The Institutional Shareholder Services (“ISS”) released updates to its guidelines that govern its shareholder recommendations on a number of corporate governance matters. Significantly, ISS has adopted a new scorecard for evaluating whether ISS will recommend approving a company’s compensation plan. The Equity Plan Scorecard, or EPSC, considers a range of factors that fall into three categories: plan cost, plan features and grant practices:
- Plan Cost. In terms of plan cost, ISS will evaluate the estimated cost of a company’s equity plan as compared to its peers. To make this comparison, ISS will look at what it terms the “Shareholder Value Transfer” (“SVT”) of the company. To determine a company’s SVT, ISS will evaluate the number of new shares requested under a plan, along with any shares then currently available for future grants, including awards that have not vested or been exercised. ISS will also review SVT based only on the sum of new shares requested and shares then remaining for future grants. ISS will generally recommend against approving plans that are overly costly to a company.
- Plan Features. When evaluating plan features, ISS will review plans to determine if there are any of the following, which ISS views negatively: an automatic, single-triggered award vesting upon a change in control; discretionary vesting authority; liberal share recycling; and minimum vesting periods for awards.
- Grant Practices. In examining an equity plan’s grant practices, ISS will compare a company’s three year “burn rate” with its peers. The duration of a plan will also be a factor, along with a ratio calculated by dividing the shares then available by shares granted in the previous three years. ISS will also review the vesting requirements for CEO equity grants in the previous three years and the proportion of the CEO’s equity awards that are subject to performance. Finally, ISS will examine whether there is a claw-back policy and if there is a minimum holding period of shares after they vest. ISS generally encourages shareholders to vote against plans with a disconnect between awards and performance or has other problematic pay practices. ISS also encourages shareholders to vote against plans that permit repricing and/or buyouts of underwater options without shareholder approval.
The weightings of the EPSC factors will be keyed to each index such as the S&P 500 or Russell 3000 companies and will be assigned a weight to calculate a total EPSC score, and ISS will then issue a recommendation based on such score. ISS plans to provide more information about the EPSC system in a compensation FAQ in December.
The update also includes numerous corporate governance matters such as unilateral bylaw/charter amendments, the independence of board chairs, litigation rights of shareholders, political contributions and environmental matters. A full text of the U.S. guidelines, along with other countries, can be found here.