2018 Benchmark Policy Consultation

US Policy—Director Elections—Non-Employee Director Compensation

Background and Overview

Non-employee director (NED) compensation has come into the corporate governance spotlight in recent years. ISS’ 2017 Board Practices Study indicated that median NED pay at S&P 1500 firms has steadily increased every year since 2012 and stood at approximately $211,000 in 2016. As director pay has risen, investors have shown a growing interest in the magnitude of boardroom compensation and the structure of pay packages. Some investors have gone a step further by challenging director pay in proxy contests and legal actions. Many companies have responded to this pressure and unfavorable judicial rulings by adding annual compensation limits to their director equity award program or introducing proposals that seek shareholder approval of the director compensation program.

Although NED pay magnitude varies by company size and industry, ISS has identified some extreme pay outliers—the reasons for which are sometimes not clearly explained by companies. Investor respondents to ISS’ 2018 Policy Application Survey indicated a strong preference for adverse vote recommendations where a pattern of excessive NED pay levels at a company has been identified. The least-favored action advocated by investor respondents to the survey was making no adverse vote recommendations.

Currently, NED compensation is broadly addressed under ISS’ five Compensation Global Principles. The fifth principle states that companies should avoid inappropriate pay for non-employee directors.

Key Changes Under Consideration

The proposed new policy would explicitly provide for adverse vote recommendations for board committee members who are responsible for approving/setting NED compensation when there is a pattern (i.e. two or more consecutive years) of excessive NED pay magnitude without a compelling rationale or other mitigating factors.

Intent and Impact

This proposed policy seeks to hold accountable directors who approve excessive NED pay without a compelling rationale or other justification.

There would be no impact on vote recommendations in 2018 for directors as a result of this proposed policy. Going forward, negative recommendations would be triggered only after a pattern of excessive NED pay is identified in consecutive years. ISS expects a minimal impact for boards as the policy is focused on extreme director pay outliers.

Request for Comment

While we appreciate any comments on this topic, ISS is specifically seeking feedback on the following:

• In your view, what are the circumstances for which large NED pay magnitude would merit support on an exceptional basis (e.g., one-time onboarding grants to new directors)?
• If a company’s proxy disclosure does not clearly indicate which board committee is responsible for setting and/or approving director pay, which board members should be held accountable?
• In calculating average/median pay, should ISS include outsized pay packages provided to NED board chairs, lead directors or other board members who receive outsized boardroom pay?

US Policy—Gender Pay Gap Shareholder Proposals

Background and Overview

Over the past three years, shareholders have increasingly filed more resolutions requesting that companies report whether a gender pay gap exists, and if so, what measures will be taken to address the gap. While primarily filed at technology firms in the first two years, in 2017 resolutions were also filed at firms in the financial services, insurance, healthcare, and telecommunication industries—all in which the shareholder proponents claim, women are underrepresented and have wider pay gaps by gender than other industries. Indications show that proponents will continue their campaign of engaging companies and filing shareholder proposals on this issue.

To date, ISS has applied its global approach on social/environmental issues when analyzing gender pay gap proposals, which is a case-by-case approach. The proposed new policy provides more specificity but is not a major shift in ISS’ current policy approach.

Key Changes Under Consideration

The proposed new policy is as follows:

Generally vote case-by-case on requests for reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account:

• The company’s current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy and fair and equitable compensation practices;
• Whether the company has been the subject of recent controversy or litigation related to gender pay gap issues; and
• Whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers.

Intent and Impact

The proposed policy provides more clarity regarding ISS’ approach as the subject seems to be one that is going to continue and potentially grow in terms of the number of shareholder proposals filed in the short to medium term. ISS does not expect the proposed policy to have a significant impact on vote recommendations.

Request for Comment

While we appreciate any comments on this topic, ISS is specifically seeking feedback on the following:

• Are there other factors ISS should consider when assessing proposals requesting disclosure on a company’s gender pay gap?

US Policy—Director Elections—Poison Pills

Background and Overview

There has been a long evolution in the history of poison pills (shareholder rights plans) in the US since their origins in the 1980’s, and ISS’ policies have evolved accordingly. Once a ubiquitous takeover defense that companies renewed automatically every 10 years, pills more commonly now take two forms: a 3 year-pill approved by shareholders, or a short-term pill (term of 1 year or less) adopted in response to unusual purchases of stock or an unsolicited takeover bid. Most companies do not have an active pill, but some may keep one “on the shelf” to adopt if the latter situation were to occur.

ISS’ current policy on director elections where the company adopted or renewed a pill that was not approved by shareholders has several focuses:

1. If the pill has a “deadhand” or “slowhand” feature. These features make it difficult to redeem a pill if a majority of the board does not consist of continuing directors or their nominees. Once quite common, ISS is now only tracking five such pills among publicly-traded companies. ISS recommends in these cases against the full slate of directors every year.
2. For long-term pills (term >1 year): Adverse recommendations depend on whether the board is annually-elected or classified. ISS recommends against all nominees every year if the board is classified, but, if the board is annually elected, only once every 3 years. Companies who had newly adopted a pill could be exempt from adverse vote recommendations by making a commitment to put the pill to a binding shareholder vote at the next year’s AGM.
3. The policy above was put into place Nov 19, 2009. Boards that adopted pills adopted prior to that date were grandfathered from the policy and do not receive adverse vote recommendation
4. Lastly, the adoption (not the renewal) of a short-term pill is considered on a case-by-case basis and generally does not cause an against recommendation on the board if there was a compelling rationale for its adoption and the company has a generally good governance track record.

Key Changes under Consideration

ISS is proposing to update the policies outlined above, and recommend against all board nominees, every year, at companies who maintain a long-term poison pill that has not been approved by shareholders. Therefore annually-elected boards would receive adverse recommendations on an annual basis, rather than every 3 years. Commitments to put a long-term pill to a vote the following year would no longer be considered a mitigating factor. The boards with the 10-year pills currently grandfathered from 2009 would no longer be exempt and would receive against recommendations. With the proposed removal of grandfathering, there will also be no need to have an explicit policy regarding deadhand or slowhand features, as the few remaining deadhand/slowhand pills are not approved by shareholders and would be covered under the proposed policy.

Short-term pill adoptions would continue to be assessed on a case-by-case basis, but the proposed policy update would focus more on the rationale for their adoption than on the company’s governance and track record. Renewals or extensions though, as with the current policy, will not receive the case-by-case assessment.

Intent and Impact

The intent of this proposed policy update is to simplify ISS’ approach to poison pills, and strengthen the principle that poison pills should be approved by shareholders.

ISS’ vote recommendations under the proposed policy would be impacted as follows:

• About 90 companies with 10-year pills adopted or renewed in 2008 and 2009 would receive adverse vote recommendations on their boards; and
• About 50 companies with annually elected boards who adopted/renewed pills since 2009 would receive adverse vote recommendations every year, rather than once every 3 years.

Request for Comment

While we appreciate any comments on this topic, ISS is specifically seeking feedback on the following:

• Should ISS continue to grandfather the directors whose boards adopted 10-year pills in 2008 and 2009 given that they will expire under their terms over the next few years?
• Regarding short-term pills (1-year term or less), is the rationale for adoption (e.g. an unsolicited takeover offer) the most important factor for consideration when voting on directors who adopted the pill? If not, please specify other factors.
• Should one factor for the consideration of short-term pill adoptions be a commitment that any renewals or extensions of the pill will be put to a shareholder vote?