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02 August 2016 • Articles


2017 ISS Policy Survey Results


Proxy Updates

ISS released its 2017 policy survey on August 2, 2016.  As a follow up to that event, ISS recently released the results of that survey, which we have reviewed and summarized below.

ISS received 439 responses this year compared to 421 responses the previous year.  270 responses came from corporate issuers, 120 responses were received from institutional investors, with the remaining responses collected from investment banks, corporate board members and consultants.  In line with previous years, ISS expects to publish a draft of its 2017 policy updates and commence an open comment period at the end of October.  According to its report, ISS expects to release the policy updates in mid-November and go effective with revised policies on February 1, 2017.

As we noted in our previous Proxy Update, the survey results are more directional in nature and, ultimately, topics covered in the survey may not be addressed in ISS’ 2017 voting policy update.  Conversely, issues not addressed in the survey may surface during the comment period.  It is safe to say the survey results provide a window into what may be on the minds of the proxy voting groups at institutional investors.

  • Overboarding – With regard to overboarding, the survey asked whether respondents felt the overboarding policy that applies to a firm’s CEO (no greater than three total board seats), should apply to an executive chairman who is not the CEO; or whether the current policy should apply (that is, that a non-executive director should sit on no more than five boards). 38% of respondents who are not investors preferred that the more lenient policy (no more than five) apply, while 62% of investors opted for the more restrictive policy (no more than three).  Comments from investors included some respondents supporting a policy even more prescriptive and others stating that since the roles of an executive chair are not always clear from issuer to issuer, shareholders may have a difficult time making a decision. 
  • Pay-for-Performance (P4P) Metrics – ISS’ P4P modeling includes TSRs over multiple periods of time to identify misalignment between CEO pay and company performance. This survey question asks whether or not respondents would support ISS including other financial metrics into their modeling screens and if so, which two metrics are appropriate:
  • Revenue metrics (such as total revenue or revenue growth),
  • Earnings metrics (such as EPS or EBITDA),
  • Return metrics (such as ROA or ROE),
  • Return on investment metrics (such as ROIC),
  • Cash flow metrics (such as OCF or FFO),
  • Economic profit metrics,
  • Or other metrics, and if so, which ones.

79% of investor respondents answered they support the inclusion of additional metrics, 19% indicated they were neutral on the proposed idea and 3% were opposed or strongly opposed.  Of the respondents that were neutral, 47% supported ROIC as a metric to include and 35% chose ROA or ROE as a possible metric.  42% of the non-investor group support or strongly support, 26%, the use of metrics other than TSR in the P4P screening, 21% were neutral and 11% opposed or strongly opposed the idea.  Earnings metrics, revenue metrics and ROI metrics were favored by the respondents that selected “neutral.” 

  • Director Tenure – The third survey question related to board refreshment; ISS asked respondents if any of the below listed factors raise concern with an issuer’s “nominating and refreshment processes.”
  • The lack of newly appointed board members (e.g. five years),
  • Lengthy average director tenure (e.g. average board tenure greater than 10 years or 15 years),
  • A high ratio of long-tenured directors (e.g. three-fourths of the board having served 10+ years).

53% of respondents among the investor group noted the lack of newly appointed independent board members as a concern, 51% stated lengthy average director tenure as an issue and 68% believe a high ratio of long-tenured directors as problematic.  Investors noted in the comments that a high degree of overlap between CEO tenure and the tenure of non-executive directors as a concern.  26% of non-investors flagged the lack of new independent board members as a concern; 19% noted lengthy average director tenure as an issue; 34% identified a high ratio of long-tenured directors as an area of concern while 34% of non-investor respondents noted that tenure is not a concern. In the comments section, several issuer respondents stated they felt long tenure as a board member is beneficial to the board and the lack of experience could be more of a concern than long tenure.

  • Maryland REIT Law – Question 4 of the survey surrounded Maryland REIT law. ISS noted that Maryland REITs make up approximately 80% of all publicly-traded REITs in the U.S. Under Maryland REIT law, boards have the authority to amend the bylaws and increase authorized shares without shareholder approval. The survey asked whether or not ISS should issue a negative recommendation against Maryland incorporated REIT directors/trustees who have not opted out of these provisions in their bylaws, and if so, should the governance committee chair, the governance committee as a whole, a separate subset of nominees, the full board or no board members receive that negative recommendation. 18% of respondents from the investor group support negative recommendations on the chair of the governance committee, while 34% support negative recommendations against the entire governance committee and 25% would support a negative recommendation against the entire board. 15% of investors do not feel a negative recommendation is necessary.  As for the non-investor group of respondents 52% believe no negative recommendations are necessary while 9% support recommendations against the chair of the governance committee, 8% against the entire governance committee and 11% against the entire board. 
  • Maryland Unsolicited Takeover Act (MUTA) – MUTA gives the board authority to make changes to a company’s capital structure and the bylaws/charter without shareholder approval, including but not limited to:
  • the ability to re-classify a board;
  • the exclusive right to set the number of directors;
  • limiting shareholders’ ability to call special meetings to a threshold of at least a majority of shares. 

The survey asked whether ISS policy should recommend a vote against directors at companies who have not opted out of MUTA, and whether it should be the governance committee chair, the entire governance committee, some other subset of directors, the full board, or no board members.  20% of the investor group respondents would support negative recommendations on the election of the governance committee chair, 31% would support a negative recommendation against the entire governance committee and 27% stated support of a negative recommendation on the entire board. 15% of this group did not feel a negative recommendation should be issued and 6% would support a different approach entirely.  56% of the non-investor group feel no against/withhold recommendation should be issued.

  • Dual-Class Structure – ISS will generally recommend a vote against/withhold on directors at newly public companies, or companies emerging from bankruptcy, that have bylaws that ISS deems to be unfriendly to shareholders, such as a classified board or supermajority vote requirements. ISS’ survey asked if respondents believe ISS should issue a negative recommendation on the election of directors at IPO companies, or those emerging from bankruptcy, that have a stock class structure with unequal voting rights. 57% of responses from institutional investors support a negative recommendation, 19% opposed the potential policy and 24% oppose a negative recommendation as long as the unequal voting rights have a sunset provision.  Among the group of non-investor respondents, 46% outright oppose a negative recommendation on directors, 31% oppose a negative recommendation if a sunset provision is included on the unequal voting rights.  24% do support a negative recommendation. 
  • Say-on-Frequency – Say-on-Frequency will be a ballot item for many companies at their 2017 annual meeting and ISS asked how institutional investors will vote on this proposal: annual, biennial, triennial, or “it depends” with a follow-up question requesting more detail. 66% of investor respondents prefer annual say-on-pay votes, 11% chose biennial and 7% selected triennial. The balance of investor respondents, 17%, felt the frequency of say-on-pay votes should be company specific based on financial performance and the presence or lack of problematic compensation practices.  42% of non-investors selected annual votes, 7% chose biennial and 19% selected triennial.  31% of this respondent group feels the frequency should depend on company specific factors such as the level of support at previous meetings and concerning pay practices.
  • Cross-Border Executive Pay Assessments – The next question considers an increasing number of companies that are incorporated in one country and listed on an exchange in another. ISS currently reviews compensation proposals “under the policy of the country whose laws or listing rules require the proposal to be put to a vote, but generally aligns the vote recommendations of the proposals based on the policy perspective of the country in which the company is listed.” ISS questioned whether proxy voting personnel believe that A) Vote recommendations should be aligned so conflicting recommendations are not given or, B) If a company is incorporated in the U.K but listed in the U.S., for example, conflicting recommendations may occur (let’s say for in the U.K. and against in the U.S.) Is it acceptable to have opposing vote recommendations if each reflects the underlying policy of the relevant country? 65% of investor respondents answered that the vote recommendation should be aligned while 27% feel differing recommendations would be fine. The balance believe a different approach should be taken such as analyzing the proposal using the policies of the market where the executives are based.  Among the non-investor group 59% responded that the recommendations should be aligned and 28% would accept differing recommendations.   The remaining respondents chose “other” or did not select an answer for this question.


As noted previously, we expect to see the policy updates released and comment period commence at the end of October.  We will circulate the updates and information regarding the comment period should you wish to participate.

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