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ISS has issued its 2011 Corporate Governance Policy Update.  As expected, it will recommend voting for an annual say-on-pay vote and the update addresses other matters of importance to public issuers.

Frequency of Advisory Vote

In line with its overall client feedback, ISS is adopting a new policy to recommend a vote FOR annual advisory votes on compensation, which ISS believes provide the most consistent and clear communication channel for shareholder concerns about companies’ executive pay programs.

According to ISS, the management say-on-pay vote, or MSOP, is at its essence a communication vehicle, and communication is most useful when it is received in a consistent and timely manner. ISS states it supports an annual MSOP vote for many of the same reasons it supports annual director elections rather than a classified board structure — because it believes this provides the highest level of accountability and direct communication by enabling the MSOP vote to correspond to the majority of the information presented in the accompanying proxy statement for the applicable shareholders’ meeting.  ISS believes having MSOP votes every two or three years, covering all actions occurring between the votes, would make it difficult to create the meaningful and coherent communication that the votes are intended to provide.  Under triennial elections, for example, ISS believes a company would not know whether the shareholder vote references the compensation year being discussed or a previous year, making it more difficult to understand the implications of the vote.

Golden Parachute Vote

When an advisory vote on golden parachute compensation is required by the Dodd-Frank Act, ISS’ policy will be to make recommendations on a case-by-case basis for 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 to an AGAINST recommendation 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; or
  • 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.

In cases where the golden parachute vote is incorporated into a company’s separate advisory vote on compensation, ISS will evaluate the “say on pay” proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.

Director Attendance

ISS’ current policy is to recommend a vote AGAINST or WITHHOLD from individual directors who attend less than 75 percent of the board and committee meetings without a valid excuse, such as illness, service to the nation, work on behalf of the company, or funeral obligations.  If the company provides meaningful public or private disclosure explaining the director’s absences, ISS will evaluate the information on a case-by-case basis taking into account the following factors:

  • Degree to which absences were due to an unavoidable conflict;
  • Pattern of absenteeism; and
  • Other extraordinary circumstances underlying the director’s absence.

The key policy change is to remove the private disclosure option for explaining absences; articulating the reasons that are acceptable; and clarifying the policy application when the attendance disclosure does not conform with SEC requirements.

In 2011, ISS will generally recommend a vote AGAINST or WITHHOLD from individual directors who attend less than 75 percent of board and applicable committee meetings (with the exception of new nominees).  Acceptable reasons for director(s) absences are generally limited to the following:

  • Medical issues/illness;
  • Family emergencies; and
  • If the director’s total service was three meetings or less and the director missed only one meeting.

These reasons for director(s) absences will only be considered by ISS if disclosed in the proxy or another SEC filing.  If the disclosure is insufficient to determine whether a director attended at least 75 percent of board and committee meetings in aggregate, ISS will generally recommend a vote AGAINST or WITHHOLD. 

Check frequently for updates on the Dodd-Frank Act and other important securities law matters.