2013 Proxy Season Advisory Firm Voting Guidelines: Latest Need-to-Know from JD Supra

“Companies should analyze the reports issued by ISS, Glass Lewis and other advisory firms in 2012 with respect to the company’s 2011 executive compensation in order to better understand the concerns of those firms and to consider addressing these concerns. Companies should also consider any feedback they received from their shareholders. If a company makes changes based on the concerns raised, it will be viewed favorably by shareholders and ISS and other advisory firms. Any such changes should be described in some detail in the 2013 proxy materials and explicitly linked to the concerns that were raised.” (Skadden Arps)

In advance of the 2013 proxy season, Institutional Shareholder Services (ISS), Glass Lewis, and other advisory firms have announced their voting guidelines for upcoming shareholder meetings. For your reference, here’s a look at the key issues:

• Board responsiveness to shareholder proposals:

“Under its existing policy, ISS will recommend ‘against’ or ‘withhold’ votes from an entire board of directors (considering new nominees on a case-by-case basis) if the board failed to act on a shareholder proposal that received the support of (i) a majority of the shares outstanding the previous year or (ii) a majority of the votes cast in the last year and one of the two previous years. Under ISS’s new policy, a majority of votes cast at a single meeting will be the trigger for ISS to evaluate a company’s response to majority-supported shareholder proposals appearing on companies’ ballots in 2013.” (Skadden Arps)

• Board responsiveness to governance failures:

“ISS believes that hedging of company stock and significant pledging of company stock by directors or executive officers demonstrate a material failure of the Board of Directors in risk oversight. Accordingly, ISS will now consider hedging and pledging as one factor in determining whether to vote AGAINST or WITHHOLD for a particular director or the Board of Directors as a whole.” (Manatt)

• “Overboarding:”

“The guidelines applicable to 2013 meetings will clarify that when a director who serves as an executive officer of a public company also serves on more than two other public company boards, Glass Lewis will recommend a vote against that director at the other public companies where he or she serves on the board, not at the company where the individual serves as both a director and an executive officer.” (Morrison & Foerster)

• Golden Parachutes:

“ISS has revised its policy on say-on-golden parachute advisory votes to include a review of existing change-in-control arrangements maintained with named executive officers rather than focusing only on new or extended arrangements. Features that may result in a recommendation against a say-on-golden parachute vote include: single- or modified-single-trigger cash severance; single-trigger acceleration of unvested equity awards; cash severance in excess of three times base salary and bonus; golden parachute payments that are excessive on an absolute basis or as a percentage of transaction equity value; and triggered and payable excise tax gross-ups.” (Ropes & Gray)

• Peer group executive pay evaluation:

“ISS’ current peer group methodology focuses on the subject company’s GICS industry classification, which may not reflect multiple business lines in which many companies operate. As a result, some ISS peer groups omitted competitors of the target company and/or included firms that did not reflect a connection to the target considered appropriate for performance and pay comparisons. The new methodology incorporates information from companies’ self-selected pay benchmarking peer groups in order to identify and prioritize GICS industry groups beyond the subject company’s own GICS classification.” (Leonard, Street and Deinard)

• Realizable pay:

“ISS is adding realizable pay as compared with grant date pay to the research report for large-cap companies. Realizable pay will consist of the sum of cash and equity-based compensation based on actual earned awards, and target values for ongoing awards, calculated using stock price at the end of the measurement period. Stock options or stock appreciation rights (SARs) will be revalued using the remaining term and updated assumptions, as of the performance period, using the Black-Scholes Option Pricing model. ISS acknowledges that the realizable pay consideration may mitigate or exacerbate a CEO’s pay-for-performance concerns.” (Reed Smith)

• Environmental and social performance:

“ISS has loosened its voting policy on shareholder proposals seeking to link executive compensation to environmental and social (sustainability) criteria. Rather than always recommending against such proposals, ISS will recommend on a case-by-case basis considering [several] factors.” (Wilson Sonsini)

The updates:

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