October 17, 2008
On October 14, 2008, RiskMetrics Group – ISS Governance Services ("ISS"), a leading proxy advisory firm, announced the opening of the comment period for its proposed 2009 proxy voting policies. ISS is accepting comments on the proposed policy updates through October 31, 2008. It expects to release the final U.S. and international policy updates on November 20, 2008, and its Global Policy Summary and Concise Guidelines on December 18, 2008. While no effective date was specified, in 2008, the new policies were effective for annual meetings held on or after February 1, 2008. The proposed policy updates and instructions on how to submit comments can be accessed at:
This client alert briefly reviews the proposed U.S. policy updates.
1. Poor Accounting Practices
Current: ISS currently considers poor accounting practices (defined as fraud, misapplication of GAAP and material weaknesses identified in Section 404 disclosures) on a case-by-case basis in determining whether to issue a withhold/against vote recommendation for audit committee members or the full board.
Proposed: ISS proposes to more fully explain the factors it considers in this case-by-case analysis. Specifically, ISS would explain that it considers the severity, breadth, chronological sequence and duration of the poor accounting practice, counterbalanced against any remediation efforts or corrective actions by the company.
In addition, ISS proposes broadening its policy to generally recommend a withhold/against vote for audit committee members if the company receives an adverse opinion by its auditor.
2. Independent Chair
Current: ISS currently recommends that shareholders vote for shareholder proposals asking that the chairman’s position be filled by an independent director or asking to separate the positions of chairman and CEO, unless there are compelling reasons to recommend against the proposal, such as a counterbalancing governance structure. In determining whether a company has a counterbalancing governance structure, ISS looks at a number of factors, including (1) that the company publicly discloses a comparison of the duties of its independent lead director and its chairman; (2) that the company publicly discloses a sufficient rationale for maintaining a combined chairman/CEO; and (3) that the company has not underperformed both its peers and index on the basis of both one- and three-year total shareholder returns ("TSR") (unless there has been a change in the chairman/CEO position within that time).
Proposed: ISS proposes eliminating the requirements that a company disclose (1) a comparison of duties between the lead director and the chairman; and (2) the company’s rationale for maintaining a combined role. In addition, ISS proposes raising the performance requirement by providing that ISS will support the shareholder proposal unless the company outperforms both its peers and index on the basis of both one- and three-year TSR (unless there has been a change in the chairman/CEO position within that time).
3. Net Operating Loss ("NOL") Poison Pills
Current: Section 382 of the Internal Revenue Code limits a company’s ability to carry its NOLs forward to reduce its future taxable income if the company undergoes a "change of ownership," defined as an ownership increase of more than 50 percentage points by one or more 5% shareholders within a three-year period. Some companies have adopted NOL poison pills (poison pills that are triggered when a shareholder becomes a 5% shareholder) in order to prevent possible changes in ownership, thereby preserving the tax benefit associated with NOLs. For company proposals asking shareholders to approve a company’s poison pill in order to preserve the tax benefit associated with NOLs, ISS currently applies its general policy on poison pills. Under the general poison pill policy, ISS issues voting recommendations on a case-by-case basis, and will consider recommending votes in favor of a poison pill only if it contains (1) a 20% or higher flip-in or flip-over ("trigger"); (2) a two- to three-year sunset provision; (3) no dead-hand, slow-hand, no-hand or similar features; and (4) a shareholder redemption feature.
Proposed: For NOL poison pill proposals, ISS proposes continuing to apply the current case-by-case approach with the following changes: (1) lowering the trigger to 4.9% from 20%; (2) considering the value of the NOLs; and (3) considering the likelihood of a NOL limiting event based on Section 382 of the Internal Revenue Code.
4. Peer Group Selection for Executive Compensation Comparisons
Current: Currently, for executive compensation comparisons, each company’s peer group contains 12 companies from the company’s six-digit Global Industry Classification Standard ("GICS") whose fiscal year revenues are closest to that of the company. If there are insufficient companies within the six-digit GICS, the peer group is supplemented with companies from the broader four-digit GICS group.
Proposed: ISS proposes continuing to identify a company’s peer group based on the six-digit GICS and the fiscal year revenue closest to the company. However, it would limit the revenue range of the peer group to between 0.5 times and two times the company’s revenue, and change the required number of peer companies to a minimum of eight and up to a maximum of 12 companies. If there are insufficient companies within the six-digit GICS, the peer group would continue to be supplemented with companies from the broader four-digit GICS group.
5. Poor Pay Practices
Modified Single Trigger Change-in-Control Provisions and Dividends on Unvested Performance Shares
Current: Currently, ISS will issue a withhold/against vote recommendation for compensation committee members and/or the CEO on a case-by-case basis, where "poor pay practices" are identified. In addition, ISS may issue a withhold/against vote recommendation for the entire board in cases where all board members were involved in approving the pay practice.
Proposed: ISS proposes expanding the list of "poor pay practices" to include the following:
Excise Tax Gross-Ups
Current: ISS currently evaluates excessive severance and/or change-in-control provisions based only on the severance multiple (i.e., >3 times base + bonus).
Proposed: ISS is considering issuing a withhold/against vote recommendation for compensation committee members when an S&P 500 company enters into a new or substantially amended agreement that provides for an excise tax gross-up.
Current: ISS currently evaluates the total value of all perquisites reported for named executive officers in the last fiscal year. Generally, the cumulative value of all perks or high-value use of one or more perks without justifiable rationale may result in a withhold/against vote recommendation for compensation committee members.
Proposed: ISS proposes to evaluate automobile allowances and personal use of aircraft individually, based on their value and overall utilization by a company. Specifically:
6. Pay for Performance
Current: ISS’s current policy identifies companies that had negative one- and three-year fiscal TSR coupled with an increase in CEO pay in the most recent fiscal year. ISS looks at each situation on a case-by-case basis, and may issue a withhold/against vote recommendation for compensation committee members and/or recommend that shareholders vote against equity plan proposals if there is evidence of a misalignment with pay for performance principles.
Proposed: ISS proposes to replace the absolute negative one- and three-year TSR performance assessment with a relative TSR performance assessment when identifying poor performing companies. In assessing relative TSR performance, ISS is considering identifying companies at the bottom quartile of each GICS grouping. If a company substantially underperforms its GICS group in terms of one- and three-year TSR, ISS may recommend a withhold/against vote for compensation committee members. ISS may also recommend a vote against equity plan proposals for these same underperforming companies if more than half of the CEO pay increase is attributable to the equity compensation and the CEO is a participant of that equity plan.
7. Corporate Social Responsibility ("CSR") Compensation Related Proposals
Current: ISS currently does not have a policy on proposals asking for a linking of executive compensation to non-financial criteria such as corporate downsizings, customer and employee satisfaction, community involvement, human rights and environmental performance. However, under ISS’s current policy, ISS evaluates on a case-by-case basis proposals requesting a review of, or a report on, linking executive compensation to such social issues.
Proposed: ISS proposes adding to the policy that it will generally recommend votes against proposals asking for a linking of executive compensation to non-financial criteria such as corporate downsizings, customer and employee satisfaction, community involvement, human rights and environmental performance.
Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above. Please contact
John F. Olson (202-955-8522, [email protected]),
Brian J. Lane (202-887-3646, [email protected]),
Ronald O. Mueller (202-955-8671, [email protected]),
Amy L. Goodman, (202-955-8653, [email protected]),
Gillian McPhee (202-955-8230, [email protected]),
Elizabeth A. Ising (202-955-8287, [email protected]) or
Susan M. Reilly (202-887-3675, [email protected])
© 2008 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.