal at its last annual meeting that has not been implemented
  • Reviewing last year’s compensation and governance disclosure, and plan to make improvements in this year’s proxy statement where appropriate

For a comparison of ISS’ policies (as updated) against suggestions for board structure and practice by influential members of the corporate, institutional investor and legal communities, see our “Comparison of Corporate Governance Principles & Guidelines: United States,” available at

New Benchmark Policy Consultation Period—Ends February 2014

ISS is requesting feedback from governance stakeholders globally on potential longer term changes to several voting policies as part of a new, ongoing consultation period that will continue until February 2014. ISS has stated that it will take comments it receives into consideration as it formulates policy updates beyond the 2014 proxy season. The following important policies affecting US corporations under review are:

  • Director tenure—ISS is considering whether to classify directors with lengthy tenure as non-independent or consider the mix of director tenures on a board when determining a vote recommendation on members of the nominating committee
  • Director independence—ISS is evaluating whether to use more of a case-by-case analysis of facts and circumstances in determining director independence, focusing on former CEOs, familial relationships and professional relationships
  • Audit firm tenure—ISS is exploring potential approaches to its auditor ratification policy, including whether to consider audit firm tenure as a factor in determining the vote recommendation on proposals to ratify auditors
  • Independent chairs—ISS is examining alternative approaches to its policy on shareholder proposals seeking an independent chair, including whether to always vote for such proposals or generally vote for such proposals as a matter of best practice but taking into account certain company-specific circumstances on a case-by-case basis that may warrant a combined CEO/chair board leadership structure
  • Equity plan scoring—ISS is considering adopting a “balanced scorecard” approach that allows the weighting of multiple factors in a holistic evaluation of equity compensation plans (for example, concerns associated with historical equity grants that might elevate a company’s burn rate and shareholder value transfer may be counterbalanced by a relatively small new share request and a declining burn rate trend)

Several of these topics were also addressed in the ISS policy survey for
2013-2014. [7]

What To Do Now?

Recent Developments in Proxy Advisory Firm Regulation and Best Practices

US and international efforts to review and reform the proxy advisory industry have intensified in recent months. Recent developments involving regulators, business-focused trade associations and the proxy advisory industry itself include:

  • In February 2013, the European Securities and Markets Authority (ESMA) published a report recommending that the proxy advisory industry develop an EU Code of Conduct that focuses on identifying, disclosing and managing conflicts of interest, and fostering transparency to ensure the accuracy and reliability of advice provided. [8]
  • In response, in October 2013, a global group of proxy advisory firms (ISS, Glass Lewis, IVOX, Manifest, PIRC and Proxinvest) announced a public consultation on draft principles for the provision of shareholder voting and analytical services. [9]These principles will be international in scope.
    • Deadline for comments is December 20, 2013; final principles scheduled for February/March 2014.
  • In the US, concerns about proxy advisory firms have been reflected in the following:
    • An SEC roundtable will be held on December 5, 2013 to discuss proxy advisory firms, including their use by investment advisers and institutional investors, and suggestions for change. [10] The deadline for comments is January 10, 2014. [11]
    • In October 2013, NASDAQ filed a petition with the SEC seeking interpretive changes that would require proxy advisory firms to disclose the models, formulas and methodologies pursuant to which they make voting recommendations and all relationships that may pose conflicts of interest. [12]
    • In June 2013, a House subcommittee held a hearing on the proxy advisory industry, including the effect on corporate governance standards, proxy advisory firm voting policies and market power, and potential conflicts of interest. [13]
    • In March 2013, the US Chamber of Commerce’s Center for Capital Markets Competitiveness published a report focused on best practices and core principles for the development, dispensation and receipt of proxy advice. [14]
  • In September 2013, the Canadian Securities Administrators (CSA) announced that it expects to propose a regulatory approach to proxy advisory firms in early 2014. [15]


[1] ISS, US Corporate Governance Policy 2014 Updates (November 21, 2013), available at
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[2] ISS, Comments on 2014 Draft Policies (accessed November 22, 2013), available at
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[3] ISS, Benchmark Policy Consultation (NEW) (accessed November 22, 2013), available at
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[4] ISS, 2013 US Proxy Voting Policies and Procedures, Frequently Asked Questions (Excluding Compensation-related Questions) (April 11, 2013), available at For a discussion of these FAQs, please see our Alert, Heads Up for 2013 Proxy Season: Guidance for How to Address ISS & Glass Lewis Policy Changes (December 21, 2012), available at Note that the FAQs relating to board responsiveness have not been amended since these FAQs were released in December 2012.
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[5] ISS, 2013 US Proxy Voting Policies and Procedures, Frequently Asked Questions on Peer Group Selection Methodology (November 18, 2013), available at (“Peer Group FAQs”).
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[6] Peer Group FAQs at 7.
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[7] ISS, 2013-2014 Policy Survey Summary of Results (October 2013), available at
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[8] ESMA, Final Report: Feedback Statement on the Consultation Regarding the Role of the Proxy Advisory Industry (February 19, 2013), available at
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[9] Best Practice Principles for Governance Research Providers Group, Public Consultation on Best Practice Principles for Governance Research Providers (October 28, 2013), available at
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[10] SEC Release No. 34-70929, Proxy Advisory Firm Roundtable (November 22, 2013), available at
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[11] SEC Release No. 34-62495, Concept Release on the US Proxy System (July 14, 2010), available at The roundtable follows on from the SEC’s “proxy plumbing” concept release published in July 2010 that raised questions about the role of proxy advisory firms and the risks associated with apparent conflicts of interest and lack of transparency.
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[12] Letter from Edward S. Knight, Executive Vice President, General Counsel & Chief Regulatory Officer, NASDAQ OMX to Elizabeth M. Murphy, Esq., Secretary, US Securities and Exchange Commission, Petition Related to Proxy Advisory Firms (October 8, 2013), available at
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[13] US House of Representatives, Capital Markets and Government Sponsored Enterprises Subcommittee, Hearing Entitled “Examining the Market Power and Impact of Proxy Advisory Firms” (June 5, 2013). See
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[14] US Chamber of Commerce’s Center for Capital Markets Competitiveness, Best Practices and Core Principles for the Development, Dispensation and Receipt of Proxy Advice (March 2013), available at
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[15] CSA Notice 25-301, Update on CSA Consultation Paper 25-401, Potential Regulation of Proxy Advisory Firms (September 19, 2013), available at
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