Say on Golden Parachute Proposals (U.S.)

Background and Overview

The Dodd-Frank Act requires companies to hold separate shareholder votes on potential “golden parachute” payments when they seek shareholder approval for mergers, sales, and certain other transactions. Since the SEC mandate on golden parachute proposals did not take effect until April 25, 2011, most proposals were submitted after July 2011. Covering meeting dates from Jan. 1, 2012, to Oct. 4, 2012, the average support on Golden Parachute proposals across ISS' coverage universe was approximately 81 percent, while support for the underlying transactions averaged above 95 percent of votes cast. Compared to the 2012 average vote on management say-on-pay proposals of 91 percent, the lower level of support on golden parachute proposals stand out.

According to the results of ISS' 2012-2013 policy survey, 74 percent of investor respondents believe that excessive golden parachute payments are problematic when shareholders consider them in evaluating both the management say-on-pay and say on golden parachute agenda items. More than a majority of ISS' institutional investor clients suggest that payments resulting from problematic severance features, such as single triggered equity, excise tax gross-ups, and modified single triggered cash severance, are objectionable regardless of the timing of the arrangement.

ISS’ 2011 and 2010 policy survey results also indicated that the majority of investor respondents do not favor single trigger equity vesting upon a change in control.

Key Changes Under Consideration

ISS is proposing to update its current policy on Golden Parachute proposals to (1) include existing change-in-control arrangements maintained with named executive officers rather than focusing only on new or extended arrangements and (2) to place further scrutiny on multiple legacy problematic features in change in control agreements.

ISS’ proposed policy reads as follows:

Vote CASE-BY-CASE on say on Golden Parachute proposals, including consideration of existing change-in-control arrangements maintained with named executive officers rather than focusing primarily on new or extended arrangements.

Features that may result in an AGAINST recommendation include one or more of the following, depending on the number, magnitude, and/or timing of issue(s):

  • Single- or modified-single-trigger cash severance;
  • Single-trigger acceleration of unvested equity awards;
  • Excessive cash severance (>3x base salary and bonus);
  • Excise tax gross-ups triggered and payable (as opposed to a provision to provide excise tax gross-ups);
  • Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or
  • Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or
  • The company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote.

Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis. However, the presence of multiple legacy problematic features will also be closely scrutinized.

In cases where the golden parachute vote is incorporated into a company's advisory vote on compensation (management say-on-pay), 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.

Intent and Impact

The proposed policy update aligns with the feedback from ISS' 2012-13 policy survey results with respect to parachute proposal-related questions.

Based on 94 say on golden parachute proposals held in 2012, the following table shows the number of companies with one or more problematic practices:

Number of Problematic Pay Practices

Company Count (#)

Company Count (%)

Cumulative Company Count (%)

None

10

10.64%

10.64%

1 only

45

47.87%

58.51%

2 only

36

38.30%

96.81%

3 only

3

3.19%

100%

Total

94

 

 

The impact of the proposed policy will likely increase the number of ISS’ negative vote recommendations.

Request for Comment

Please feel free to add any additional information or comments on the proposed policy change.  In addition, ISS is specifically seeking feedback on the following:

  • In your organization’s view, when evaluating payments arising from problematic pay practices in the context of a say on golden parachute proposal, would you differentiate between new and existing arrangements when determining whether to support the proposal? If yes, please specify.
  • Would the number of problematic features be a consideration when evaluating a say on golden parachute proposal? If yes, please specify.
  • Are there any other factors that should be considered in evaluating say on golden parachute proposals? If yes, please specify.

To submit a comment, please send via e-mail to policy@issgovernance.com. Please indicate your name and organization for attribution. While ISS will consider all feedback that it receives, comments will not be published without attribution.

All comments received will be published as received, unless otherwise requested in the body of the e-mail submission.