ISS to Recommend Annual Say-On-Pay Votes and Shifts Course on Director Attendance | Dodd-Frank and the Law - 19 Nov 2010

ISS to Recommend Annual Say-On-Pay Votes and Shifts Course on Director Attendance

by
Jill Radloff


  |   November 19, 2010

ISS has issued its 2011 Corporate Governance Policy Update. 
As expected, it will recommend voting for an annual say-on-pay vote and
the update addresses other matters of importance to public issuers.

Frequency of Advisory Vote

In line with its overall client feedback, ISS is adopting a new
policy to recommend a vote FOR annual advisory votes on compensation,
which ISS believes provide the most consistent and clear communication
channel for shareholder concerns about companies’ executive pay
programs.

According to ISS, the management say-on-pay vote, or MSOP, is at its
essence a communication vehicle, and communication is most useful when
it is received in a consistent and timely manner. ISS states it supports
an annual MSOP vote for many of the same reasons it supports annual
director elections rather than a classified board structure — because it
believes this provides the highest level of accountability and direct
communication by enabling the MSOP vote to correspond to the majority of
the information presented in the accompanying proxy statement for the
applicable shareholders’ meeting.  ISS believes having MSOP votes every
two or three years, covering all actions occurring between the votes,
would make it difficult to create the meaningful and coherent
communication that the votes are intended to provide.  Under triennial
elections, for example, ISS believes a company would not know whether
the shareholder vote references the compensation year being discussed or
a previous year, making it more difficult to understand the
implications of the vote.

Golden Parachute Vote

When an advisory vote on golden parachute compensation is required by
the Dodd-Frank Act, ISS’ policy will be to make recommendations on a
case-by-case basis for proposals to approve the company’s golden
parachute compensation, consistent with ISS’ policies on problematic pay
practices related to severance packages.  Features that may lead to an
AGAINST recommendation include:

• Recently adopted or materially amended agreements that include excise tax gross-up provisions (since prior annual meeting);


• Recently adopted or materially amended agreements that include modified single triggers (since prior annual meeting);


• Single trigger payments that will happen immediately upon a change
  in control, including cash payment and such items as the acceleration of
  performance-based equity despite the failure to achieve performance
  measures;


• Single-trigger vesting of equity based on a definition of change in
  control that requires only shareholder approval of the transaction
  (rather than consummation);


• Potentially excessive severance payments; or


• Recent amendments or other changes that may make packages so
  attractive as to influence merger agreements that may not be in the best
  interests of shareholders.

In cases where the golden parachute vote is incorporated into a
company’s separate advisory vote on compensation, ISS will evaluate the
“say on pay” proposal in accordance with these guidelines, which may
give higher weight to that component of the overall evaluation.

Director Attendance

ISS’ current policy is to recommend a vote AGAINST or WITHHOLD from
individual directors who attend less than 75 percent of the board and
committee meetings without a valid excuse, such as illness, service to
the nation, work on behalf of the company, or funeral obligations.  If
the company provides meaningful public or private disclosure explaining
the director’s absences, ISS will evaluate the information on a
case-by-case basis taking into account the following factors:

• Degree to which absences were due to an unavoidable conflict;


• Pattern of absenteeism; and


• Other extraordinary circumstances underlying the director’s absence.

The key policy change is to remove the private disclosure option for
explaining absences; articulating the reasons that are acceptable; and
clarifying the policy application when the attendance disclosure does
not conform with SEC requirements.

In 2011, ISS will generally recommend a vote AGAINST or WITHHOLD from
individual directors who attend less than 75 percent of board and
applicable committee meetings (with the exception of new nominees). 
Acceptable reasons for director(s) absences are generally limited to the
following:

• Medical issues/illness;


• Family emergencies; and


• If the director’s total service was three meetings or less and the director missed only one meeting.

These reasons for director(s) absences will only be considered by ISS
if disclosed in the proxy or another SEC filing.  If the disclosure is
insufficient to determine whether a director attended at least 75
percent of board and committee meetings in aggregate, ISS will generally
recommend a vote AGAINST or WITHHOLD. 

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