Analysis of ISS Policy Application Survey

Lyuba Goltser is a partner and Reid Powell is an associate at Weil, Gotshal & Manges LLP. This post is based on a Weil publication by Ms. Goltser and Mr. Powell.

[On October 19, 2017], ISS released the results of its Policy Application Survey. This follows the release of its Governance Principles Survey in late September. The Governance Principles Survey is high-level and covers “one share, one vote,” board gender diversity, cross-market company share issuances and repurchases, the use of virtual meetings, and pay ratio disclosures. The more in-depth Policy Application Survey drills down into key issues by market and region as well as by topic, such as responsible investment, takeover defenses, and compensation. The Policy Application Survey results provide views of investors and non-investors and the results of these surveys often are a precursor of changes to ISS’ voting policies. [1]

ISS is expected to publish draft 2018 policy updates and open a comment period in late October and release its final policy updates in mid-November. Key takeaways from the Governance Principles Survey are available here. Takeaways of the Policy Application Survey applicable to U.S. public companies are as follows:

Outcomes-Based Compensation Measure Receives Broad Support for Quantitative Analysis

For several years, ISS has calculated and presented a standardized measure of “realizable pay” for CEOs of S&P 1500 companies, which was used in its qualitative analysis. ISS asked its respondents to comment if this measure should also be used in its quantitative analysis.

For short-term programs, the measure considers the difference between target bonus/non-equity incentives versus what is actually paid. For long-term programs, the measure accounts for actual payouts, forfeitures, and the impact of stock price appreciation or depreciation. ISS noted that “realizable pay” is a helpful measure because figures presented in the summary compensation table have become less reflective of compensation actually realized by executives.

ISS noted that in many pay programs there is significant leverage to company performance, allowing executives to earn up to 200% or more of target awards when performance is strong, and also forcing executives to forfeit a significant portion or all of their performance rewards when performance is weak. As a result, many companies have supplemented proxy disclosure to include “realizable pay” to demonstrate the company’s commitment to pay-for-performance.

A large majority of investors (87%) and approximately half of non-investors (54%) supported ISS adding an “outcomes-based” measure, such as realizable pay, as part of ISS’ quantitative pay-for-performance evaluation.

Among the reasons cited for supporting such a measure are that the measure could mitigate concerns regarding pay-TSR misalignment, mitigate concerns regarding excessive pay quantum, or could raise attention to excessive leverage to performance (e.g., large payouts for modest performance).

Non-Employee Director Pay—Current ISS Policy Generally Accepted

According to ISS data, non-employee director pay has increased significantly since 2012. Currently, ISS identifies non-employee director outliers by comparing non-employee director pay to other companies within the same index and GICS. ISS asked respondents which factors should be used in determining if a governance concern exists regarding high pay magnitude or problematic pay structures. A majority of investors (86 respondents) and a substantial majority of non-investors (207 respondents) ranked keeping the current ISS comparisons within the same index and GICS. A smaller portion of respondents (60 in total) indicated that non-employee director pay should be relative to all public companies.

ISS also provides cautionary language in its proxy voting recommendation reports after identifying a pattern (i.e. multiple years) of high non-employee director pay levels at a company. ISS asked respondents to rank appropriate actions in such circumstances, and both investors and non-investors (130 in total) voted that, in year one, ISS should identify the concern but generally not issue an immediate adverse vote recommendation. To a lesser extent (86 in total), respondents also supported holding relevant committee members accountable for two or more consecutive years of high director pay (i.e., adverse recommendations in year two or later).

Respondents Disagree on Gender Pay Gap Reporting

There is an increasing number of shareholder proposals requesting a report on the company’s policies and goals to reduce the gender pay gap. When asked if companies should be disclosing gender pay gap information, 60% of investors supported such disclosure, compared with only 17% of non-investor respondents. A majority of both investor and non-investor respondents cited that such specific pay gap disclosure is not necessary if the company provides robust disclosure of either diversity and inclusion policies and practices, or compensation philosophy and fair and equitable compensation practices.

Mixed Views on Poison Pill Policy

ISS’ current policy provides that short-term pill adoptions (a year or less) that are not put to a shareholder vote are evaluated on a case-by-case basis, considering the disclosed rationale for adoption and the company’s governance practices and track record. The survey asked if ISS should apply the case-by-case basis to recommending “withhold” votes for directors in place when a short-term poison pill is adopted without a shareholder vote.

A large majority of investors (83%) supported a “withhold” recommendation on a case-by-case approach, while non-investors (56%) answered that one-year pill adoptions are generally acceptable and negative recommendations against directors are not warranted.

Endnotes

1ISS received 328 responses to the survey: 77 responses from institutional investors or their services providers, 203 from public companies, and the remaining responses from consultants to public companies or corporate directors. Over 200 responses were from organizations based in the United States.(go back)

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