ISS and Glass Lewis Release 2017 Policy Updates

ISS and Glass Lewis Release 2017 Policy Updates

December 2 2016

PDFISS and Glass Lewis recently released their policy guidelines for the 2017 proxy season.  Similar to last year, compensation-related updates for U.S. issuers from both proxy advisors were minor, however, ISS also published significant modifications to its pay-for-performance methodology for 2017.  The updated guidelines will be effective for all companies with annual meetings on or after February 1, 2017.

Steps to Take Now
Companies that modified their peer group for executive compensation benchmarking purposes in 2016 will want to take note of the announcement of the opening of the ISS peer group submission window.  Companies may submit 2016 peer group modifications to ISS via their Governance Analytics platform no later than December 9, 2016.

In recognition of the new ISS and Glass Lewis “overboarded” director definitions that go into effect in 2017, companies should review the number of current board memberships held by directors to assess whether the new definitions will impact the likely vote recommendations for director elections.

For companies seeking shareholder approval of director compensation programs or director equity plans in 2017, a thorough review and assessment of the evaluation framework ISS will utilize in determining whether to support the proposal is critical.

2017 ISS Policy Updates

“Overboarded” Directors
Beginning in February 2017, ISS will recommend against directors who sit on more than five public company boards.  As disclosed last year, ISS cited the significant increase in time commitment over the last 10 years and feedback received from institutional investors regarding the ability of a director to devote sufficient time to each board commitment in modifying the “overboarded” director definition.

Note that ISS did not modify its “overboarded” policy for CEOs of public companies, which currently considers CEOs “overboarded” if they sit on the boards of more than two public companies in addition to their own.

Equity Plan Scorecard Adjustments for 2017
The following adjustments to the Equity Plan Scorecard (EPSC) methodology are effective for annual meetings as of February 1, 2017:

  • The Plan Features pillar added a new factor “Dividends payable prior to award vesting” with the following scoring levels:
    • Full points will be earned if the equity plan expressly prohibits, for all award types, the payment of dividends before the vesting of the underlying award. ISS deems the accrual of dividends payable upon vesting acceptable with no negative impact on EPSC scoring.
    • A company’s general practice of not paying dividends until vesting will not secure points under the methodology. The prohibition on not paying dividends on unvested awards must be explicitly stated in the equity plan document.
  • No points will be earned if this prohibition is absent or not applicable to all applicable equity award vehicles
    • ISS cites “incentive and retention” as rationale for belief that dividends on unvested awards should be paid only after the underlying awards have been earned and not during the performance and/or service vesting period.
  • The Plan Features pillar modified the minimum vesting period factor
    • Equity plans must specify a minimum vesting period of one year for all award types under the plan in order to receive full points for this factor.
      • Previously, companies could receive full points if at least one award type provided for a minimum vesting period of one year.
    • No points will be earned if the plan allows for individual award agreements that reduce or eliminate the one-year vesting requirement.
      • Note that the “carve-out” allowing for up to 5% of shares issued under an equity plan with no minimum vesting period remains.

Certain factor scores have also been adjusted, but these modifications were not disclosed.  Additional information about updates to the EPSC policy will be included in ISS’ Equity Compensation Plans FAQ document to be published in December 2016.

Ratification of Director Pay Programs and Director Equity Plans
ISS codified the evaluation framework applied to a recent trend of companies seeking non-binding shareholder approval of non-employee director pay programs.  ISS’ vote recommendation will be determined based on the following eight factors:

  • The relative magnitude of director compensation as compared to companies of a similar profile
  • The presence of problematic pay practices relating to director compensation
  • Director stock ownership guidelines and holding requirements
  • Equity award vesting schedules
  • The mix of cash and equity-based compensation
  • Meaningful limits on director compensation
  • The availability of retirement benefits or perquisites
  • The quality of disclosure surrounding director compensation

ISS did not disclose the weightings of the eight factors or any associated guidelines. The updated policy also clarifies that when a non-employee director equity plan is determined to be relatively costly, as measured by ISS’ Shareholder Value Transfer (SVT) methodology, the vote recommendation will be case-by-case, looking holistically at all of the above eight factors, rather than requiring that SVT calculations meet certain minimum criteria.

Modifications to 2017 pay-for-performance methodology
Earlier in November, ISS announced changes to the methodology underlying its pay-for-performance models to take effect Feb. 1, 2017.

A new standardized comparison of CEO pay and financial performance ranking relative to the ISS-selected peer group will be added to proxy research reports. Three-year financial performance will be measured by a weighted average of six financial metrics including return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow from operations growth. The metrics and weightings will be based on the company’s four-digit GICS industry group.  While this information will not impact the quantitative pay-for-performance tests during the 2017 proxy season, it may be referenced in the qualitative review and therefore, may lessen or amplify pay-for-performance concerns.  It is also possible, and highly likely in our view, that the financial metrics will be incorporated in the pay-for-performance tests at some point in the future.

In providing rationale for the change, ISS cited its 2017 benchmark policy survey highlighting the fact that a substantial majority of investors (79%) and companies (68%) responding to the survey supported or strongly supported the use of additional performance metrics.

ISS also announced that the Relative Degree of Alignment (RDA) assessment will only be considered in the overall quantitative concern level when the subject company has a minimum of two years of pay and TSR data.  Companies that only have one year of data will receive an n/a for their RDA test.

Peer Group Window Open
ISS has opened up the window for companies to submit their self-selected peer groups utilized for executive compensation benchmarking purposes.  The peer group provided should be the group used for benchmarking CEO pay for the fiscal year ending prior to your next annual meeting.  The peer group submission window is available from November 28th through December 9th for companies with annual meetings between February 1, 2017 and September 15, 2017.  Another submission process for companies with meetings after September 15, 2017 will be opened next summer.

This submission is important as ISS uses the company’s self-selected executive compensation benchmarking peers as an input in determining the ISS-selected peer group.  As a reminder, this peer group is developed by ISS to perform CEO pay vs. performance analyses, the results of which are significant factors in determining ISS’ say-on-pay vote recommendation.

If a company made changes to their compensation peers between the 2016 proxy and 2017 proxy, submitting the new peer group through this process allows the ISS-selected peer group to be influenced by the company-selected peers. If companies have not made changes to their disclosed peer group, the disclosed peer group from the 2016 proxy filing will automatically be factored into the ISS peer selection process.

Only representatives of the company may log into ISS’ Governance Analytics platform and complete the peer submission process.  Companies can obtain a Governance Analytics account by emailing ISS at

2017 Glass Lewis Policy Updates

“Overboarded” Directors
Similar to ISS, Glass Lewis announced last year that beginning in 2017, the firm will generally recommend voting against a director who serves on a total of more than five public company boards.  In addition, Glass Lewis will also recommend voting against a director who serves as an executive officer of any public company while serving on a total of more than two public company boards.

When determining whether a director’s service on an excessive number of boards may limit the ability of the director to devote sufficient time to board duties, the following relevant factors were cited by Glass Lewis:

  • The size and location of the other companies where the director serves on the board
  • The director’s board duties at the companies in question
  • Whether the director serves on the board of any large privately-held companies
  • The director’s tenure on the boards in question
  • The director’s attendance record at all companies

Glass Lewis may also hold back from recommending against specific directors if the company provides sufficient rationale for their continued board service. The rationale should allow shareholders to evaluate the scope of the directors’ other commitments as well as their contributions to the board including specialized knowledge of the company’s industry, strategy or key markets, the diversity of skills, perspective and background they provide, and other relevant factors.  Glass Lewis will also generally refrain from recommending a vote against a director who serves on an excessive number of boards within a consolidated group of companies or a director that represents a firm whose sole purpose is to manage a portfolio of investments which include the company.

Board Evaluation and Refreshment
Glass Lewis reaffirmed their belief that the board should evaluate the need for changes to board composition based on an analysis of skills and experience necessary for the company, as well as the results of director evaluations, as opposed to relying solely on age or tenure limits.  In Glass Lewis’ view, shareholders are better off monitoring the board’s overall composition, including its diversity of skill sets, the alignment of the board’s areas of expertise with a company’s strategy, the board’s approach to corporate governance, and its stewardship of company performance, rather than imposing inflexible rules that don’t necessarily correlate with returns or benefits for shareholders.  However, if a board adopts term/age limits, the firm believes companies should follow through and not waive such limits. If the board waives its term/age limits, Glass Lewis will consider recommending shareholders vote against the Nominating and/or Governance committees, unless the rule was waived with sufficient explanation.  Glass Lewis provided “consummation of a corporate transaction” as an example of a potentially sufficient reason for explaining why an age/term limit was waived.

Relevant to the discussion of board refreshment and evaluation, note that Glass Lewis may also recommend a vote against the Chair of the Nominating committee where a failure to ensure that the board has directors with relevant experience, either through director assessment or board refreshment, has contributed to the company’s poor performance.

Joseph Sorrentino