ISS has made available for public comment certain proposed changes to ISS’ benchmark voting policies for 2018 that could generally become effective for the upcoming proxy season. In the U.S., ISS is proposing three changes:
- Gender Pay Gap Shareholder Proposals: ISS is proposing specific factors to consider when making a recommendation with respect to gender pay gap shareholder proposals, including a company’s current diversity and inclusion policies and related disclosure, whether the company has been the subject of recent controversy or litigation related to gender pay gap issues and whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers.
- Non-Employee Director Compensation: The policy will focus on excessive non-employee director pay without a compelling rationale or other mitigating factors. There would be no impact on vote recommendations in 2018 for directors as a result of this proposed policy.
- Poison Pills: ISS is proposing to recommend against all board nominees, every year, at companies who maintain a long-term poison pill that has not been approved by shareholders.
The comment period will run through 5:00 p.m. ET on November 9, 2017. ISS expects to announce its final 2018 benchmark policy changes during the second half of November.
Gender Pay Gap Shareholder Proposals
To date, ISS has applied its global “case-by-case” approach on social/environmental issues when analyzing gender pay gap proposals. The proposed new policy provides more specificity but is not a major shift in ISS’ current policy approach.
In the proposed new policy ISS’s policy will be to recommend votes on a case-by-case basis on requests for reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account:
- The company’s current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy and fair and equitable compensation practices;
- Whether the company has been the subject of recent controversy or litigation related to gender pay gap issues ; and
- Whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers.
ISS believes the proposed policy provides more clarity regarding ISS’ approach as the subject seems to be one that is going to continue and potentially grow in terms of the number of shareholder proposals filed in the short to medium term. ISS does not expect the proposed policy to have a significant impact on vote recommendations.
Non-Employee Director Compensation
Although non-employee director compensation, which ISS refers to as NED, varies by company size and industry, ISS believes it has identified some extreme pay outliers at which excessive compensation is sometimes not clearly explained. Currently, NED compensation is broadly addressed under ISS’ five Compensation Global Principles. The fifth principle states that companies should avoid inappropriate pay for non-employee directors.
The proposed new policy would explicitly provide for adverse vote recommendations for board committee members who are responsible for approving/setting NED compensation when there is a pattern (i.e. two or more consecutive years) of excessive NED pay magnitude without a compelling rationale or other mitigating factors.
There would be no impact on vote recommendations in 2018 for directors as a result of this proposed policy. Going forward, negative recommendations would be triggered only after a pattern of excessive NED pay is identified in consecutive years. ISS expects a minimal impact for boards as the policy is focused on extreme director pay outliers.
The current policy with respect to poison pills is as follows:
- Recommend against the full slate of directors for companies that maintain a pill that has a “deadhand” or “slowhand” feature.
- For long term pills, or those with a term in excess of one year, whether ISS makes an adverse recommendation depends on whether the board is annually-elected or classified. ISS recommends against all nominees every year if the board is classified, but, if the board is annually elected, only once every 3 years. Companies who had newly adopted a pill could be exempt from adverse vote recommendations by making a commitment to put the pill to a binding shareholder vote at the next year’s annual meeting.
- ISS’ current policy was put into place on Nov 19, 2009. Boards that adopted pills prior to that date were grandfathered from the policy and do not receive adverse vote recommendations.
- The adoption (but not the renewal) of a short-term pill is considered on a case-by-case basis and generally does not cause an against recommendation on the board if there was a compelling rationale for its adoption and the company has a generally good governance track record.
ISS is proposing to update the policies outlined above, and recommend against all board nominees, every year, at companies who maintain a long-term poison pill that has not been approved by shareholders. Therefore annually-elected boards would receive adverse recommendations on an annual basis, rather than every 3 years. Commitments to put a long-term pill to a vote the following year would no longer be considered a mitigating factor. The boards with the 10-year pills currently grandfathered from 2009 would no longer be exempt and would receive against recommendations. With the proposed removal of grandfathering, there will also be no need to have an explicit policy regarding deadhand or slowhand features, as the few remaining deadhand/slowhand pills are not approved by shareholders and would be covered under the proposed policy.
Short-term pill adoptions would continue to be assessed on a case-by-case basis, but the proposed policy update would focus more on the rationale for their adoption than on the company’s governance and track record. Renewals or extensions though, as with the current policy, will not receive the case-by-case assessment.