ISS Releases 2016 policy updates

Institutional Shareholder Services (ISS), a provider of corporate governance solutions to the global financial community, today released 2016 updates to its benchmark proxy voting policies for the Americas, EMEA, and Asia-Pacific regions. The updated policies will generally be applied for shareholder meetings on or after February 1, 2016.

To ensure its voting policies take into consideration the views of its institutional clients, as well as the perspectives of the broader corporate governance community, ISS gathers input each year from institutional investors, issuers, and other market constituents worldwide through a variety of channels and mediums.

“Today’s release of our policy updates for 2016 is part of our regular policy development process and reflects the input of a wide range of investors, companies and other market participants, who this year provided feedback through our annual survey, through topical and regional roundtables, and through year-round direct discussions with ISS,” said Georgina Marshall, ISS’ global head of research. “The significant input we receive helps ensure that ISS’ benchmark policies reflect changing market good practices, create dialogue around important issues and, most importantly, serve the needs of our institutional investor clients worldwide in assisting them in making informed voting decisions. We’re also delighted to announce the introduction of a new European pay-for-performance model for 2016, to assist institutional investors in navigating some of the complexities of assessing pay-for-performance alignment across the largest European companies.”

Key US benchmark policy changes announced include that ISS is changing its director overboarding policy. For most directors except for standing CEOs, the maximum number of public company boards that a director can sit on before being considered “overboarded” is being reduced from six to five. There will be a one-year grace period until 2017, giving directors and companies sufficient time to make any changes in advance of the 2017 proxy season, should they wish to do so. During 2016, ISS research reports will highlight if a director is on more than five public company boards, but adverse voting recommendations will not be issued under this new overboarding policy unless the current maximum of six boards is exceeded. For CEOs, the current overboarding limit will remain at two outside directorships. With regard to board actions that significantly reduce shareholder rights without approval by shareholders (so-called unilateral board actions), ISS’ US benchmark policy is being updated to distinguish between (1) unilateral board adoptions of bylaw or charter provisions made prior to or in connection with a company’s initial public offering (IPO), and (2) unilateral board amendments to those documents made after a company’s IPO. On executive pay and transparency, ISS’ US “Problematic Pay Practice” policy will be updated to add “Insufficient Executive Compensation Disclosure by Externally Managed Issuers (EMIs)” to the list of practices that may result in an adverse voting recommendation on executive compensation. This will apply when an EMI fails to provide sufficient disclosure to enable shareholders to make a reasonable assessment of compensation arrangements for the EMI’s named executive officers.

For Canada, ISS is adopting a Canadian “scorecard” model (Equity Plan Scorecard – “EPSC”) for assessing the equity plans of Canadian TSX companies, similar to the model introduced in the US for 2015. The EPSC will consider a range of positive and negative factors in evaluating equity incentive plan proposals. In concert with ISS’ longstanding Canadian policies for reviewing the equity plans of TSX companies (relating to non-employee director participation, amendment provisions, and repricing without shareholder approval), the total EPSC score will be a key determining factor in whether ISS recommends for or against a proposal relating to an equity plan. There will also be changes to the definition of overboarding for directors of Canadian companies, from more than two outside public company boards to more than one in the case of CEOs, and from more than six total public company boards to more than four in the case of non-CEOs. This new policy will be phased in beginning in February 2017, similar the way in which the change to the US policy will be implemented.

For Europe, key 2016 changes include a three-year minimum vesting period required for long-term incentive plans in France, which will align ISS’ policy for French companies with the same vesting periods used in other continental European markets, as well as with local guidelines and investor views. For the U.K. and Ireland, ISS’ benchmark policy is being updated for share issuance authorities to clarify that a disapplication of pre-emption rights up to 10 percent of the issued share capital will be acceptable, provided that the extra 5 percent above the original 5 percent is to be used only for the purposes of an acquisition or a specified capital investment. The policy for the U.K. and Ireland is also changing with regard to overboarding to make explicit reference to a recommended maximum number of boards on which directors should sit, and that ISS may recommend against directors considered overboarded. The policy changes also clarify how ISS assesses director attendance at board and committee meetings. While ISS’ policy does not state a hard-and-fast threshold for this market on the maximum number of directorships that are considered acceptable, the issue of time commitment is considered especially relevant to the role of board chair, particularly where a company is both complex and global in scale and furthermore if it operates within a highly regulated sector such as financial services. A director’s board and committee attendance will also be considered when a director holding multiple board positions stands for election or re-election.

In addition to the 2016 European benchmark policy updates, ISS is also announcing a new European pay-for-performance assessment model which will be introduced in 2016. This will initially cover 600 or so of the largest European companies (based on the STOXX 600 index), and extends ISS’ quantitative pay-for -performance assessments beyond the models historically used for the US and Canadian markets. The ISS European pay-for-performance model will assess quantitative elements, considering both relative pay-for-performance alignment compared with selected peer groups and absolute pay-for-performance alignment measures. The methodology incorporates models for Relative Degree of Alignment, Multiple of Median, and Pay-TSR Alignment, akin to those used in ISS’ models for the US and Canada.

For Asia-Pacific, ISS’ benchmark policy changes for 2016 include the adoption of a new policy on director elections in Japan under which ISS will recommend against top executives of companies if the board, after the shareholder meeting, does not include at least two outsiders. Japan’s Corporate Governance Code (which took effect in June) encourages companies to appoint at least two independent outside directors based on independence criteria developed by the Tokyo Stock Exchange. In addition, recently-updated corporate law requires companies without any outside directors to explain why the appointment of outside directors is inappropriate. ISS data as of the end of June 2015 show that 55 percent of Japanese companies already have at least two outside directors.