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Directors React to ISS Policy Updates for 2012 Proxy Season

On December 1-2, 2011, directors from across the country participated in the Executive Compensation Director’s Forum presented by The Weinberg Center for Corporate Governance of the University of Delaware and The Conference Board’s Governance Center.  At the Forum, directors discussed a wide range of issues related to the challenges of designing and administering appropriate executive programs in a difficult and hard-to-predict economic environment, where compensation decisions are being placed under the microscope by investors, proxy-advisory firms, employees, media and the public.

Among the topics discussed at the forum were the new U.S. and international corporate governance policy updates for the 2012 proxy season, issued by Institutional Shareholder Services (ISS) on November 17, 2011.  The policy updates will apply to shareholder meetings held on or after February 1, 2012.

Governance and compensation experts discussed the updates and changes to ISS policies during the two-day session.  Among the key changes reviewed were the following:

Executive Compensation

Pay for Performance Evaluation.    In seeking input on its policies, ISS reports that an overwhelming majority of institutional investors responding to their survey indicate that two factors are important in evaluating whether to support a company’s “say on pay” proposal:

  • executive pay relative to peers, and;  
  • pay increases that are disproportionate to performance.

In fact, the majority of situations in which ISS recommended against say-on-pay votes in 2011 involved a perceived pay-for-performance disconnect.  (Perhaps the second most common factor was the existence of an “egregious” pay practice.)

Under its current policy, in evaluating the connection between pay and performance, ISS evaluates a company’s one- and three-year total shareholder return (TSR) and whether it falls below the median of the company four-digit GICS industry code, and then reviews changes in CEO compensation during this period. Most frequently, ISS found a disconnect between CEO pay and company performance when there was an increase in year-over-year CEO compensation and the company’s TSR was in the bottom half of companies in its GICS code.

Under the new policy, ISS will examine:

  • A relative company performance component, examining TSR against an ISS-created sample peer group  of 14-24 companies.  Peers will be determined based primarily on market cap and revenue.  The new component will measure both the company’s TSR rank and the CEO’s total pay rank within the peer group and the multiple of the CEO’s total pay relative to the peer-group median.   This comparison will be made over one- and three-year periods, with the three-year period weighted higher at 60 percent of the total.
  • An absolute performance component, which will measure the trend in CEO pay against the company’s annualized TSR during the past five fiscal years.

If this quantitative analysis demonstrates a lack of pay-for-performance alignment, ISS will undertake   qualitative review to make a final decision regarding its voting recommendation.

The issue of how ISS identifies an appropriate peer group was an area of concern among directors, who have to deal with the difficulties inherent in selecting a peer group as part of their responsibility for making compensation decisions.  There is more to come in defining ISS’ peer group and pay-for-performance  methodology, and ISS plans to issue additional technical guidance later this month. One thing is clear:  ISS will not consider the company’s own peer group in setting a peer group for its recommendations.  Another area that raised concerns for directors was the uncertainty over whether companies would be aware of the identify of its ISS-determined peer group before ISS issues its voting recommendations.  ISS has not yet made a decision about this question, but believes the technical guidance it will issue will enable a company  to identify ISS-defined peers on its own.

Board Response to Say on Pay Votes.  In the lead up to the 2012 voting season, there has been a great deal of discussion about what happens with companies that garnered a of majority shareholder support for the company’s say-on-pay proposal, but not overwhelming majority support. Many governance advisors have suggested that there is some level of support above a majority that may indicate a degree of shareholder concern about company compensation.  This, coupled with the view that some shareholders may have given companies the “benefit of the doubt” in the first year on say on pay, led many governance professionals to advise these companies to engage shareholders to identify concerns over executive compensation.

The new ISS policies have taken this discussion a step further, and ISS has adopted a new policy applicable to any company whose last say-on-pay proposal received support of less than 70 percent of the votes cast.  In those cases, ISS will make recommendations on a case-by-case basis with respect to the re-election of compensation-committee members and the company’s say-on-pay proposal.  Among the factors ISS will consider is the company’s response to investor concerns, including disclosure of engagement efforts with institutional investors regarding the issues that led to lower support.

Consistent with the new SEC requirement that a company’s CD&A  (Compensation Discussion and Analysis) address whether and how the company considered its most recent say-on-pay vote in determining executive compensation decisions and policies, the ISS policy recommends that companies with “low votes” should disclose their engagement efforts with institutional investors and identify any specific actions taken to address investor concerns.

Directors heard from a group of investors on this topic, who strongly advised companies that received less than 70 percent say-on-pay support to proactively reach out to investors to identify their concerns.  These investors also noted that they had voted “no” on more say-on-pay votes than recommended by ISS.  At least two of the investors had sent letters to companies that received a “no” vote on say on pay, to engage with the company regarding their concerns.  Companies that have not begun this discussion need to move now, as it will be increasingly difficult for investors to engage quickly during the heart of the proxy season in the 1st quarter.  And companies need to carefully consider who speaks for the company regarding these matters– the company representative should be very knowledgeable not only about the company’s compensation program, but also the governance concerns of investors.  Investor panelists indicated that it is still rare for the company representative to be a member of the compensation committee or the board.

Proxy Access
ISS will continue to make recommendations on proxy-access proposals (both company and shareholder proposals) on a case-by-case basis.  Factors ISS will consider include proposed ownership thresholds, the maximum percentage of directors that shareholders may nominate each year, and the method of determining which nominations appear in the proxy if multiple shareholders submit nominations.  ISS has indicated that it will also consider the proponent’s rationale in its analysis, although the policy no longer specifically references that factor.

To date, shareholders have announced the submission of 11 proxy access proposals, including five proposals made by Norges Bank Investment Management (NBIM), which manages Norway’s $550 billion pension fund, at Wells Fargo, Charles Schwab, Western Union, Staples, Pioneer Natural Resources, and CME Group.   ISS’ continuation of a case-by-case approach is consistent with development of private ordering over time.  Many experts believe proxy access proposals will be made in 2012 primarily at companies that experience particularly poor performance, where existing shareholder dissatisfaction and the likelihood of significant support is high.

Political Spending
Under the 2012 policy updates, ISS will generally recommend votes “For” proposals that seek disclosure of corporate political contributions and trade-association spending, instead of its prior case-by-case evaluation policy.  In addition, ISS will consider the company’s existing disclosure oversight mechanisms and any recent significant controversies, fines or litigation regarding the company’s political contributions or political activities.  Several investors, including CalSTRS and TIAA-CREF, have also indicated their plan to support these proposals subject to their policy guidelines, so companies would be prudent to review their policies in this area.    This approach is consistent with the policy recommended by the Council of Institutional Investors.

Summary-ISS a Blunt Instrument?
Several of the investors and experts at the forum argued that due to the sheer volume of company votes reviewed by ISS, of necessity ISS reviews involve more general tools and analyses that may not fit all companies and are therefore not as customized as companies might prefer.  As a result, it is increasingly important that companies:

  • be aware of how their performance stacks up against these policies; 
  • engage their investors with respect to any concerns that are identified; and 
  • communicate why the company’s practices may need to diverge from ISS or other governance standards and policies. 

In 2011, even companies with a negative say-on-pay recommendation from ISS were overwhelming successful in obtaining a positive vote – but not without a concerted effort to engage with their investors and articulate a strong and rational basis for supporting the company’s plans.

More Information About the Policies and the 2012 Proxy Season
There are several good summaries of the policy changes, including:
 The new policies can be found at
The new ISS policies will also be discussed in the following Governance Watch Webcasts from The Conference Board:

  • December 16, 2011 –  What to Expect in the 2012 Proxy Season; and 
  • January 5, 2012 –  Executive Compensation and the 2012 Proxy Season. 

For more information regarding the webcasts and to register, visit

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One Response to “Directors React to ISS Policy Updates for 2012 Proxy Season”

  1. [...] I noted in my post about the 2012 ISS Policy Updates, in the lead up to the 2012 voting season, there has been a great deal of discussion about what [...]

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