Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

A key component to evaluating whether to place an equity plan proposal in a proxy is whether or not ISS will support the plan.  Accoding to ISS, while it has historically recommended against approximately 30 percent of equity plan proposals each year under existing policy (ranging from 30 percent to 42 percent during the period from 2005 to 2013), the vast majority of plan proposals receive the requisite number of votes to pass. In the aftermath of the 2008-2009 financial “meltdown,” no more than nine equity plan proposals have failed to garner majority support each year (2010 through 2013), compared with 22 failed plans in 2005.

ISS is proposing to change the methodology used to evaluate equity plan proposals.  ISS proposes to use a an equity plan scorecard, or EPSC, that considers a range of positive and negative factors, rather than a series of “pass/fail” tests as applied in the existing policy, to evaluate equity incentive plan proposals. A company’s total EPSC score will generally determine whether a “For” or “Against” recommendation is warranted.

It remains to be seen whether the proposed EPSC will make the ISS black box blacker, making it more difficult to determine whether a proposal will be supported.  It’s possible the lack of bright line drawing may be a benefit to issuers. According to ISS, the proposed policy is not designed to increase or decrease the number of companies that would receive adverse vote recommendations.

Scorecard factors evaluated will fall under three main categories:  plan cost, plan features, and grant practices.

Plan Cost:  Plan cost will be measured by the total potential cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated shareholder value transfer or SVT, in relation to peers. SVT will be calculated for both:

  • new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants, and
  • only on new shares requested plus shares remaining for future grants.

Plan Features:  Plan features to be evaluated include:

  • Automatic single-triggered award vesting upon a CIC;
  • Discretionary vesting authority;
  • Liberal share recycling on various award types; and
  • Minimum vesting period for grants made under the plan.

Grant Practices:  Grant practices to be evaluated include:

The company’s three-year burn rate relative to its industry/market cap peers;

  • Vesting requirements in most recent CEO equity grants;
  • The estimated duration of the plan based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years;
  • The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;
  • Whether the company maintains a claw-back policy; and
  • Whether the company has established post exercise/vesting share-holding requirements.


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