Client Alert: ISS Releases 2016 Policy Updates

ISS Releases 2016 Policy Updates

December 1 2015

PDFISS recently released its final policy guidelines for the 2016 proxy season.  While compensation-related updates for U.S. issuers were minor, ISS also announced a modified definition for “overboarded” Directors as well as tweaks to its Equity Plan Scorecard and QuickScore 3.0 models for 2016.  The updated guidelines will be effective for all companies with annual meetings on or after February 1, 2016.

The highlights for U.S. issuers include:

  • Compensation disclosure at externally-managed companies
    • Insufficient disclosure may lead to ISS recommending Against say-on-pay
  • Analysis of shareholder proposals on equity holding requirements
    • Clarified factors considered in the analysis, but vote recommendation will remain a case-by-case analysis
  • Under the new definition, a director is considered “overboarded” if they sit on more than five public company boards, a reduction from the previous limit of six boards
    • “Overboarded” directors are in danger of an ISS Against vote recommendation beginning in 2017
  • Adjustments to Equity Plan Scorecard for 2016
    • Plan Features pillar modified two factors
      • Post-vesting holding requirements: Full points if the holding period is 36 months (previously 12 months) or until employment termination
      • CIC vesting: Full points for time-based awards if there is no accelerated vesting upon CIC or if accelerated vesting occurs only if awards are not assumed/converted by acquirer. Full points for performance-based awards if vesting is based on actual performance and/or pro rata time basis as of the CIC or if outstanding performance awards are forfeited.
    • Companies that are recent IPOs or newly emergent from bankruptcy will now have a small portion of their score determined based on Grant Practices pillar factors, excluding burn rate and plan duration
  • One new question focused on proxy access was added to QuickScore 3.0
  • Peer group submission window is open
    • Companies with annual meetings between February 1, 2016 and September 15, 2016 may submit 2015 peer group modifications to ISS on their website no later than December 11, 2015.
    • The peer group provided should be the group used for benchmarking CEO pay in 2015

Insufficient Executive Compensation Disclosure by Externally Managed Companies
Externally-managed companies (a structure commonly associated with REITs) do not directly compensate their executives. Instead, executives are compensated by the external manager, which is reimbursed by the company through a management fee.  ISS is raising concerns regarding the lack of compensation disclosure and transparency of externally-managed companies.

Under the new policy, ISS will consider insufficient disclosure regarding compensation arrangements between executives and the external manager to be a problematic pay practice that warrants an Against recommendation on the say-on-pay proposal.  ISS wants externally-managed companies to provide disclosure about the value and nature of NEOs’ compensation arrangements in sufficient detail to enable shareholders to reasonably assess the arrangements and cast an informed vote on the company’s say-on-pay.

An example of enhanced disclosure cited by ISS includes listing “the aggregate portion of such fees that is allocable to executive compensation expenses.”  ISS also cites the “small number” of externally-managed companies that currently disclose detailed information on behalf of their external managers as proof that such information can be made available within the constraints of company agreements with external managers.

Shareholder Proposals on Equity Holding Requirements
This policy update clarifies the factors considered in ISS’ analysis of shareholder proposals requesting companies adopt policies requiring senior executive officers to retain all or a significant portion of the shares acquired through compensation plans.  It also broadens the policy to encompass equity retention proposals more generally, thereby eliminating the need for a separate ISS policy tied to a specified retention ratio.  The revised policy clarifies that the proponent’s suggested retention percentage/ratio and the required retention duration are two of the several factors to be assessed under ISS’ case-by-case approach.  ISS believes that this change makes the policy on equity holding requirements more streamlined and easier to understand.

Based on the updated policy, the following factors will be taken into account in assessing equity holding requirements proposed by shareholders:

  • The percentage/ratio of net shares required to be retained;
  • The time period required to retain the shares;
  • Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness of such requirements;
  • Whether the company has any other policies aimed at mitigating risk taking by executives;
  • Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding period/retention ratio or the company’s existing requirements; and
  • Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus.

“Overboarded” Directors
Citing 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, ISS will consider directors “overboarded” if they serve on more than five (as opposed to previous policy of six) public company boards.

ISS implemented the revised policy with a one-year transition rule for the 2016 proxy season. ISS will note in its 2016 analysis if a director is serving on more than five public company boards.  However, beginning in February 2017, ISS will recommend Against directors who sit on more than five public company boards.

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.  However, ISS stated that they will continue “evaluating the optimal level of directorships” for CEOs of public companies.

Equity Plan Scorecard Adjustments for 2016
As disclosed in the 2016 FAQs, the following adjustments to the Equity Plan Scorecard methodology are effective for annual meetings as of February 1, 2016:

  • The period required for full points with respect to the Post-Vesting/Exercise Holding Period Plan Feature is 36 months (versus 12 months previously) or until employment termination; half points will accrue for a holding period of 12 months.
  • The Plan Features factor “Automatic Single-Trigger Vesting” is renamed “CIC Vesting,” with the following scoring levels:
    • Full points if plan provides for
      • Outstanding time-based awards: either no accelerated vesting or accelerated vesting only if awards are not assumed/converted for outstanding time-based awards, and
      • Performance-based awards: either forfeiture or termination of outstanding awards or vesting based on actual performance as of the CIC and/or on a pro-rata basis for time elapsed in ongoing performance period(s)
    • No points if plan provides for automatic accelerated vesting of time-based awards or payout of performance-based awards above target level
    • Half points if plan provides for any other vesting terms related to a CIC
      • Previously, full points were award if no accelerated vesting upon CIC took place, while zero points were awarded if automatic accelerated vesting upon CIC was disclosed in the plan. In addition, there was no potential to earn half points
    • The Special Cases model (previously the “IPO” model) which generally includes companies such as recent IPOs and bankruptcy emergent companies without three years of disclosed equity grant data, now incorporates Grant Practice factors other than Burn Rate and Duration that will apply to Russell 3000 and S&P 500 companies. Maximum pillar scores for this model are as follows:
      • Plan Cost: 50 (previously 60)
      • Plan Features: 35 (previously 40)
      • Grant Practices: 15 (previously 0); scored factors consist of CEO equity vesting period, proportion of performance-based equity granted to CEO, existence of a claw-back policy, and maintaining post exercise/vesting share-holding requirements

Certain factor scores have also been adjusted, but these modifications were not disclosed.  The maximum of 100 total points and threshold of 53 points to receive a favorable recommendation remain unchanged.

QuickScore 3.0 Adjustments for 2016
ISS released an update to QuickScore 3.0, its model that measures governance risk. For U.S. firms, only one new question regarding the ability of shareholders to nominate board directors in the company proxy along with management nominees was added (Does the company provide proxy access to shareholders?).  This new factor will initially be zero-weighted and detailed for informational purposes only.

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 now for companies with annual meetings between February 1, 2016 and September 15, 2016.  Another submission process for companies with meetings after September 15, 2016 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 2015 proxy and 2016 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 2015 proxy filing will automatically be factored into the ISS peer selection process.

Companies can use this link to update their self-selected peers.  Companies must then confirm the submission by sending an electronic copy of the full list of peers submitted on the company’s letterhead, in PDF, to Note that without this verification, updated peers will not be factored into the ISS-selected peer group.  Feedback and confirmation letters must be submitted no later than December 11, 2015.

PDF: ISS Releases 2016 Policy Update


Joseph Sorrentino