Institutional Shareholder Services announced last week that it had updated its corporate governance policies to reflect stricter governance standards.
According to the Rockville, MD-based company, over 700 institutions use ISS to analyze proxies and make vote recommendations for over 10,000 U.S.-based public companies.
However, the company's governance policy is not widely available. When asked for a copy, an ISS spokesperson told Compliance Week that "Our corporate governance policy is our Holy Grail," and it couldn't be distributed.
However, a report from ISS last week does provide a view into some of the company's updated voting policies, which reflect new listing standards and regulations.
Here's a summary of key points:
Equity-Based Compensation
According to the report, ISS will get tougher on boards in the areas of executive compensation and independence.
Starting Feb. 1, ISS will vote against equity compensation plans where there is a "clear disconnect" between CEO pay and company performance. The company will also recommend "withhold" votes for compensation committee members who fail to tie CEO pay to performance.
In the past, ISS has opposed stock plans for other reasons — like when the board didn't allow shareholders to vote on option re-pricing programs — but never over a "disconnect" issue. This would be a first for the company.
Performance-Based Options
The company will also support shareholder proposals advocating the use of performance-based equity awards, unless the program is weighted heavily towards "top executives" or is overly restrictive.
Two weeks ago, $291 billion pension powerhouse TIAA-CREF announced it would also toughen its voting guidelines. This topic was also on their list: the fund stated it would encourage an emphasis on restricted stock awards over stock options.
Multiple Board Membership
ISS will recommend "withholding" votes from directors who sit on more than six boards.
The company estimates that the average director's oversight duties take approximately 300 hours per board per year, and hence six boards would simply overextend directors.
This is in sync with a recent study from Korn/Ferry which stated that additional time requirements for directors — and increased personal liability risk — forced 23 percent of directors at Fortune 1000 companies to turn down additional board roles.
Similarly, a survey conducted by executive recruiting firm Christian & Timbers last July found that 70 percent of boards were limiting the number of outside boards on which their own CEOs can serve. According to the survey, 43 percent of CEOs said their board limited the number of boards on which they could serve to one; 27 percent said they were limited to sitting on two other boards.
Splitting The Chairman & CEO Role
ISS will generally vote "for" proposals seeking to split the chairman and CEO roles.
According to ISS, it would vote for such proposals unless the company has a "strong countervailing governance structure," which would include the designation of an independent lead director and a two-thirds independent board.
TIAA-CREF worded its own policies a bit differently: it would vote for the designation of a lead or presiding director when the chairman and CEO positions aren't separated.
Case By Case
ISS stated it would vote on a case-by-case basis two other sensitive issues: shareholder access and auditor rotation.
The complete text of related releases, policies and studies is available in the box at upper right.
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