Institutional Shareholder Services (ISS) has recently published its summary of 2016 policy updates. The executive summary explains both how ISS has undertaken its review of global policies but more importantly summarises the key policy updates that will apply to companies from 1 February 2016. ISS will publish the full (or possibly summary!) additions, revisions and updates to the ISS Proxy Voting Guidelines for 2016, in December. Just by way of reminder, ISS issued its first stand-alone UK and Ireland proxy voting guidelines in January 2015 (see our previous blog post),
It is always interesting to hear clients comment on the different expectations that apply to their company just because they are based in one country rather than another. This can be particularly frustrating when they are listed in both countries. This year’s policy update includes a great example of that kind of inconsistency (not to mention the need to use a made-up word to describe the problem).
When reading the term “overboarding” being used to describe a person who holds too many board positions, one can’t help but think of Dr Samuel Johnson’s bemusement at Blackadder’s sentence:
“Here it is, sir. … I’m anispeptic, frasmotic, even compunctuous to have caused you such pericombobulation”
(see second episode, third series of the truly fantastic 1980’s BBC sitcom, “Blackadder”). Notwithstanding the need to make up a term for such a person, it apparently doesn’t mean the same thing across the world:
- In the US, the term will be amended to mean a person who has more than five (down from six) public company directorships or, if the individual is an executive director, two other public company directorships.
- Contrast this with Canada where ISS’s recommended policy for the number of public company directorships is to become four (also down from six) and down to one (from two) other public company directorships for an executive director. There is an additional override in Canada. If the director has attended at least 75% of the board and committee meetings then ISS won’t recommend a negative vote against the individual.
- There’s a third definition of overboarding for UK companies (similar to the US definition but with some bells and whistles). For UK companies, executive directors can hold up to two other public company directorships and non-executives can hold up to four other public company directorships (so five non-executive roles in total) as long as the individual is not chairman of one of those companies, in which case the maximum becomes the chairmanship and three other public company directorships.
One can’t help wondering why the roles of non-executive directorships should be different across three broadly similar jurisdictions (at least from a regulatory perspective).
Other changes include:
- Helpfully for Canadian companies, ISS is proposing to introduce an Equity Plan Scorecard to assess various aspects of a plan for the purpose of determining whether it should be recommended by ISS. The current system is a series of standalone pass/fail tests.
- Expectations regarding performance periods for equity awards in France are to be extended to three years, in line with the expectations elsewhere in Europe.
As well as the summary referred to above, ISS also issued their paper on alignment of pay for performance for Europe the main thrust of which is the development of a European pay-for-performance model. This will be similar to the ones that ISS already publish for companies in the US and Canada, which have been in place since 2012 and 2013 respectively. The task has been made more difficult because remuneration disclosures required by the various European markets are more varied than for the single markets of the US and Canada. ISS’ purpose in evaluating pay-for-performance is to identify companies where there is a “misalignment”.
The measures to be used by ISS include two that are relative (compared to a comparative group of companies) and assessed over a 3-year period and one that is absolute, which is evaluated without reference to the performance of other companies. The three measures are:
- Relative degree of alignment, which addresses the question “is the pay the CEO has received for the period under review commensurate with the performance achieved by the company in the same period, relative to a comparable group?”
- Multiple of median, for which the question is “was the CEO paid significantly more in the last year than his or her peers in the comparison group?”
- Pay-TSR alignment, which is measured over a 5-year period and assesses the degree to which CEO pay has changed compared to shareholder returns for that company over that period.
The reports for European companies will contain graphs that investors will be familiar with in reports on US companies and will apply to general meetings held on or after 1 February 2016.