BOARD OF DIRECTORS:
| General Recommendation: Generally vote for director nominees, except under the following circumstances: |
Vote against1 or withhold from the entire board of directors (except new nominees2, who should be considered case-by-case) for the following:
Problematic Takeover Defenses
Classified Board Structure:
| 1.1. | The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable. |
Director Performance Evaluation:
| 1.2. | The board lacks accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one- and three-year total shareholder returns in the bottom half of a company's four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company's five-year total shareholder return and operational metrics. Problematic provisions include but are not limited to: |
| › | A classified board structure; |
| › | A supermajority vote requirement; |
| › | Either a plurality vote standard in uncontested director elections or a majority vote standard with no plurality carve-out for contested elections; |
| › | The inability of shareholders to call special meetings; |
| › | The inability of shareholders to act by written consent; |
| › | A dual-class capital structure; and/or |
| › | A non-shareholder-approved poison pill. |
Poison Pills:
| 1.3. | The company's poison pill has a "dead-hand" or "modified dead-hand" feature. Vote against or withhold from nominees every year until this feature is removed; |
| 1.4. | The board adopts a poison pill with a term of more than 12 months ("long-term pill"), or renews any existing pill, including any "short-term pill" (12 months or less), without shareholder approval. A commitment or policy that puts a newly adopted pill to a binding shareholder vote may potentially offset an adverse vote recommendation. Review such companies with classified boards every year, and such companies with annually elected boards at least once every three years, and vote against or withhold votes from all nominees if the company still maintains a non-shareholder-approved poison pill; or |
| 1.5. | The board makes a material adverse change to an existing poison pill without shareholder approval. |
Vote case-by-case on all nominees if:
| 1.6. | The board adopts a poison pill with a term of 12 months or less ("short-term pill") without shareholder approval, taking into account the following factors: |
| › | The date of the pill's adoption relative to the date of the next meeting of shareholders—i.e. whether the company had time to put the pill on the ballot for shareholder ratification given the circumstances; |
| › | The issuer's governance structure and practices; and |
| › | The issuer's track record of accountability to shareholders. |
Restricting Binding Shareholder Proposals:
Generally vote against or withhold from members of the governance committee if:
| 1.7. | The company's charter imposes undue restrictions on shareholders' ability to amend the bylaws. Such restrictions include, but are not limited to: outright prohibition on the submission of binding shareholder proposals, or share ownership requirements or time holding requirements in excess of SEC Rule 14a-8. Vote against on an ongoing basis. |
Problematic Audit-Related Practices
Generally vote against or withhold from the members of the Audit Committee if:
| 1.8. | The non-audit fees paid to the auditor are excessive (see discussion under "Auditor Ratification"); |
| 1.9. | The company receives an adverse opinion on the company's financial statements from its auditor; or |
| 1.10. | There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. |
Vote case-by-case on members of the Audit Committee and potentially the full board if:
| 1.11. | Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company's efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted. |
Problematic Compensation Practices/Pay for Performance Misalignment
In the absence of an Advisory Vote on Executive Compensation ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:
| 1.12. | There is a significant misalignment between CEO pay and company performance (pay for performance); |
| 1.13. | The company maintains significant problematic pay practices; |
| 1.14. | The board exhibits a significant level of poor communication and responsiveness to shareholders; |
| 1.15. | The company fails to submit one-time transfers of stock options to a shareholder vote; or |
| 1.16. | The company fails to fulfill the terms of a burn-rate commitment made to shareholders. |
Vote case-by-case on Compensation Committee members (or, in exceptional cases, the full board) and the Management Say-on-Pay proposal if:
| 1.17. | The company's previous say-on-pay received the support of less than 70 percent of votes cast, taking into account: |
| › | The company's response, including: |
| › | Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support; |
| › | Specific actions taken to address the issues that contributed to the low level of support; |
| › | Other recent compensation actions taken by the company; |
| › | Whether the issues raised are recurring or isolated; |
| › | The company's ownership structure; and |
| › | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
Unilateral Bylaw/Charter Amendments and Problematic Capital Structures
| 1.18. | Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if the board amends the company's bylaws or charter without shareholder approval in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders, considering the following factors: |
| › | The board's rationale for adopting the bylaw/charter amendment without shareholder ratification; |
| › | Disclosure by the company of any significant engagement with shareholders regarding the amendment; |
| › | The level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter; |
| › | The board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions; |
| › | The company's ownership structure; |
| › | The company's existing governance provisions; |
| › | The timing of the board's amendment to the bylaws/charter in connection with a significant business development; and |
| › | Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders. |
Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees, who should be considered case-by-case) if the directors:
| › | Adopted supermajority vote requirements to amend the bylaws or charter; or |
| › | Eliminated shareholders' ability to amend bylaws. |
| 1.19. | For newly public companies, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if, prior to or in connection with the company's public offering, the company or its board adopted bylaw or charter provisions materially adverse to shareholder rights, or implemented a multi-class capital structure in which the classes have unequal voting rights considering the following factors: |
| › | The level of impairment of shareholders' rights; |
| › | The disclosed rationale; |
| › | The ability to change the governance structure (e.g., limitations on shareholders' right to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter); |
| › | The ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure; |
| › | Any reasonable sunset provision; and |
Unless the adverse provision and/or problematic capital structure is reversed or removed, vote case-by-case on director nominees in subsequent years.
Governance Failures
Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
| 1.20. | Material failures of governance, stewardship, risk oversight3, or fiduciary responsibilities at the company; |
| 1.21. | Failure to replace management as appropriate; or |
| 1.22. | Egregious actions related to a director's service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company. |
Vote case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:
| 2.1. | The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year. Factors that will be considered are: |
| › | Disclosed outreach efforts by the board to shareholders in the wake of the vote; |
| › | Rationale provided in the proxy statement for the level of implementation; |
| › | The subject matter of the proposal; |
| › | The level of support for and opposition to the resolution in past meetings; |
| › | Actions taken by the board in response to the majority vote and its engagement with shareholders; |
| › | The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and |
| › | Other factors as appropriate. |
| 2.2. | The board failed to act on takeover offers where the majority of shares are tendered; |
| 2.3. | At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote; |
| 2.4. | The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the majority of votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency; or |
| 2.5. | The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received a plurality, but not a majority, of the votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency, taking into account: |
| › | The board's rationale for selecting a frequency that is different from the frequency that received a plurality; |
| › | The company's ownership structure and vote results; |
| › | ISS' analysis of whether there are compensation concerns or a history of problematic compensation practices; and |
| › | The previous year's support level on the company's say-on-pay proposal. |
Attendance at Board and Committee Meetings:
| 3.1. | Generally vote against or withhold from directors (except new nominees, who should be considered case-by-case4) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following: |
| › | Missing only one meeting (when the total of all meetings is three or fewer). |
| 3.2. | If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question. |
Overboarded Directors:
Generally vote against or withhold from individual directors who:
| 3.3. | Sit on more than five public company boards; or |
| 3.4. | Are CEOs of public companies who sit on the boards of more than two public companies besides their own—withhold only at their outside boards5. |
Vote against or withhold from Inside Directors and Affiliated Outside Directors (per the Categorization of Directors) when:
| 4.1. | The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating; |
| 4.2. | The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; |
| 4.3. | The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee; or |
| 4.4. | Independent directors make up less than a majority of the directors. |
Independent Chair (Separate Chair/CEO)
| General Recommendation: Generally vote for shareholder proposals requiring that the chairman's position be filled by an independent director, taking into consideration the following: |
| › | The scope of the proposal; |
| › | The company's current board leadership structure; |
| › | The company's governance structure and practices; |
| › | Company performance; and |
| › | Any other relevant factors that may be applicable. |
Regarding the scope of the proposal, consider whether the proposal is precatory or binding and whether the proposal is seeking an immediate change in the chairman role or the policy can be implemented at the next CEO transition.
Under the review of the company's board leadership structure, ISS may support the proposal under the following scenarios absent a compelling rationale: the presence of an executive or non-independent chair in addition to the CEO; a recent recombination of the role of CEO and chair; and/or departure from a structure with an independent chair. ISS will also consider any recent transitions in board leadership and the effect such transitions may have on independent board leadership as well as the designation of a lead director role.
When considering the governance structure, ISS will consider the overall independence of the board, the independence of key committees, the establishment of governance guidelines, board tenure and its relationship to CEO tenure, and any other factors that may be relevant. Any concerns about a company's governance structure will weigh in favor of support for the proposal.
The review of the company's governance practices may include, but is not limited to, poor compensation practices, material failures of governance and risk oversight, related-party transactions or other issues putting director independence at risk, corporate or management scandals, and actions by management or the board with potential or realized negative impact on shareholders. Any such practices may suggest a need for more independent oversight at the company thus warranting support of the proposal.
ISS' performance assessment will generally consider one-, three-, and five-year TSR compared to the company's peers and the market as a whole. While poor performance will weigh in favor of the adoption of an independent chair policy, strong performance over the long term will be considered a mitigating factor when determining whether the proposed leadership change warrants support.
Proxy Access
| General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions: |
| › | Ownership threshold: maximum requirement not more than three percent (3%) of the voting power; |
| › | Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group; |
| › | Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group; |
| › | Cap: cap on nominees of generally twenty-five percent (25%) of the board. |
Review for reasonableness any other restrictions on the right of proxy access.
Generally vote against proposals that are more restrictive than these guidelines.
Proxy Contests/Proxy Access — Voting for Director Nominees in Contested Elections
| General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors: |
| › | Long-term financial performance of the company relative to its industry; |
| › | Management's track record; |
| › | Background to the contested election; |
| › | Nominee qualifications and any compensatory arrangements; |
| › | Strategic plan of dissident slate and quality of the critique against management; |
| › | Likelihood that the proposed goals and objectives can be achieved (both slates); and |
| › | Stock ownership positions. |
In the case of candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether or not there are more candidates than board seats).
CAPITAL/RESTRUCTURING
Capital
Common Stock Authorization
| General Recommendation: Vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with a transaction on the same ballot that warrants support. |
Vote against proposals at companies with more than one class of common stock to increase the number of authorized shares of the class of common stock that has superior voting rights.
Vote against proposals to increase the number of authorized common shares if a vote for a reverse stock split on the same ballot is warranted despite the fact that the authorized shares would not be reduced proportionally.
Vote case-by-case on all other proposals to increase the number of shares of common stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following:
| › | The company's use of authorized shares during the last three years; |
| › | Disclosure in the proxy statement of the specific purposes of the proposed increase; |
| › | Disclosure in the proxy statement of specific and severe risks to shareholders of not approving the request; and |
| › | The dilutive impact of the request as determined relative to an allowable increase calculated by ISS (typically 100 percent of existing authorized shares) that reflects the company's need for shares and total shareholder returns. |
ISS will apply the relevant allowable increase below to requests to increase common stock that are for general corporate purposes (or to the general corporate purposes portion of a request that also includes a specific need):
| A. | Most companies: 100 percent of existing authorized shares. |
| B. | Companies with less than 50 percent of existing authorized shares either outstanding or reserved for issuance: 50 percent of existing authorized shares. |
| C. | Companies with one- and three-year total shareholder returns (TSRs) in the bottom 10 percent of the U.S. market as of the end of the calendar quarter that is closest to their most recent fiscal year end: 50 percent of existing authorized shares. |
| D. | Companies at which both conditions (B and C) above are both present: 25 percent of existing authorized shares. |
If there is an acquisition, private placement, or similar transaction on the ballot (not including equity incentive plans) that ISS is recommending FOR, the allowable increase will be the greater of (i) twice the amount needed to support the transactions on the ballot, and (ii) the allowable increase as calculated above.
Mergers and Acquisitions
| General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including: |
| › | Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale. |
| › | Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal. |
| › | Strategic rationale - Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. |
| › | Negotiations and process - Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation "wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value. |
| › | Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the "ISS Transaction Summary" section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists. |
| › | Governance - Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. |
COMPENSATION
Executive Pay Evaluation
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:
| 1. | Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs; |
| 2. | Avoid arrangements that risk "pay for failure": This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation; |
| 3. | Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed); |
| 4. | Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly; |
| 5. | Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors does not compromise their independence and ability to make appropriate judgments in overseeing managers' pay and performance. At the market level, it may incorporate a variety of generally accepted best practices. |
Advisory Votes on Executive Compensation—Management Proposals (Management Say-on-Pay)
| General Recommendation: Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation. |
Vote against Advisory Votes on Executive Compensation (Management Say-on-Pay or "MSOP") if:
| › | There is a significant misalignment between CEO pay and company performance (pay for performance); |
| › | The company maintains significant problematic pay practices; |
| › | The board exhibits a significant level of poor communication and responsiveness to shareholders. |
Vote against or withhold from the members of the Compensation Committee and potentially the full board if:
| › | There is no MSOP on the ballot, and an against vote on an MSOP is warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof; |
| › | The board fails to respond adequately to a previous MSOP proposal that received less than 70 percent support of votes cast; |
| › | The company has recently practiced or approved problematic pay practices, including option repricing or option backdating; or |
| › | The situation is egregious. |
Primary Evaluation Factors for Executive Pay
Pay-for-Performance Evaluation
ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the Russell 3000 or Russell 3000E Indices6, this analysis considers the following:
| › | The degree of alignment between the company's annualized TSR rank and the CEO's annualized total pay rank within a peer group, each measured over a three-year period. |
| › | The multiple of the CEO's total pay relative to the peer group median. |
| 2. | Absolute Alignment8 – the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years – i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period. |
If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, misaligned pay and performance are otherwise suggested, our analysis may include any of the following qualitative factors, as relevant to evaluating how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
| › | The ratio of performance- to time-based equity awards; |
| › | The overall ratio of performance-based compensation; |
| › | The completeness of disclosure and rigor of performance goals; |
| › | The company's peer group benchmarking practices; |
| › | Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers; |
| › | Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards); |
| › | Realizable pay9 compared to grant pay; and |
| › | Any other factors deemed relevant. |
Problematic Pay Practices
The focus is on executive compensation practices that contravene the global pay principles, including:
| › | Problematic practices related to non-performance-based compensation elements; |
| › | Incentives that may motivate excessive risk-taking; and |
Problematic Pay Practices related to Non-Performance-Based Compensation Elements
Pay elements that are not directly based on performance are generally evaluated case-by-case considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy. Please refer to ISS' Compensation FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to negative recommendations if they are deemed to be inappropriate or unjustified relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:
| › | Repricing or replacing of underwater stock options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options); |
| › | Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting; |
| › | New or extended agreements that provide for: |
| › | CIC payments exceeding 3 times base salary and average/target/most recent bonus; |
| › | CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers); |
| › | CIC payments with excise tax gross-ups (including "modified" gross-ups); |
| › | Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI's executives is not possible. |
Incentives that may Motivate Excessive Risk-Taking
| › | Multi-year guaranteed bonuses; |
| › | A single or common performance metric used for short- and long-term plans; |
| › | Lucrative severance packages; |
| › | High pay opportunities relative to industry peers; |
| › | Disproportionate supplemental pensions; or |
| › | Mega annual equity grants that provide unlimited upside with no downside risk. |
Factors that potentially mitigate the impact of risky incentives include rigorous claw-back provisions and robust stock ownership/holding guidelines.
Options Backdating
The following factors should be examined case-by-case to allow for distinctions to be made between "sloppy" plan administration versus deliberate action or fraud:
| › | Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes; |
| › | Duration of options backdating; |
| › | Size of restatement due to options backdating; |
| › | Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and |
| › | Adoption of a grant policy that prohibits backdating, and creates a fixed grant schedule or window period for equity grants in the future. |
Compensation Committee Communications and Responsiveness
Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board's responsiveness to investor input and engagement on compensation issues:
| › | Failure to respond to majority-supported shareholder proposals on executive pay topics; or |
| › | Failure to adequately respond to the company's previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account: |
| › | The company's response, including: |
| › | Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support; |
| › | Specific actions taken to address the issues that contributed to the low level of support; |
| › | Other recent compensation actions taken by the company; |
| › | Whether the issues raised are recurring or isolated; |
| › | The company's ownership structure; and |
| › | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
Frequency of Advisory Vote on Executive Compensation ("Say When on Pay")
| General Recommendation: Vote for annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies' executive pay programs. |
Equity-Based and Other Incentive Plans
| General Recommendation: Vote case-by-case on certain equity-based compensation plans10 depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an "equity plan scorecard" (EPSC) approach with three pillars: |
| › | Plan Cost: The total estimated cost of the company's equity plans relative to industry/market cap peers, measured by the company's estimated Shareholder Value Transfer (SVT) in relation to peers and considering both: |
| › | SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and |
| › | SVT based only on new shares requested plus shares remaining for future grants. |
| › | Automatic single-triggered award vesting upon a change in control (CIC); |
| › | Discretionary vesting authority; |
| › | Liberal share recycling on various award types; |
| › | Lack of minimum vesting period for grants made under the plan; |
| › | Dividends payable prior to award vesting. |
| › | The company's three-year burn rate relative to its industry/market cap peers; |
| › | Vesting requirements in most recent CEO equity grants (3-year look-back); |
| › | The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years); |
| › | The proportion of the CEO's most recent equity grants/awards subject to performance conditions; |
| › | Whether the company maintains a claw-back policy; |
| › | Whether the company has established post-exercise/vesting share-holding requirements. |
Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders' interests, or if any of the following egregious factors apply:
| › | Awards may vest in connection with a liberal change-of-control definition; |
| › | The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it – for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a history of repricing – for non-listed companies); |
| › | The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; or |
| › | Any other plan features are determined to have a significant negative impact on shareholder interests. |
SOCIAL/ENVIRONMENTAL ISSUES
Global Approach
Issues covered under the policy include a wide range of topics, including consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short or long term.
| General Recommendation: Generally vote case-by-case, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder value, and in addition the following will also be considered: |
| › | If the issues presented in the proposal are more appropriately or effectively dealt with through legislation or government regulation; |
| › | If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal; |
| › | Whether the proposal's request is unduly burdensome (scope or timeframe) or overly prescriptive; |
| › | The company's approach compared with any industry standard practices for addressing the issue(s) raised by the proposal; |
| › | If the proposal requests increased disclosure or greater transparency, whether or not reasonable and sufficient information is currently available to shareholders from the company or from other publicly available sources; and |
| › | If the proposal requests increased disclosure or greater transparency, whether or not implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage. |
Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation
| General Recommendation: Generally vote against proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing practices. |
Vote case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:
| › | The potential for reputational, market, and regulatory risk exposure; |
| › | Existing disclosure of relevant policies; |
| › | Deviation from established industry norms; |
| › | Relevant company initiatives to provide research and/or products to disadvantaged consumers; |
| › | Whether the proposal focuses on specific products or geographic regions; |
| › | The potential burden and scope of the requested report; |
| › | Recent significant controversies, litigation, or fines at the company. |
Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless such information is already publicly disclosed.
Generally vote against proposals requesting that companies adopt specific policies to encourage or constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.
Climate Change/Greenhouse Gas (GHG) Emissions
| General Recommendation: Generally vote for resolutions requesting that a company disclose information on the risks related to climate change on its operations and investments, such as financial, physical, or regulatory risks, considering: |
| › | Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; |
| › | The company's level of disclosure is at least comparable to that of industry peers; and |
| › | There are no significant controversies, fines, penalties, or litigation associated with the company's environmental performance. |
Generally vote for proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:
| › | The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; |
| › | The company's level of disclosure is comparable to that of industry peers; and |
| › | There are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions. |
Vote case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:
| › | Whether the company provides disclosure of year-over-year GHG emissions performance data; |
| › | Whether company disclosure lags behind industry peers; |
| › | The company's actual GHG emissions performance; |
| › | The company's current GHG emission policies, oversight mechanisms, and related initiatives; and |
| › | Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions. |
Board Diversity
| General Recommendation: Generally vote for requests for reports on a company's efforts to diversify the board, unless: |
| › | The gender and racial minority representation of the company's board is reasonably inclusive in relation to companies of similar size and business; and |
| › | The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company. |
Vote case-by-case on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:
| › | The degree of existing gender and racial minority diversity on the company's board and among its executive officers; |
| › | The level of gender and racial minority representation that exists at the company's industry peers; |
| › | The company's established process for addressing gender and racial minority board representation; |
| › | Whether the proposal includes an overly prescriptive request to amend nominating committee charter language; |
| › | The independence of the company's nominating committee; |
| › | Whether the company uses an outside search firm to identify potential director nominees; and |
| › | Whether the company has had recent controversies, fines, or litigation regarding equal employment practices. |
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1 In general, companies with a plurality vote standard use "Withhold" as the contrary vote option in director elections; companies with a majority vote standard use "Against". However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.
2 A "new nominee" is any current nominee who has not already been elected by shareholders and who joined the board after the problematic action in question transpired. If ISS cannot determine whether the nominee joined the board before or after the problematic action transpired, the nominee will be considered a "new nominee" if he or she joined the board within the 12 months prior to the upcoming shareholder meeting.
3 Examples of failure of risk oversight include, but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; significant adverse legal judgments or settlements; hedging of company stock; or significant pledging of company stock.
4 For new nominees only, schedule conflicts due to commitments made prior to their appointment to the board are considered if disclosed in the proxy or another SEC filing.
5 Although all of a CEO's subsidiary boards will be counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent, but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships.
6 The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities.
7 The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company's selected peers' GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of the company's. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.
8 Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.
9 ISS research reports include realizable pay for S&P1500 companies.
10 Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated case-by-case.
