On November 20, ISS released 2016 updates to its benchmark proxy voting policies for the Americas, EMEA, and Asia-Pacific regions. The updated policies will generally be applied for shareholder meetings on or after Feb. 1, 2016. The release of the policy updates follows an in-depth process including ISS’ annual policy survey, a comment period and consultation process, and roundtables to discuss potential changes to policy and their implications.
For most directors, except for standing CEOs, the maximum number of public company boards that a director can sit on before being considered overboarded under ISS’ benchmark policy is being reduced from six to five. There will be a one-year grace period until 2017 before recommendations will be made against directors now considered overboarded under the policy change, giving directors and companies sufficient time to make any changes in advance of the 2017 proxy season, should they wish to do so. During 2016, ISS research reports will highlight if a director is on more than five public company boards, but adverse voting recommendations will not be issued under this new overboarding policy unless the current maximum of six boards is exceeded. For CEOs, the current overboarding limit will remain at two outside directorships.
Since ISS adopted its original overboarding limits, the average time commitment for board service has grown. According to the National Association of Corporate Directors’ (NACD) 2014-2015 Public Company Governance Survey, respondent directors of public companies now spend an average of 242 hours a year (or more than 30 eight-hour work days annually) on board service. This typical time commitment jumps up to 278 hours (or nearly five more eight-hour work days) when you add in the survey respondents’ estimates of additional time spent in informal meetings/conversations with management. By comparison, the average annual director time commitment reported by NACD’s survey respondents in 2005 was 190 hours (or fewer than 24 eight-hour work days).
Unilateral Bylaw/Charter Amendments
ISS is updating its benchmark policy on unilateral bylaw and charter amendments to separate the methodology for evaluating adoptions of bylaw or charter provisions made prior to or in connection with a company’s initial public offering from the methodology for evaluating unilateral board amendments to the bylaws or charter made following completion of a company’s initial public offering.
A significant percentage of recent IPOs in the U.S. have included provisions that limit board accountability to post-IPO investors and make it difficult for shareholders to amend the company’s governing documents or take other corporate actions. While some pre-IPO boards argue that these governance structures will benefit investors over the long run, few of them provide opportunities for post-IPO shareholders to ratify these provisions post-IPO. Notably, many recently IPOed companies have limited directors’ accountability to shareholders by staggering board terms (via classified boards) and adopting supermajority vote provisions to amend the firms’ governing documents.
Under the revised policy, boards that adopt changes to governing documents are now potentially subject to continuing recommendations against reelections until the amendments are reversed or ratified by the shareholders, including boards at recently listed companies that adopt pre-IPO provisions that are particularly detrimental to shareholders.
ISS has updated its policy on contested elections to include a framework for evaluating candidates to the board nominated by a shareholder through a proxy access provision. The circumstances and motivations of a proxy contest and a proxy access nomination may differ significantly. Therefore, it is necessary to create adequate analytical latitude for evaluating candidates nominated through proxy access.
Additionally, at “externally-managed issuers” (EMIs), when the company does not disclose any of the compensation arrangements, or a very limited amount of executive compensation data, ISS will generally recommend against the company’s say-on-pay proposal. EMIs typically do not disclose any details about their compensation arrangements or payments made to executives by external managers. Many EMIs do not provide even basic disclosure regarding executive compensation arrangements and payments between the external manager and the EMI’s executives, based on ISS observations of recent proxy filings. When “executive compensation information” is disclosed, it is usually limited to the aggregate management fee paid by the EMI to its manager. Without adequate information, shareholders are unable to conduct a reasonable assessment of executive compensation arrangements in order to identify potentially problematic aspects of those arrangements and to make an informed decision when voting on the EMI’s say-on-pay proposal.
ISS has also updated its policy on equity retention proposals, broadening the framework for evaluating these proposals, and also updated some Environmental and Social proposal benchmark policies to adjust for evolving language in shareholder proposals and to codify the current approach to evaluating these proposals.
Equity Plan Scorecard
Similar to the model introduced in the United States for the 2015 proxy season, ISS is adopting a “scorecard” model (Equity Plan Scorecard – “EPSC”) for Canadian TSX equity plans that considers a range of positive and negative factors to evaluate equity incentive plan proposals. In concert with ISS’ longstanding Canadian benchmark policies for TSX equity plans (relating to non-employee director participation, amendment provisions, and repricing without shareholder approval), the total EPSC score will determine whether ISS recommends for or against the proposal.
ISS has also updated its overboarding policy for Canada, changing the definition of an overboarded director to a CEO who sits on more than one outside board, and any director who is not a CEO who sits on more than four outside boards. However, recommendations against directors will generally be made only in cases where the overboarded director also fails to attend at least 75 percent of the meetings where s/he is expected to be present.
ISS has also adopted a new Canadian benchmark policy on EMIs. Such companies will, similar to the U.S., risk against recommendations when they do not provide sufficient information for shareholders to effectively evaluate executive compensation. However, say-on-pay resolutions are voluntarily adopted in Canada, and none of the currently identified Canadian EMIs had a say-on-pay resolution on the ballot this past year, according to ISS records. Additionally, all non-controlled TSX-listed issuers are required to adopt majority voting director resignation policies which could result in a director being required to resign from a board if s/he receives more ‘withhold’ than ‘for’ votes at the shareholders’ meeting. Some investor respondents to ISS’ 2015-16 ISS Global Policy Survey indicated that in cases where an externally managed company does not have a say-on-pay proposal (i.e., ‘withhold’ votes may be recommended for individual directors), factors other than disclosure should be considered, such as performance, compensation and expenses paid in relation to peers, board and committee independence, conflicts of interest, and pay-related issues. Policy outreach sessions conducted with Canadian institutional investors resulted in identical feedback.
For Brazil, ISS updated its benchmark policy for evaluating directors and fiscal council members when the nominee names are not disclosed, its benchmark policy for director elections when the chair/CEO roles are both held by the same person, its benchmark policy for addressing director conflicts of interest, and its benchmark policy for evaluating proposals seeking approval for management compensation and equity compensation plans.
EUROPE, MIDDLE EAST, & AFRICA
ISS has made a number of changes to its European benchmark policy for 2016. Key changes include a three-year minimum vesting period required for long-term incentive plans in France, which aligns ISS’ benchmark policy for French companies with the same vesting periods used in other continental European markets, as well as with local guidelines and investor views. For the U.K. and Ireland, benchmark policy is being updated for share issuance authorities to reflect new 2015 U.K. market guidelines and clarifying that a disapplication of pre-emption rights over up to 10 percent of the issued share capital will be acceptable, provided that the extra 5 percent above the original 5 percent is to be used only for the purposes of an acquisition or a specified capital investment.
In March 2015, the Pre-Emption Group, a U.K. body which includes representatives of companies and investors, issued revised guidelines. The revised guidelines now permit companies to seek shareholder approval for an extra 5 percent disapplication in addition to the standard 5 percent, provided that the additional 5 percent is used only in connection with an acquisition or a specified capital investment. A “specified capital investment” is defined as “one or more specific capital investment related uses for the proceeds of an issuance of equity securities, in respect of which sufficient information regarding the effect of the transaction on the listed company, the assets the subject of the transaction and (where appropriate) the profits attributable to them is made available to shareholders to enable them to reach an assessment of the potential return.” Among others, the key U.K. investor trade bodies (the Investment Association and the Pensions and Lifetime Savings Association (previously known as the National Association of Pension Funds)) have endorsed the new guidelines.
The policy for the U.K. and Ireland is also changing with regard to overboarding to make explicit reference to a recommended maximum number of boards on which directors should sit, and that ISS may recommend against directors considered overboarded. The policy changes also clarify how ISS assesses director attendance at board and committee meetings, which will be considered when a director holding multiple board positions stands for election or reelection.
The U.K. Corporate Governance Code specifies a recommended limit of no more than one FTSE 100 non-executive directorship to be held by executive directors. Although there is no stated limit in the Code for chairmen or non-executives, the Code does emphasize that “all directors should be able to allocate sufficient time to the company to discharge their responsibilities.” It is a common feature of ISS’ client’s voting policies that overboarding is considered in the context of a specific recommended maximum number of board seats. The approach to be applied in the U.K. is consistent with ISS’ European policy.
Other Policy Updates
ISS has updated its EMEA benchmark policies in several other areas, including expanding its policies on auditors at companies on the FTSE All Share (in the U.K.) and MSCI-EAFE (in continental Europe) to now be used to evaluate smaller companies. Other policy updates address untimely or insufficient disclosure in director elections in the U.K. and Ireland; expand ISS antitakeover policy for France from the CAC40 to cover all companies; expand policy parameters around director independence in Russia; and update policies on director elections, remuneration plans, and equity incentive plans in South Africa.
European Pay for Performance Model
In addition to the 2016 European benchmark policy updates, ISS is also announcing a new European pay-for-performance assessment model which will be introduced in 2016. This will initially cover 600 or so of the largest European companies (based on the STOXX 600 index), and extends ISS’ quantitative pay-for-performance assessments beyond the models historically used for the U.S. and Canadian markets. The ISS European pay-for-performance model will assess quantitative elements, considering both relative pay-for-performance alignment compared with selected peer groups and absolute pay-for-performance alignment measures. The methodology incorporates models for Relative Degree of Alignment, Multiple of Median, and Pay-TSR Alignment, akin to those used in ISS’ models for the U.S. and Canada. For more on ISS’ new European pay-for-performance model and methodology, please click here.
For the Asia-Pacific region, ISS’ benchmark policy changes for 2016 include the adoption of a new policy on director elections in Japan under which ISS will recommend against top executives of companies if the board, after the shareholders meeting, does not include at least two outsiders. Japan’s Corporate Governance Code (which took effect in June) encourages companies to appoint at least two independent outside directors based on independence criteria developed by the Tokyo Stock Exchange. In addition, recently-updated corporate law requires companies without any outside directors to explain why the appointment of outside directors is inappropriate. ISS data, as of the end of June 2015, shows that just shy of 55 percent of Japanese companies already have at least two outside directors.
Other policy updates in the AsiaPac region include a more stringent review of poison pills at Japanese companies. The current poison pill policy was formulated a decade ago when Japanese companies first started to introduce pills. Given the potential for pills to be misused, particularly by insider-dominated boards, the policy was intended to set a reasonably stringent threshold for Japanese companies, factoring in corporate governance and information disclosure practices at that time.
Today, the situation is different from a decade ago. There is a noticeable trend toward accepting outside oversight at Japanese companies, and an increasing number of companies have started to make their proxy circulars available to shareholders on stock exchange websites in recent years. Accordingly, the threshold conditions for supporting a pill in Japan reflect shareholders’ expectations for increased board independence and more timely disclosure.
In South Korea, ISS will recommend on director elections based on minimum independence criteria, at small companies as well as large companies, and will place greater scrutiny on disclosure at proposals seeking approval on remuneration caps for internal auditors.
In China, ISS introduced updates to its related party transactions policy regarding loan financing requests for company subsidiaries and associate companies. In China and in Hong Kong, ISS introduced a policy covering employee share purchase plans. Additional updates were made to director election policies in Hong Kong and Singapore, to the share issuance request policy in Singapore, and to introduce a new policy covering the acceptance of deposits from shareholders and/or the general public at Indian companies, as well as changes to the general Asian-Pacific policy.
For additional details on these and other ISS 2016 benchmark policy updates, please visit theISS Policy Gateway