ISS PUBLISHES ANNUAL POLICY SURVEY RESULTS SUMMARY
By Bradley A. Robinson
October 13, 2011
Each year, Institutional Shareholder Services (“ISS”) conducts a survey of its institutional investor clients as well as the corporate issuer community in order to gauge the market’s views of a number of corporate governance issues. This survey serves as a critical component of ISS’s corporate governance policy formulation for the upcoming year. As such, and given the outsized influence of ISS in comparison with competitors in the proxy advisory arena, it is important for issuers to be aware of the results of the survey as well as understand how those results will affect them. This year’s survey was conducted from July 6, 2011, through August 26, 2011, and released late September 2011.
Overview of Results
Top issues for investors and issuers were: Compensation, Board Independence, and Risk Oversight. As has been the case for several years, compensation remains a top issue for both investors (60%) and issuers (61%) in North America. Globally, board independence has also remained near the top of the list for investors, while risk oversight remains a key concern for issuers.
Shareholder engagement is another key area of concern of ISS. In 2011, according to the survey results, engagement has increased from 2010, with the vast majority of respondents stating that engagement had either stayed the same or increased from the previous year. At Eagle Rock, we believe that shareholder engagement is an integral component of good corporate governance, the importance of which only increases as more issuers adopt comprehensive and/or year-round programs.
As changes to the proxy statement reporting rules change, so must the focus of investors and issuers. With additional disclosures regarding director qualifications, issuers should pay particular attention to the most relevant details investors and ISS will look for. In 2011, the survey results were fairly straightforward, with relevant industry experience topping the list, followed by biographic information and performance/governance of other companies where a director serves or served. Least relevant were ISS votes at other companies and continuing director education. While not covered in the survey, the possibility of “private ordering” of proxy access by shareholders could make director qualification disclosures a major issue going forward (for more on private ordering please read this article at rtco.com: SEC Announces Effectiveness of Rule 14a-8, Allowing “Private Ordering” of Proxy Access).
As mentioned, compensation practices remain a top concern for investors and issuers alike.
Specific areas of interest and results for compensation practices include:
- Pay levels compared to peers and relative to performance are important to both issuers and investors. While investors were more likely to find this more important than issuers, both recognize the importance of aligning executive pay with peers and performance.
- Discretionary awards not aligned with company performance are “problematic.” Discretionary awards in general have been an increasing area of concern over recent years. Those not linked to performance will likely be a red flag for investors and proxy advisors alike.
- There is a disconnect between investors and issuers on the issue of what level of opposition to say-on-pay should trigger an explicit response by the board. The largest block of investors believes that this threshold should be 20%, with 72 percent of investors agreeing that at 30% opposition would require a response. In contrast the largest block of issuers believes that the threshold should be 50%.
- Investors are less likely to take into account positive factors in mitigating the cost of equity plans. Investors should be aware of SVT (Shareholder Value Transfer) calculations. In the past, factors such as good performance, lower burn rates, and strict vesting requirements were a larger factor in mitigating the cost of equity plans. This should be considered a part of a larger trend in added scrutiny of equity plans, as most investor respondents said negative factors like poor performance and liberal vesting requirements (including single trigger change in control vesting), among other negative factors of equity plans, would weigh "very much" against a plan.
Other Key US Governance Issues
As noted, another major concern for investors is Board Independence. While this is an international concern, general support for increased board independence is on the rise in the US and support among the investor community for an Independent Board Chair has grown to 70%. In contrast, 73% the issuer community believe that a company should not commit to an independent chair.
Another key finding of the survey was that, when considering reincorporations and mergers, shareholder rights can play a significant role in determining whether to support a proposal. For a significant, but minority, portion of the respondents, a reduction in shareholder rights could outweigh economic considerations.
Finally, among the major findings that should be highlighted, investors overwhelmingly felt that shareholders should have the right to approve stock-based transactions (“private placements”). Under current law, and common practice, issuers may enter into stock-based transactions in excess of 20% of outstanding shares without shareholder consent, so long as consent is sought before a transaction for the stock is finalized. Usually these agreements have significant economic penalties to the issuer if shareholder consent is not obtained. In the survey, investors expressed the strong preference that issuers not circumvent shareholder consent by issuing convertible securities subject to penalties, prior to shareholder consent on the merits of the transaction.
For more details, see: