Monday November 24, 2014

Comp, Risk Remain Investor Concerns

The 2011-2012 ISS Policy Survey provides insight into the greatest concerns amongst its clients and corporate issuers, finding that executive compensation, board independence and risk oversight continue to be pressing issues.

Top Governance Issues:

Executive compensation continues to be an American issue for a second straight year. Only for North America, a majority of both investor (60 percent) and issuer respondents (61 percent) cite the perennial issue of executive compensation as one of the top three governance topics for the coming year, similar to last year’s survey results.

Carol Bowie

Carol Bowie

On a global basis, investor respondents focused on board independence. Across every region, board independence was identified among the three most important governance topics by approximately 40 percent of investor respondents.

This article originally appeared on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog. This post is based on the key findings of the complete ISS Policy Survey, available here.

Issuers focus on risk oversight in North America and Europe. For issuers, the second most commonly cited topic in North America was risk oversight. In Europe, risk oversight was commonly cited along with board competence.


Engagement between issuers and investors remains strong. A majority of investor respondents (57 percent) indicated more engagement activity with issuers in 2011. Regarding engagement activity with institutional shareholders, issuer respondents almost equally cited “about the same as in 2010″ and “more engagement in 2011.”

Director Qualifications

Director’s recent experience a key issue when evaluating board nominees. When evaluating director nominees, a director’s recent industry/sector experience was cited as either “relevant” or “very relevant” by most investor respondents. For issuer respondents, this was the only category of information that received a strong majority (61 percent) for “very relevant.”

Other categories that strongly appeared relevant to both investor and issuer respondents include director biographic information; performance of companies where director serves (or served) on boards; and governance track record for firms where directors serves (or served) on boards.

As indicated by both issuer and investor respondents, ISS recommendations at other public companies where the director serves and whether directors were subject to continuing boardroom education were least relevant when evaluating director nominees.

ES&G Issues

Environmental, social and governance issues are significant for a second straight year. Similar to last year’s survey results, a strong majority of both investor and issuer respondents indicated that a company’s performance regarding ES&G factors can have a significant impact on long-term shareholder value.

U.S. Compensation Practices

Pay levels relative to peers and a company performance’s trend are relevant for both investor and issuer respondents when determining pay for performance alignment. When determining whether executive pay is aligned with company performance, an overwhelming majority of investor respondents considered both pay that is significantly higher than peer pay levels and pay levels that have increased disproportionately to the company’s performance trend to be very relevant. Most issuer respondents, on the other hand, shared a similar sentiment with that of investors, but appeared to tone down the response by indicating both of these factors to be “somewhat relevant.”

Discretionary annual bonus awards can sometimes be problematic: investor and issuer respondents agree. A majority of investor respondents (57 percent) and 46 percent of issuer respondents agreed that discretionary annual bonus awards (i.e., those not based on attainment of pre-set goals) to be sometimes problematic if the awards are not aligned with company performance.

Investor and issuer respondents diverge on opposition levels to a say-on-pay vote that should trigger a board response to improve pay practices. The most commonly cited level of opposition on a say-on-pay proposal that should trigger an explicit response from the board regarding improvements to pay practices is “more than 20 percent” for investor respondents (36 percent) and “more than 50 percent” for issuer respondents (48 percent). However, on a cumulative basis, 72 percent of investor respondents and 52 percent of issuer respondents indicate that an explicit response from the board regarding improvement to pay practices should be made at opposition levels at “more than 30 percent” and “more than 40 percent,” respectively.

Less appetite from investor respondents in taking into account positive factors to mitigate cost of an equity plan. Responses from investor and issuer respondents varied as to whether positive factors (above median long-term shareholder return; low average burn rate relative to peers; double-trigger CIC equity vesting; reasonable plan duration; robust vesting requirements) mitigate an equity plan where shareholder value transfer (SVT) cost is excessive relative to peers. Most investor respondents were reluctant to indicate that any of those factors would “very much” mitigate the cost. For certain factors, e.g., above median long-term shareholder return and low average burn rate relative to peers, there was a strong showing from issuer respondents that these factors should “very much” be taken into account to mitigate the cost.

On the flip side, where SVT cost is not excessive and whether negative factors (liberal CIC definition with automatic award vesting; excessive potential share dilution relative to peers; high CEO or NEO “concentration ratio”; automatic replenishment; prolonged poor financial performance; prolonged poor shareholder returns) weigh against the plan, a majority of investor respondents indicated all of the factors, with the exception of high CEO/NEO “concentration ratio,” should “very much” weigh against the plan. Of all of these factors, a vast majority of investor respondents (73 percent) cited prolonged poor financial performance and prolonged poor shareholder returns.

While it did not appear that issuer respondents were emphatic about these factors weighing against the plan, a majority of the issuer respondents indicated that liberal CIC definition with automatic award vesting, excessive potential share dilution relative to peers, and automatic replenishment (“evergreen funding”) should “somewhat” weigh against the plan.

Investors indicate post-IPO equity plans seeking Section 162(m) tax deductibility should be evaluated under same guidelines as a standard equity plan. According to a vast majority of investor respondents (80 percent), equity plans coming to a shareholder vote for the first time after an IPO (in order to quality for Section 162(m) tax deductibility) should be evaluated under the same guidelines as a “standard” equity plan, even if no new shares are requested. While 59 percent of issuer respondents disagreed, a substantial minority (41 percent) shared the same view with investor respondents.

“Single-trigger” equity vesting in the context of equity plans elicits differing views from issuer and investor respondents. An overwhelming majority of investor respondents do not consider automatic accelerated vesting of outstanding grants upon a change in control or accelerated vesting at the board’s discretion after a change in control to be appropriate. The vast majority of issuer respondents disagree, and consider both scenarios appropriate. However, both issuer and investor respondents agree that accelerated vesting in certain circumstances after a change in control (e.g., if awards are not converted or replaced by a surviving entity) are appropriate.

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