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Board Response to Management Say-on-Pay Vote (U.S.)

 

Background and Overview

The U.S. market experienced near universal management say-on-pay (MSOP) votes in 2011. The Dodd-Frank Act, which mandated these advisory votes, also requires issuers to report whether and how their compensation policies and decisions have taken into account the results of the most recent say-on-pay vote. For companies that fail to receive a meaningful level of support for their say-on-pay proposals, shareholders will be looking for substantive disclosure to determine whether the company has taken sufficient actions to address any compensation concerns underlying such votes.

According to the results of ISS' 2011-12 policy survey, 100 percent of investor and issuer respondents believe that there should be an explicit response from the board regarding improvements to pay practices if an MSOP proposal receives more than 50 percent opposition. While there is more divergence of opinion with respect to lower opposition levels, on a cumulative basis 86 percent of investors (and 52 percent of issuers) believe an explicit response is warranted if the MSOP received more than 40 percent opposition, and 72 percent of investors (versus 40 percent of issuers) believe that opposition in excess of 30 percent requires an explicit response.

Key Changes Under Consideration

This policy update clarifies that ISS will recommend CASE-BY-CASE on Compensation Committee members (or in rare cases where the full board is deemed responsible, all directors) and the current MSOP proposal if the company's prior say-on-pay proposal received significant opposition from votes cast, taking into account:

  • The level of opposition;
  • The company's ownership structure;
  • Disclosure of engagement efforts with major institutional investors regarding the compensation issue(s);
  • The company's response;
  • Specific actions taken to address the issue(s) that appear to have caused the significant level of against votes;
  • Other recent compensation actions taken by the company; and
  • ISS' current analysis of the company's executive compensation and whether any prior issues of concern are recurring or one-time.

A higher level of scrutiny will be placed on companies where the MSOP proposal received less than 50 percent support from all votes cast. Further, the recurrence of previously identified compensation issues or newly identified compensation concerns, depending on the severity, may result in an AGAINST vote on Management Say on Pay and the Compensation Committee members.

Intent and Impact

ISS considers compensation committee and board responsiveness in our analysis of executive compensation (i.e., MSOP) policy. We are proposing to clarify our approach with respect to these factors in the context of MSOP votes, due to the current volume of those proposals. When a significant number of shareholders opposes a company's MSOP proposal, an appropriate response from the company must include disclosure of its outreach efforts to major institutional investors as well as concrete actions that it has taken or will take to address the compensation issue(s) that resulted in significant opposition votes. These specific actions taken should ideally be new rather than a reiteration of existing practices. The company's disclosure should be comprehensive and meaningful; boilerplate disclosure is generally of minimal use to shareholders and, as such, does not constitute a sufficient response.

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:

  • Does a support level of less than 70 percent warrant an explicit response from a company to address concerns – i.e., including actions or an action plan?  If not, what opposition level warrants an explicit response?
  • Should boards be expected to provide an explicit response to a low supported MSOP proposal by the year following that vote; or should accountability be based on the results of more than one low MSOP vote?
  • Are there additional factors that investors should consider for the case-by-case analysis, besides those mentioned above?

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.