ISS Publishes its 2011 U.S. Corporate Governance Policy Updates

Last week while I was out, ISS published its 2011 U.S. Corporate Governance Policy Updates, giving corporate America an indication of how ISS will recommend as to votes on executive compensation (and other) issues. The following are the key policies for 2011, including changes from last year's policy:

Shareholder Say on Pay Votes

Regarding Shareholder Say on Pay (SSOP), ISS announced that, if the company maintains problematic pay practices, ISS generally will vote:

• AGAINST SSOP proposals;
• AGAINST/WITHHOLD on compensation committee members (or in rare cases where the full board is deemed responsible, all directors including the CEO) in:
• Egregious situations;
• When no SSOP item is on the ballot; or
• When the board has failed to respond to concerns raised in prior SSOP evaluations; and/or
• AGAINST an equity incentive plan proposal if excessive non-performance-based equity awards are the major contributors to a pay-for-performance misalignment.

The key change to this policy is to revise the list of egregious pay practices that, by themselves, are sufficiently problematic to warrant withhold or against votes in most circumstances (previously, ISS had categorized problematic pay practices as either “major” or “minor”). These egregious practices include: 

• Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);
• Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting;
• New or extended agreements that provide for:
• CIC payments exceeding 3 times base salary and average/target/most recent bonus;
• CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers);
• CIC payments with excise tax gross-ups (including "modified" gross-ups).

Frequency of Say on Pay Votes

ISS has adopted a policy to recommend a vote FOR annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies' executive pay programs.

Vote on Golden Parachutes

ISS' policy will be to recommend CASE-BY-CASE on 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 ISS to recommend a vote AGAINST 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;
• 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; and
• Substantial gross-up provisions carried forward from a preexisting/grandfathered contract in some cases.

ISS adds that, in cases where the company incorporates the golden parachute vote into its SSOP vote, ISS will evaluate the "say on pay" proposal in accordance with the foregoing guidelines, which may give higher weight to that component of the overall evaluation.

Prospective Policies

ISS has ended its past policy of allowing an issuer to reverse a negative recommendation based on problematic pay practices identified in the ISS report by committing to remove the problematic pay practice prospectively. Apparently, an issuer needs to adopt any prospective policies before it files the proxy, in order to get “credit” for them. If a company waits until the proxy is filed and ISS has released its critical report, it is too late to fix it for purposes of their vote recommendations.

Happy Thanksgiving.