2017 ISS Policy SurveyMorrowSodali
As if to remind us that corporate governance is now truly a year-round process, ISS has released its 2017 policy survey in the middle of the doldrums of summer. The release kicks off a policy review process that will, in addition to the survey, include regional-based, topic-specific roundtables to examine local market best practices and gather input, as well as an open comment period. This will culminate with the release of revised policies in November. Commenting on the process, ISS President & CEO Gary Retelny said “…we will continue to raise the bar on engagement with governance stakeholders.”
This year’s survey includes 18 questions covering a number of governance and compensation topics across multiple markets (8 questions pertain to U.S.-based companies). The survey can be found, and completed, by clicking here.
The survey questions are more directional in nature and, ultimately, topics covered in the survey may not be addressed in ISS’ 2017 voting policy update. Conversely, issues not addressed in the survey may surface during the market outreach and comment period. It is safe to say the survey provides a window into what may be on the minds of the proxy voting groups at your institutional investors. Below we have summarized matters addressed in the survey for the U.S. market:
- Overboarding – The first question asks whether a non-executive chair should be held to the same standard as a CEO when it comes to overboarding. Overboarding can result in an against or withhold recommendation. Currently, non-executive chairs are categorized as “non-executive” directors and therefore are subject to the overboarding policy applied to such directors, i.e., no more than 5 total public company directorships. Sitting CEOs are subject to a higher standard and will receive a negative recommendation for sitting on more than 3 boards (their own plus 2 outside boards). The survey question asks whether a non-executive chair should be held to the same standard as a sitting CEO.
- Dual-Class Structure – Current ISS benchmark policy states that ISS will generally recommended a vote against/withhold on directors at IPO companies (or those emerging from bankruptcy) which have unfriendly shareholder terms in their bylaws (such as classified board or supermajority vote requirements). The survey questions whether or not ISS should issue a negative recommendation on directors at companies that go public, or emerge from bankruptcy, which have a structure containing multiple classes of stock with unequal voting rights.
- Director Tenure – As we have noted in previous Morrow Sodali publications, director tenure is on the minds of many institutional investors and the advisory services. ISS is asking responders if any of the below factors raise concern with an issuer’s “nominating and refreshment processes.”
- The lack of newly appointed board members (e.g. five years),
- Lengthy average director tenure (e.g. average board tenure greater than 10 years or 15 years),
- A high ratio of long-tenured directors (e.g. three-fourths of the board having served 10+ years).
- Maryland REIT Law – The survey states Maryland REITs make up almost 80% of all publicly-traded REITs in the United States. As of 2015, more than 2/3 of Maryland REITs, under Maryland REIT law, give their board the authority to amend the bylaws and increase authorized shares without shareholder approval. ISS asks whether or not its policy should recommend voting against Maryland incorporated REIT directors who have not opted out of these provisions in their bylaws; and if so, whether it should be the governance committee chair, the entire governance committee, some other subset of directors, the full board, or no board members.
- Maryland Unsolicited Takeover Act (MUTA) – The survey also has a question about the Maryland Unsolicited Takeover Act (MUTA) (which has been a hot topic among some labor funds). MUTA allows the board to make changes to a company’s capital structure and by laws/charter (without shareholder approval) including, but not limited to:
- the ability to re-classify a board;
- the exclusive right to set the number of directors;
- limiting shareholders’ ability to call special meetings to a threshold of at least a majority of shares.
ISS asks whether its policy should recommend voting against directors who have not opted out of MUTA, and similar to the Maryland REIT law question, whether it should be the governance committee chair, the entire governance committee, some other subset of directors, the full board, or no board members.
- Say-on-Frequency – Many U.S. companies will have Say-on-Frequency on the ballot again at their 2017 annual meetings and ISS questions how institutions vote on such proposals: annual, biennial, triennial, or “it depends” with a follow-up question requesting more detail.
- Cross-Border Executive Pay Assessments – A number of companies are incorporated in one country and listed on an exchange in another. ISS reviews compensation proposals “under the policy of the country whose laws or listing rules require the proposal to be put to a vote, but generally aligns the vote recommendations of the proposals based on the policy perspective of the country in which the company is listed.” ISS questions whether proxy voting personnel believe that A) Vote recommendations should be aligned so conflicting recommendations are not given or, B) If a company is incorporated in the U.K but listed in the U.S., for example, conflicting recommendations may occur (let’s say for in the U.K. and against in the U.S.) Is it acceptable to have opposing vote recommendations if each reflects the underlying policy of the relevant country?
- Pay-for-Performance Metrics – TSRs over multiple periods of time are used in ISS’ pay-for-performance quantitative modeling to identify misalignment between CEO pay and performance. ISS questions whether or not responders would support ISS incorporating other financial metrics into their pay-for-performance quantitative screens and, if so, which two metrics are appropriate:
- Revenue metrics (such as total revenue or revenue growth),
- Earnings metrics (such as EPS or EBITDA),
- Return metrics (such as ROA or ROE),
- Return on investment metrics (such as ROIC),
- Cash flow metrics (such as OCF or FFO),
- Economic profit metrics,
- Or other metrics, and if so, which ones.
ISS typically publishes the results of the survey at the end of September, has a comment period from late September to early October and releases the final policy in November (to be effective February 1, 2017). We will continue to monitor this and update you as events unfold.
Please contact your Morrow Sodali representative if you have any questions.
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