ISS Releases Its 2011 Policy Updates, Including Say-on-Pay Vote Policies
(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
November 23, 2010
On November 19, the shareholder advisory group Institutional Shareholder Services (ISS) released its 2011 Corporate Governance Policy Updates. This is ISS’s annual list of policies indicating how it will recommend that shareholders vote on various matters. The 2011 policies shed light on ISS’s likely recommendations regarding the new Say-on-Pay vote and frequency vote (“Say When on Pay”) required at 2011 annual shareholders meetings under the Dodd-Frank Act. Among the important policies are the following:
- As expected, in connection with frequency votes, ISS indicated that it will recommend a vote for annual Say-on-Pay votes (rather than biennial or triennial votes). ISS believes Say-on-Pay is most effective as a communication vehicle if the vote occurs every year.
- If ISS concludes that a company has “problematic” compensation practices, ISS will generally recommend a vote against the Say-on-Pay proposal, but won't necessarily recommend a “withhold” vote relating to compensation committee members. However, ISS will recommend withhold votes on compensation committee members when there is no Say-on-Pay vote. For example, if a company adopts triennial Say-on-Pay vote frequency, in the “off years” between votes, ISS would react to problematic practices by recommending withhold votes on committee members.
- If ISS concludes that a company has some pay practices that are “egregious” (i.e., worse than problematic), it may recommend withhold votes on compensation committee members, regardless of whether there is a Say-on-Pay vote that year. ISS includes on this list (i) extraordinary relocation benefits (including home buyouts), (ii) change in control payments in excess of three times base salary and target bonus, (iii) new or materially amended agreements that provide for excise tax gross-ups and (iv) repricing or replacement of underwater options without shareholder approval.
The Say-on-Pay era definitely increases the clout of ISS and other shareholder advisory groups. In fact, I heard an unsubstantiated rumor that “ISS” actually stands for “Influence Surpassing Senators”.
Proposed SEC Rules Become More Portable
I noticed that two sets of lengthy SEC proposed rules have now been published in the Federal Register. These versions have smaller type and fewer pages, making them much easier to carry around with me everywhere. The proposed SEC rules on shareholder advisory votes (including Say-on-Pay) print out on 31 pages (compared to 122 for the original SEC version). The proposed whistleblower rules print out on 69 pages (compared to the original 181).
This is great news! Now I can easily bring the proposals to the family Thanksgiving dinner – and if I spill gravy on them, it’s easy to print out new copies.