On October 15, 2014, Institutional Shareholder Services (ISS) published its draft policy changes for 2015 and opened a public comment period ending October 29, 2014. The proposed revisions for U.S. listed companies are designed to implement more holistic methods for evaluating (i) new equity plan proposals and (ii) independent chair proposals. The final policies are expected to be released the week of November 7, 2014. If adopted, the policies will take effect for meetings of public companies on or after February 1, 2015. The key changes are described below and are available on the ISS website http://www.issgovernance.com/policy-gateway/policy-outreach/, under the Policy Gateway.
ISS is proposing to use an equity plan “scorecard” evaluation methodology that will provide for a more nuanced consideration of equity plan proposals and will consider a range of positive and negative factors in determining whether to give a negative recommendation rather than relying on the series of “pass/fail” tests applied in the existing policy. While some egregious plan features will continue to result in a negative recommendation regardless of other mitigating factors (e.g., authority to reprice options without shareholder approval), consideration of all of the scorecard factors will generally determine whether a “For” or “Against” recommendation is warranted. ISS does not intend for the scorecard methodology to change the number of negative recommendations issued and has not provided any guidance on the weightings of the various scorecard factors.
The three main categories of scorecard factors are:
Separate scoring models would be employed for companies in the S&P 500, Russell 3000 (excluding S&P 500) and Non-Russell 3000 index groups and for companies that have recently completed an IPO or emerged from bankruptcy. Burn rate benchmarks would be calibrated for respective index groups and the relevant GICS industry classification would be used within each index group.
The scorecard methodology would eliminate the potential for burn rate commitments. Additionally, liberal share recycling provisions would be evaluated as a plan feature, instead of a component of “shareholder value transfer” calculations.
ISS is also proposing to implement a more comprehensive and nuanced policy for evaluating independent chair shareholder proposals. ISS’s current policy is to generally recommend “For” independent chair shareholder proposals unless the company satisfies each of the following six criteria:
The proposed methodology would add new governance, board leadership and performance factors to the analytic framework, including:
Under the new methodology, ISS would consider all the factors as a whole and no one factor would be dispositive to their recommendation. ISS expects that the new methodology will result in a higher level of “For” recommendations.