ISS previously issued its 2015 policy updates which we discussed here. ISS has now issued FAQs on the independent chair policy and the Equity Plan Scorecard.
Independent Chair Policy
In this five page FAQ, ISS seeks to answer the following questions:
- How does the new approach differ from the previous approach?
- What additional factors will ISS assess under the new Independent Chair policy?
- What does ISS consider a strong lead director role?
- How will ISS consider board tenure?
- How does ISS consider company performance?
- How will the scope of a proposal have an effect on ISS’ analysis?
- What problematic governance practices could be considered as reasons to support a proposal?
- Will ISS consider a company’s rationale for maintaining a non-independent chair?
- Is there any action short of appointing an independent chair that would be considered a sufficient response to a majority-supported independent chair proposal?
The FAQs reveal that board tenure can play a role in the analysis. According to ISS, board tenure may be a contributing factor in determining a vote recommendation for independent chair shareholder proposals, but will be considered in aggregate with other factors. Concurrence of director/CEO tenure, lenghty directorships, or high average director tenure, may be considered. These concerns will be considered in the context of the overall leadership structure in determining whether the proposal presents the best leadership structure at the company.
And if you get a proposal, what action can you take that would be sufficient for ISS? ISS states full implementation would consist of separating the chair and CEO positions, with an independent director filling the role of chair. A policy that the company will adopt this structure upon the resignation of the current CEO/Chair would also be considered responsive.
ISS says partial responses will be evaluated on a case-by-case basis, depending on the disclosure of shareholder input obtained through the company’s outreach, the board’s disclosed rationale, and the facts and circumstances of the case. There are many factors that can cause investors to support such proposals, without necessarily demanding an independent chair immediately. For example, through their outreach, a company may learn that shareholders are concerned about the lack of a lead director, weaknesses in the lead director’s responsibilities, or the choice of lead director. In such a case, creating or strengthening a robust lead director position may be considered a sufficient response, assuming no other factors are involved. If the company already has a robust lead director position, then the company’s outreach to shareholders to discover the causes of the majority vote and subsequent actions to address the issue will be reviewed accordingly
Equity Plan Scorecard
The Equity Plan Scorecard includes 20 FAQs:
- What is the basis for ISS’ new scorecard approach for evaluating equity compensation proposals?
- How does the new ISS’ Equity Plan Scorecard (ESPC) work?
- How do the EPSC models differ?
- How many EPSC points are required to receive a positive recommendation?
- Which types of equity compensation proposals will be evaluated under the EPSC policy?
- How are non-employee director plans treated when another equity plan is on ballot?
- How will equity plan proposals at recent IPO companies be evaluated?
- What factors are considered in the EPSC, and why?
- Are the factors binary? Are they weighted equally?
- Which factors, on a stand-alone basis, will continue to result in a negative recommendation on an equity plan proposal, regardless of the score from all other EPSC factors?
- Are all covered plans subject to the same EPSC factors and weightings?
- How do the SVT factors work in the EPSC model?
- How does the burn rate factor work in the EPSC?
- Will ISS continue to potentially “carve out” a company’s option overhang in certain circumstances?
- Will there still be a 2% de minimis burn rate?
- Will ISS continue to accept burn rate commitments under the new policy?
- Is the CEO equity award proportion that is considered “performance based” explicit (i.e., as disclosed in proxy by the company) or calculated based on the Grants of Plan-Based Awards table?
- How is plan duration calculated under the EPSC?
- How will the EPSC operate if multiple equity plans are on the ballot?
- How will plan proposals that are only seeking approval in order to qualify grants as “performance-based” for purposes of IRC Section 162(m) be treated?
The FAQs go a long way in adding some transparency to a complex new policy.
Absent overriding factors, a score of 53 or higher (out of a total 100 possible points) generally results in a positive recommendation for the proposal. EPSC factors are not equally weighted. Each factor is assigned a maximum number of potential points, which may vary by model. Some are binary, but others may generate partial points. For all models, the total maximum points that may be accrued is 100. The FAQs include a useful chart showing factors scored and definitions, but it does not include the number of points allocated to the factors.
Proposals that only seek approval to ensure tax deductibility of awards pursuant to Section 162(m), and that do not seek additional shares for grants, will generally receive a favorable recommendation regardless of EPSC factors, provided the Board’s Compensation Committee (or other administrating committee) is 100 percent independent according to ISS standards. In the case of proposals that include additional plan amendments, such amendments will be analyzed to determine whether they are, on balance, positive or negative with respect to shareholders’ interests, and ISS will determine the appropriate evaluative framework and recommendation accordingly.
ABOUT STINSON LEONARD STREET
Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.
The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.