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ISS 2014 Proxy Season Policy Updates


Lawyer Jonathan Feldman
Area Corporate Finance and Securities, Shareholder Rights and Activism


Proxy advisory firm Institutional Shareholder Services Inc. (ISS) recently released its proxy voting policy updates for the 2014 proxy season.  The new guidelines address, among other things, corporate governance standards, shareholder rights and executive compensation.  This update summarizes the significant changes made to the proxy voting guidelines affecting Canadian issuers, effective for shareholder meetings on or after February 1, 2014.

Corporate Governance

1.  Director Independence

ISS clarified the circumstances under which a former or interim executive will be considered an “insider” or an “affiliated outsider.”  ISS’ former policy on director independence stated only that an interim CEO would be considered an insider.  The new policy states that the following will be considered insiders:

  • all interim executives;
  • former CEOs of an affiliate company, even after a cooling off period; and
  • former interim executives if either: 

 (a) their service was longer than 18 months, or
 (b) their service was between 12 and 18 months with compensation that was high relative to other directors.

2.  Director Overboarding

Previously, ISS did not issue withhold recommendations on individual directors who are overboarded (sitting on too many boards) where the directors have demonstrated poor attendance.  Under the new policy, ISS recommends that shareholders withhold votes from directors that are both overboarded and have attended less than 75% of board and committee meetings in the past year.

3.  Problematic Audit-Related Issues

To hold audit committee members accountable for weaknesses in an issuer’s accounting controls, ISS’ new policy requires that votes be cast on a case-by-case basis on audit committee members if problematic accounting practices are identified that raise serious concerns.  Should ISS determine that an issuer’s accounting practices raise persistent concerns, the members of the audit committee, and potentially the entire board, will receive a withhold recommendation.

4.  Egregious Actions

ISS updated its policy on the egregious action of directors to recommend that shareholders withhold from all directors and committee members who engage in, among other things, hedging of company stock and bribery.

5.  Board Responsiveness

ISS now recommends that shareholders withhold from individual directors, committee members or the entire board if either: (i) a director receives less than 50% support and the board failed to address the issues leading to the low vote result or an acceptable response was not otherwise provided; or (ii) the board failed to act on a shareholder proposal that received majority support from shareholders.  This policy will operate on a case-by-case basis.

Shareholder Rights and Defences

1.  Advance Notice Requirements

ISS added language to clarify its advance notice policy indicating that it will now recommend against advance notice requirements (i) where the board only has the discretion to waive a portion of the advance notice requirement, or (ii) where the issuer requires a proposed nominee to agree in writing that it will comply with all of the issuer’s policies and guidelines.

2.  Enhanced Shareholder Meeting Quorum

ISS believes that placing a higher quorum for the election of directors violates its principle that all matters voted on at shareholder meetings are of equal importance.  ISS’ new policy explicitly states it will not support by-laws that establish a different quorum for meetings where half or more of incumbent directors may be replaced.

Executive Compensation

1.  Quantitative Pay for Performance Screen

ISS simplified the quantitative pay-for-performance measures used to measure senior executive compensation relative to issuer performance.  ISS’ Relative Degree of Alignment measures the difference between an issuer’s total shareholder return (TSR) rank and the CEO’s total pay rank within a peer group.  ISS simplified this methodology by measuring TSR and the CEO’s total pay rank over only a three-year period, as opposed to measuring TSR over both one and three-year periods.

2.  Board Responsiveness

As part of its qualitative analysis of issuers’ executive compensation, ISS reviews an issuer’s responsiveness to shareholders following low vote results on compensation issues.  ISS clarified its position on the issue, stating that an issuer’s failure to respond to a majority supported shareholder proposal or a majority opposed “say on pay” vote will negatively affect its qualitative review of a company’s executive compensation.

3.  Non-Employee Director Participation in Equity Plans

ISS updated and simplified the language used in its policy on non-employee director (NED) participation in company equity compensation plans by increasing the permitted value limit on forms of equity granted to NEDs other than stock options.  The policy’s limit on individual annual equity grants where NEDs do not receive stock options has been increased to $150,000 per director per year.

4.  Repricing Proposals

ISS previously narrowly supported proposals for repricing options under certain exceptions.  The updated policy removes these exceptions and establishes that ISS will now generally recommend against any repricing proposal.

Please contact any member of our Corporate Securities Group to discuss these latest developments.