Yes, it’s that time of year again. Turkey, Black Friday, decking the halls, office parties, and the annual issuance of ISS’s voting policies for the coming year.
To make sure I’m on Santa’s good list, I need to be honest – and, to be honest, the 2018 changes seem rather benign. In fact, as noted below, ISS hasn’t gone as far as some of its mainstream members in terms of encouraging board diversity and sustainability initiatives.
Here’s a quick rundown on the key changes for 2018:
- Director Compensation: Director compensation – or at least excessive director compensation – has been looming ever larger as a hot topic in governance. ISS continues the trend by determining that a two-consecutive-year pattern of excessive director pay will result in an against or withhold vote for directors absent a “compelling” rationale. Since the policy contemplates a two-year pattern, there will be no negative voting recommendations on this matter until 2019.
- Gender Pay Gap Proposals and Board Diversity: ISS says its voting recommendations on these shareholder proposals will be made on a case-by-case basis, depending upon a company’s current policies and disclosure related to its diversity and inclusion policies and practices, its compensation philosophy, and its compensation practices. We don’t know for sure how ISS will apply this to real-world cases, but companies with little no disclosure of its pay equity policies and/or records of pay equity problems would be advised to clean up their act. ISS says it will “highlight”, but will not render adverse recommendations, based upon a company’s lack of board gender diversity. It’s not clear what this means in the real world either, but it is worth noting that a number of ISS’s mainstream clients, such as State Street, have gone farther than ISS, voting against non-diverse boards.
- Shareholder Engagement Disclosure in Say-on-Pay Votes: ISS has long put its voting recommendations where its mouth is by considering shareholder engagement disclosure in developing voting recommendations on say-on-pay proposals. (In fact, I’ve seen ISS give a company a pass on questionable pay policies where it has made a decent case that its major holders are OK with those policies or the company’s progress in improving them.) While the policy isn’t changing, ISS has now clarified what it wants to see when companies disclose their shareholder engagement activities. Specifically, ISS will be looking for disclosure of the timing and frequency of engagements, whether independent directors have participated, specific concerns of investors opposing say-on-pay proposals, and actions taken to address those investors’ concerns.
- Shareholder Rights Plans: Consistent with its long-held view that poison pills should be approved by shareholders, ISS will recommend voting against all directors of companies that have “long-term” (i.e., more than one-year) rights plans that have not been approved by shareholders. Commitments to put rights plans to a vote will no longer be treated as mitigating factors, and grandfathered plans will lose that status. Short-term rights plans will continue to be assessed on a case-by-case basis.
- Pledging of Company Stock. For several years, ISS has recommended negative or withhold votes against committee members or the whole board where a significant levels of company stock have been pledged by executives or directors. This practice has now been codified in ISS’s voting policies.
- Pay-for-Performance Analysis. ISS will now consider, in addition to other tests, CEO total pay and company financial performance against a peer group over the three most recent fiscal years.
Notably, the voting policies do not discuss some other matters, such as whether and how ISS will deal with pay ratio disclosures, which will make their debut in the coming year. For that and other reasons, and despite the relatively benign nature of these policies, 2018 promises to be another “interesting” year.