Exhibit 99.2
NWQ INVESTMENT MANAGEMENT COMPANY, LLC
PROXY VOTING POLICIES AND PROCEDURES
1. Application; General Principles
1.1 These Proxy Voting Policies and Procedures apply to securities held in client accounts over which NWQ Investment Management Company, LLC (“NWQ”) has voting authority, directly or indirectly. Indirect voting authority exists where NWQ’s voting authority is implied by a general delegation of investment authority without reservation of proxy voting authority.
1.2 NWQ shall vote proxies in respect of securities owned by or on behalf of a client in the client’s best interests and without regard to the interests of NWQ or any other client of NWQ. Where NWQ shares investment discretion with regard to certain securities owned by or on behalf of clients with an advisory affiliate and proxy voting authority is not reserved by NWQ, proxy voting shall be delegated to the advisory affiliate in accordance with its proxy voting policies and procedures, as amended from time to time, (subject to Section 2 with regard to determination it may be in clients’ overall best interests not to vote).
2. Voting; Procedures
2.1 To provide centralized management of the proxy voting process, NWQ shall establish a Proxy Voting Committee.
2.2 The Proxy Voting Committee shall be comprised of at least one senior portfolio manager. The Committee may also seek the assistance of others, including investment, operations, legal or compliance personnel as necessary.
2.2.1 The Proxy Voting Committee shall:
· supervise the proxy voting process, including the identification of material conflicts of interest involving NWQ (see Section 3 for definition of material conflict of interest) and the proxy voting process in respect of securities owned by or on behalf of such clients;
· determine how to vote proxies relating to issues not covered by these Policies and Procedures; and
· determine when NWQ may deviate from these Policies and Procedures.
2.3 Unless the Proxy Voting Committee otherwise determines (and documents the basis for its decision) or as otherwise provided below, the Proxy Voting Committee shall cause proxies to be voted in a manner consistent with the recommendations or guidelines of an independent third party proxy service or other third party. In most cases, NWQ has adopted the guidelines of and will generally vote in accordance with the recommendations of Risk Metrics Group (“RMG”) (formerly, Institutional Shareholder Services, Inc.), as such guidelines may be updated from time to time (the current guideline summaries are attached hereto as Exhibit A). In select other cases, NWQ may agree generally to vote proxies for a particular client account in accordance with the third party recommendations or guidelines selected by the client, such as the AFL-CIO Guidelines (guideline summary available on request). The applicable recommendations and guidelines employed by NWQ shall be referred to herein as the “Guidelines” and the “Recommendations” respectively. As a general
matter, unless otherwise restricted NWQ reserves the right to override the applicable Recommendations or Guidelines in any situation where it believes that following such Recommendations or Guidelines is not in its clients’ best interests.
2.3.1 Where any material conflict of interest has been identified and the matter is covered by the applicable Recommendation or Guidelines, the Proxy Voting Committee shall cause proxies to be voted in accordance with the applicable Recommendation or Guidelines.
2.3.2 Where any material conflict of interest has been identified and the matter is not covered by the applicable Recommendation or Guidelines, NWQ may (i) vote in accordance with the recommendation of an alterative independent third party (who may be a proxy voting service) or (ii) disclose the conflict to the client, obtain the client’s consent to vote, and make the proxy voting determination itself (and document the basis for the decision).
2.4 NWQ may determine not to vote proxies in respect of securities of any issuer if it determines it would be in its clients’ overall best interests not to vote. Such determination may apply in respect of all client holdings of the securities or only certain specified clients, as NWQ deems appropriate under the circumstances.
2.4.1 Generally, NWQ does not intend to vote proxies associated with the securities of any issuer if as a result of voting, the issuer restricts such securities from being transacted (“share blocking” is done in a few foreign countries). However, NWQ may decide, on an individual security basis that it is in the best interests of its clients for NWQ to vote the proxy associated with such a security, taking into account the loss of liquidity. In addition, NWQ may decline to vote proxies where the voting would in NWQ’s judgment result in some other financial, legal, regulatory disability or burden to NWQ or the client (such as imputing control with respect to the issuer).
2.4.2 To the extent that NWQ receives proxies for securities that are transferred into a client’s portfolio that were not recommended or selected by NWQ and are sold or expected to be sold promptly in an orderly manner (“legacy securities”), NWQ will generally refrain from voting such proxies. In such circumstances, since legacy securities are expected to be sold promptly, voting proxies on such securities would not further NWQ’s interest in maximizing the value of client investments. NWQ may consider an institutional client’s special request to vote a legacy security proxy, and if agreed would vote such proxy in accordance with the guidelines below.
2.4.3 In addition, the Proxy Voting Committee may determine: (a) not to recall securities on loan if, in its judgment, the negative consequences to clients of disrupting the securities lending program would outweigh the benefits of voting in the particular instance or, (b) in its judgment, the expense and administrative inconvenience outweighs the benefits to clients of voting the securities.
3. Material Conflicts of Interest
3.1 Voting the securities of an issuer where the following relationships or circumstances exist are deemed to give rise to a material conflict of interest for purposes of these Policies and Procedures:
3.1.1 The issuer is an institutional separate account client of NWQ or wrap program in which NWQ participates as an investment manager that paid fees to NWQ for the prior calendar year
in excess of 1% of NWQ’s annual revenues for that year. This analysis will be performed in February of each year.
3.1.2 The issuer is an entity in which a member of the Executive Committee or Proxy Committee of NWQ or a relative(1) of any such person is or was (within the past three years of the proxy vote) an executive officer or director employee, or such person or relative otherwise has received more than $1,000 from the issuer during NWQ’s last three fiscal years, other than the receipt of interest, dividends, capital gains or proceeds from an insurance company for a claim. This analysis will be performed in February of each year.
3.1.3 Any other circumstance that NWQ is aware of where NWQ’s duty to serve its clients’ interests, typically referred to as its “duty of loyalty,” could be materially compromised.
3.1.4 Notwithstanding the foregoing, a conflict of interest described in Section 3.1 shall not be considered material for the purposes of these Policies and Procedures in respect of a specific vote or circumstance if the matter to be voted on relates to a restructuring of the terms of existing securities or the issuance of new securities or a similar matter arising out of the holding of securities, other than common equity, in the context of a bankruptcy or threatened bankruptcy of the issuer.
3.1.5 Notwithstanding the foregoing, in its process of determining whether there are material conflicts of interest, NWQ does not consider nonpublic information about the business arrangements of its affiliates or their officers and directors.
3.1.6 Notwithstanding the foregoing, business arrangements that NWQ is not actively involved in shall not be deemed to raise a material conflict of interest for NWQ. For example, if NWQ is aware that an issuer is considering the inclusion of an NWQ-advised fund in its 401(k) plan menu, but NWQ is not actively soliciting the business, NWQ shall not be deemed to have a material conflict of interest in voting proxies of the issue.
4. Recordkeeping and Retention
4.1 NWQ shall retain records relating to the voting of proxies, including:
4.1.1 Copies of these Policies and Procedures and any amendments thereto. Copies of applicable Policies and Procedures adopted by NWQ’s advisory affiliate with regard to any securities in client accounts managed under shared investment discretion (as referenced in section 1.2 above), and any amendments thereto.
4.1.2 A copy of each proxy ballot and proxy statement filed by the issuer with the Securities and Exchange Commission or foreign regulator (“Proxy Statement”), or English translation of Proxy Statement as made available through a third party service provider regarding securities held on behalf of clients who have authorized voting of proxies, with exception of any “legacy securities” ballots or proxy statements (referenced in section 2.3.2 above) not voted.
4.1.3 Records of each vote cast by NWQ (or its advisory affiliate, as applicable) on behalf of clients; these records may be maintained on an aggregate basis for certain clients (e.g., managed account clients).
(1) For the purposes of these Guidelines, “relative” includes the following family members: spouse, minor children or stepchildren.
4.1.4 A copy of any documents created by NWQ that were material to making a decision on how to vote or that memorializes the basis for that decision.
4.1.5 A copy of each written request for information on how NWQ (or its advisory affiliate, as applicable) voted proxies on behalf of the client, and a copy of any written response by NWQ to any (oral or written) request for information on how such proxies were voted.
4.2 These records shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of NWQ’s fiscal year during which the last entry was made in the records, the first two years in an appropriate office of NWQ.
4.3 NWQ may rely on Proxy Statements filed on the SEC’s EDGAR system or on Proxy Statements, ballots and records of votes cast by NWQ maintained by a third party, such as a proxy voting service.
Adopted: June 24, 2003
Amended: May 21, 2007
Amended: February 25, 2009
2013 U.S. Proxy Voting Summary Guidelines
December 19, 2012
Institutional Shareholder Services Inc.
Copyright © 2012 by ISS
www.issgovernance.com
ISS’ 2013 U.S. Proxy Voting Summary Guidelines
Effective for Meetings on or after Feb. 1, 2013
Published December 19, 2012
Table of Contents
1. ROUTINE/MISCELLANEOUS | 7 |
Adjourn Meeting | 7 |
Amend Quorum Requirements | 7 |
Amend Minor Bylaws | 7 |
Change Company Name | 7 |
Change Date, Time, or Location of Annual Meeting | 7 |
Other Business | 7 |
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Audit-Related | 8 |
Auditor Indemnification and Limitation of Liability | 8 |
Auditor Ratification | 8 |
Shareholder Proposals Limiting Non-Audit Services | 8 |
Shareholder Proposals on Audit Firm Rotation | 9 |
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2. BOARD OF DIRECTORS: | 10 |
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Voting on Director Nominees in Uncontested Elections | 10 |
1. Board Accountability | 10 |
2. Board Responsiveness | 12 |
3. Director Independence | 13 |
4. Director Competence | 13 |
2013 ISS Categorization of Directors | 15 |
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Other Board-Related Proposals | 17 |
Age/Term Limits | 17 |
Board Size | 17 |
Classification/Declassification of the Board | 17 |
CEO Succession Planning | 18 |
Cumulative Voting | 18 |
Director and Officer Indemnification and Liability Protection | 18 |
Establish/Amend Nominee Qualifications | 19 |
Establish Other Board Committee Proposals | 19 |
Filling Vacancies/Removal of Directors | 19 |
Independent Chair (Separate Chair/CEO) | 19 |
Majority of Independent Directors/Establishment of Independent Committees | 20 |
Majority Vote Standard for the Election of Directors | 20 |
Proxy Access | 21 |
Require More Nominees than Open Seats | 21 |
Shareholder Engagement Policy (Shareholder Advisory Committee) | 21 |
Proxy Contests—Voting for Director Nominees in Contested Elections | 22 |
Vote-No Campaigns | 22 |
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3. SHAREHOLDER RIGHTS & DEFENSES | 23 |
Advance Notice Requirements for Shareholder Proposals/Nominations | 23 |
Amend Bylaws without Shareholder Consent | 23 |
Confidential Voting | 23 |
Control Share Acquisition Provisions | 23 |
Control Share Cash-Out Provisions | 24 |
Disgorgement Provisions | 24 |
Exclusive Venue | 24 |
Fair Price Provisions | 24 |
Freeze-Out Provisions | 25 |
Greenmail | 25 |
Net Operating Loss (NOL) Protective Amendments | 25 |
Poison Pills (Shareholder Rights Plans) | 25 |
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy | 25 |
Management Proposals to Ratify a Poison Pill | 26 |
Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs) | 26 |
Reimbursing Proxy Solicitation Expenses | 26 |
Reincorporation Proposals | 27 |
Shareholder Ability to Act by Written Consent | 27 |
Shareholder Ability to Call Special Meetings | 27 |
Stakeholder Provisions | 28 |
State Antitakeover Statutes | 28 |
Supermajority Vote Requirements | 28 |
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4. CAPITAL/RESTRUCTURING | 29 |
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Capital | 29 |
Adjustments to Par Value of Common Stock | 29 |
Common Stock Authorization | 29 |
Dual Class Structure | 29 |
Issue Stock for Use with Rights Plan | 30 |
Preemptive Rights | 30 |
Preferred Stock Authorization | 30 |
Recapitalization Plans | 30 |
Reverse Stock Splits | 31 |
Share Repurchase Programs | 31 |
Stock Distributions: Splits and Dividends | 31 |
Tracking Stock | 31 |
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Restructuring | 31 |
Appraisal Rights | 31 |
Asset Purchases | 31 |
Asset Sales | 32 |
Bundled Proposals | 32 |
Conversion of Securities | 32 |
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans | 32 |
Formation of Holding Company | 33 |
Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs) | 33 |
Joint Ventures | 34 |
Liquidations | 34 |
Mergers and Acquisitions | 34 |
Private Placements/Warrants/Convertible Debentures | 35 |
Reorganization/Restructuring Plan (Bankruptcy) | 36 |
Special Purpose Acquisition Corporations (SPACs) | 36 |
Spin-offs | 37 |
Value Maximization Shareholder Proposals | 37 |
5. COMPENSATION | 38 |
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Executive Pay Evaluation | 38 |
Advisory Votes on Executive Compensation—Management Proposals (Management Say-on-Pay) | 38 |
Pay-for-Performance Evaluation | 39 |
Problematic Pay Practices | 40 |
Board Communications and Responsiveness | 41 |
Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”) | 41 |
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale | 41 |
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Equity-Based and Other Incentive Plans | 42 |
Cost of Equity Plans | 42 |
Repricing Provisions | 42 |
Pay-for-Performance Misalignment—Application to Equity Plans | 43 |
Three-Year Burn Rate/Burn Rate Commitment | 43 |
Burn Rate Table for 2013 | 44 |
Liberal Definition of Change in Control | 45 |
Problematic Pay Practices | 45 |
Specific Treatment of Certain Award Types in Equity Plan Evaluations | 45 |
Dividend Equivalent Rights | 45 |
Liberal Share Recycling Provisions | 45 |
Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs) | 45 |
Option Overhang Cost | 45 |
Other Compensation Plans | 46 |
401(k) Employee Benefit Plans | 46 |
Employee Stock Ownership Plans (ESOPs) | 46 |
Employee Stock Purchase Plans—Qualified Plans | 46 |
Employee Stock Purchase Plans—Non-Qualified Plans | 47 |
Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related Compensation Proposals) | 47 |
Option Exchange Programs/Repricing Options | 48 |
Stock Plans in Lieu of Cash | 48 |
Transfer Stock Option (TSO) Programs | 48 |
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Director Compensation | 49 |
Equity Plans for Non-Employee Directors | 49 |
Non-Employee Director Retirement Plans | 50 |
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Shareholder Proposals on Compensation | 50 |
Advisory Vote on Executive Compensation (Say-on-Pay) | 50 |
Adopt Anti-Hedging/Pledging/Speculative Investments Policy | 50 |
Bonus Banking/Bonus Banking “Plus” | 50 |
Compensation Consultants—Disclosure of Board or Company’s Utilization | 50 |
Disclosure/Setting Levels or Types of Compensation for Executives and Directors | 51 |
Golden Coffins/Executive Death Benefits | 51 |
Hold Equity Past Retirement or for a Significant Period of Time | 51 |
Non-Deductible Compensation | 52 |
Pay for Performance | 52 |
Performance-Based Awards | 52 |
Pay for Superior Performance | 53 |
Pre-Arranged Trading Plans (10b5-1 Plans) | 53 |
Prohibit CEOs from Serving on Compensation Committees | 54 |
Recoup Bonuses (Clawbacks) | 54 |
Severance Agreements for Executives/Golden Parachutes | 54 |
Share Buyback Holding Periods | 54 |
Supplemental Executive Retirement Plans (SERPs) | 55 |
Tax Gross-Up Proposals | 55 |
Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity | 55 |
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6. SOCIAL/ENVIRONMENTAL ISSUES | 56 |
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Animal Welfare | 56 |
Animal Welfare Policies | 56 |
Animal Testing | 56 |
Animal Slaughter (Controlled Atmosphere Killing (CAK)) | 56 |
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Consumer Issues | 57 |
Genetically Modified Ingredients | 57 |
Reports on Potentially Controversial Business/Financial Practices | 57 |
Pharmaceutical Pricing, Access to Medicines, Product Reimportation, and Health Pandemics | 57 |
Product Safety and Toxic/Hazardous Materials | 58 |
Tobacco-Related Proposals | 59 |
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Climate Change and the Environment | 59 |
Climate Change/Greenhouse Gas (GHG) Emissions | 59 |
General Environmental Proposals and Community Impact Assessments, Concentrated Area Feeding Operations | 60 |
Energy Efficiency | 60 |
Facility and Operational Safety/Security | 61 |
Hydraulic Fracturing | 61 |
Operations in Protected Areas | 61 |
Recycling | 61 |
Renewable Energy | 62 |
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Diversity | 62 |
Board Diversity | 62 |
Equality of Opportunity | 62 |
Gender Identity, Sexual Orientation, and Domestic Partner Benefits | 63 |
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General Corporate Issues | 63 |
Charitable Contributions | 63 |
Environmental, Social, and Governance (ESG) Compensation-Related Proposals | 63 |
Political Spending & Lobbying Activities | 63 |
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International Issues, Labor Issues, and Human Rights | 64 |
International Human Rights Proposals | 64 |
Internet Privacy and Censorship | 65 |
MacBride Principles | 65 |
Operations in High Risk Markets | 65 |
Outsourcing/Offshoring | 65 |
Workplace Safety | 66 |
Weapons and Military Sales | 66 |
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Sustainability | 66 |
Sustainability Reporting | 66 |
Water Issues | 67 |
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7. MUTUAL FUND PROXIES | 68 |
Election of Directors | 68 |
Converting Closed-end Fund to Open-end Fund | 68 |
Proxy Contests | 68 |
Investment Advisory Agreements | 68 |
Approving New Classes or Series of Shares | 68 |
Preferred Stock Proposals | 69 |
1940 Act Policies | 69 |
Changing a Fundamental Restriction to a Nonfundamental Restriction | 69 |
Change Fundamental Investment Objective to Nonfundamental | 69 |
Name Change Proposals | 69 |
Change in Fund’s Subclassification | 70 |
Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value | 70 |
Disposition of Assets/Termination/Liquidation | 70 |
Changes to the Charter Document | 70 |
Changing the Domicile of a Fund | 71 |
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval | 71 |
Distribution Agreements | 71 |
Master-Feeder Structure | 71 |
Mergers | 71 |
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Shareholder Proposals for Mutual Funds | 72 |
Establish Director Ownership Requirement | 72 |
Reimburse Shareholder for Expenses Incurred | 72 |
Terminate the Investment Advisor | 72 |
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8. FOREIGN PRIVATE ISSUERS LISTED ON U.S. EXCHANGES | 73 |
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DISCLOSURE/DISCLAIMER | 74 |
1. Routine/Miscellaneous
Adjourn Meeting
Generally vote AGAINST proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.
Vote FOR proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote AGAINST proposals if the wording is too vague or if the proposal includes “other business.”
Amend Quorum Requirements
Vote AGAINST proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding unless there are compelling reasons to support the proposal.
Amend Minor Bylaws
Vote FOR bylaw or charter changes that are of a housekeeping nature (updates or corrections).
Change Company Name
Vote FOR proposals to change the corporate name unless there is compelling evidence that the change would adversely impact shareholder value.
Change Date, Time, or Location of Annual Meeting
Vote FOR management proposals to change the date, time, or location of the annual meeting unless the proposed change is unreasonable.
Vote AGAINST shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling or location is unreasonable.
Other Business
Vote AGAINST proposals to approve other business when it appears as voting item.
Audit-Related
Auditor Indemnification and Limitation of Liability
Vote CASE-BY-CASE on the issue of auditor indemnification and limitation of liability. Factors to be assessed include but are not limited to:
· The terms of the auditor agreement—the degree to which these agreements impact shareholders’ rights;
· The motivation and rationale for establishing the agreements;
· The quality of the company’s disclosure; and
· The company’s historical practices in the audit area.
Vote AGAINST or WTHHOLD from members of an audit committee in situations where 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.
Auditor Ratification
Vote FOR proposals to ratify auditors unless any of the following apply:
· An auditor has a financial interest in or association with the company, and is therefore not independent;
· There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of the company’s financial position;
· Poor accounting practices are identified that rise to a serious level of concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures; or
· Fees for non-audit services (“Other” fees) are excessive.
Non-audit fees are excessive if:
· Non-audit (“other”) fees > audit fees + audit-related fees + tax compliance/preparation fees
Tax compliance and preparation include the preparation of original and amended tax returns and refund claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other” fees.
In circumstances where “Other” fees include fees related to significant one-time capital structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to the standard “non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
Shareholder Proposals Limiting Non-Audit Services
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.
Shareholder Proposals on Audit Firm Rotation
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation, taking into account:
· The tenure of the audit firm;
· The length of rotation specified in the proposal;
· Any significant audit-related issues at the company;
· The number of Audit Committee meetings held each year;
· The number of financial experts serving on the committee; and
· Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price.
2. Board of Directors:
Voting on Director Nominees in Uncontested Elections
Votes on director nominees should be determined CASE-BY-CASE.
Four fundamental principles apply when determining votes on director nominees:
1. Board Accountability: Practices that promote accountability include: transparency into a company’s governance practices; annual board elections; and providing shareholders the ability to remove problematic directors and to vote on takeover defenses or other charter/bylaw amendments. These practices help reduce the opportunity for management entrenchment.
2. Board Responsiveness: Directors should be responsive to shareholders, particularly in regard to shareholder proposals that receive a majority vote and to tender offers where a majority of shares are tendered. Furthermore, shareholders should expect directors to devote sufficient time and resources to oversight of the company.
3. Director Independence: Without independence from management, the board may be unwilling or unable to effectively set company strategy and scrutinize performance or executive compensation.
4. Director Competence: Companies should seek directors who can add value to the board through specific skills or expertise and who can devote sufficient time and commitment to serve effectively. While directors should not be constrained by arbitrary limits such as age or term limits, directors who are unable to attend board and committee meetings or who are overextended (i.e., serve on too many boards) may be unable to effectively serve in shareholders’ best interests.
1. Board Accountability
Vote AGAINST(1) or WITHHOLD from the entire board of directors (except new nominees(2), 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;
(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.
· 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 ballot for shareholder ratification given the circumstances;
· The issuer’s rationale;
· The issuer’s governance structure and practices; and
· The issuer’s track record of accountability to shareholders.
Problematic Audit-Related Practices
Generally vote AGAINST or WITHHOLD from the members of the Audit Committee if:
1.7. The non-audit fees paid to the auditor are excessive (see discussion under “Auditor Ratification”);
1.8. The company receives an adverse opinion on the company’s financial statements from its auditor; or
1.9. 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:
1.10. 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:
1.11. There is a significant misalignment between CEO pay and company performance (pay for performance);
1.12. The company maintains significant problematic pay practices;
1.13. The board exhibits a significant level of poor communication and responsiveness to shareholders;
1.14. The company fails to submit one-time transfers of stock options to a shareholder vote; or
1.15. 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:
1.16. The company’s previous say-on-pay proposal 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.
Governance Failures
Under extraordinary circumstances, vote AGAINST or WITHHOLD from directors individually, committee members, or the entire board, due to:
1.17. Material failures of governance, stewardship, risk oversight(3), or fiduciary responsibilities at the company;
1.18. Failure to replace management as appropriate; or
1.19. 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.
2. Board Responsiveness
Vote AGAINST or WITHHOLD from individual directors, committee members, or the entire board of directors as appropriate if:
2.1. For 2013, the board failed to act(4) on a shareholder proposal that received the support of a majority of the shares outstanding the previous year;
(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) Responding to the shareholder proposal will generally mean either full implementation of the proposal or, if the matter requires a vote by shareholders, a management proposal on the next annual ballot to implement the proposal. Responses that involve less than full implementation will be considered on a case-by-case basis, taking into account:
· The subject matter of the proposal;
· The level of support and opposition provided to the resolution in past meetings;
· Disclosed outreach efforts by the board to shareholders in the wake of the vote;
· Actions taken by the board in response to 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. For 2013, the board failed to act on a shareholder proposal that received the support of a majority of shares cast in the last year and one of the two previous years;
2.3. For 2014, the board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year;
2.4. The board failed to act on takeover offers where the majority of shares are tendered;
2.5. 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; or
2.6. 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.
Vote CASE-BY-CASE on the entire board if:
2.7. 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.
3. Director Independence
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors (per the Categorization of Directors) when:
3.1. The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating;
3.2. The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee;
3.3. The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee; or
3.4. Independent directors make up less than a majority of the directors.
4. Director Competence
Attendance at Board and Committee Meetings:
4.1. Generally vote AGAINST or WITHHOLD from directors (except new nominees, who should be considered CASE-BY-CASE(5)) 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:
· Medical issues/illness;
· Family emergencies; and
(5) 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.
· Missing only one meeting (when the total of all meetings is three or fewer).
4.2. 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:
Vote AGAINST or WITHHOLD from individual directors who:
4.3. Sit on more than six public company boards; or
4.4. Are CEOs of public companies who sit on the boards of more than two public companies besides their own—withhold only at their outside boards(6).
(6) Although all of a CEO’s subsidiary boards will be counted as separate boards, ISS will not recommend a withhold vote from the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent, but will do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships.
2013 ISS Categorization of Directors
1. Inside Director (I)
1.1. Current employee or current officer(i) of the company or one of its affiliates(ii).
1.2. Beneficial owner of more than 50 percent of the company’s voting power (this may be aggregated if voting power is distributed among more than one member of a group).
1.3. Director named in the Summary Compensation Table (excluding former interim officers).
2. Affiliated Outside Director (AO)
Board Attestation
2.1. Board attestation that an outside director is not independent.
Former CEO/Interim Officer
2.2. Former CEO of the company(iii),(iv).
2.3. Former CEO of an acquired company within the past five years(iv).
2.4. Former interim officer if the service was longer than 18 months. If the service was between 12 and 18 months an assessment of the interim officer’s employment agreement will be made(v).
Non-CEO Executives
2.5. Former officer(i) of the company, an affiliate(ii) or an acquired firm within the past five years.
2.6. Officer(i) of a former parent or predecessor firm at the time the company was sold or split off from the parent/predecessor within the past five years.
2.7. Officer(i), former officer, or general or limited partner of a joint venture or partnership with the company.
Family Members
2.8. Immediate family member(vi) of a current or former officer(i) of the company or its affiliates(ii) within the last five years.
2.9. Immediate family member(vi) of a current employee of company or its affiliates(ii) where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role).
Transactional, Professional, Financial, and Charitable Relationships
2.10. Currently provides (or an immediate family member(vi) provides) professional services(vii) to the company, to an affiliate(ii) of the company or an individual officer of the company or one of its affiliates in excess of $10,000 per year.
2.11. Is (or an immediate family member(vi) is) a partner in, or a controlling shareholder or an employee of, an organization which provides professional services(vii) to the company, to an affiliate(ii) of the company, or an individual officer of the company or one of its affiliates in excess of $10,000 per year.
2.12. Has (or an immediate family member(vi) has) any material transactional relationship(viii) with the company or its affiliates(ii) (excluding investments in the company through a private placement).
2.13. Is (or an immediate family member(vi) is) a partner in, or a controlling shareholder or an executive officer of, an organization which has any material transactional relationship(viii) with the company or its affiliates(ii) (excluding investments in the company through a private placement).
2.14. Is (or an immediate family member(vi) is) a trustee, director, or employee of a charitable or non-profit organization that receives material grants or endowments(viii) from the company or its affiliates(ii).
Other Relationships
2.15. Party to a voting agreement(ix) to vote in line with management on proposals being brought to shareholder vote.
2.16. Has (or an immediate family member(vi) has) an interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committee(x).
2.17. Founder(xi) of the company but not currently an employee.
2.18. Any material(xii) relationship with the company.
3. Independent Outside Director (IO)
3.1. No material(xii) connection to the company other than a board seat.
Footnotes:
(i) The definition of officer will generally follow that of a “Section 16 officer” (officers subject to Section 16 of the Securities and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge of a principal business unit, division, or policy function). Current interim officers are included in this category. For private companies, the equivalent positions are applicable. A non-employee director serving as an officer due to statutory requirements (e.g. corporate secretary) will be classified as an Affiliated Outsider under 2.18: “Any material relationship with the company.” However, if the company provides explicit disclosure that the director is not receiving additional compensation in excess of $10,000 per year for serving in that capacity, then the director will be classified as an Independent Outsider.
(ii) “Affiliate” includes a subsidiary, sibling company, or parent company. ISS uses 50 percent control ownership by the parent company as the standard for applying its affiliate designation.
(iii) Includes any former CEO of the company prior to the company’s initial public offering (IPO).
(iv) When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company, ISS will generally classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director’s independence; any operating ties to the firm; and the existence of any other conflicting relationships or related party transactions.
(v) ISS will look at the terms of the interim officer’s employment contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. ISS will also consider if a formal search process was under way for a full-time officer at the time.
(vi) “Immediate family member” follows the SEC’s definition of such and covers spouses, parents, children, step-parents, step-children, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee for director, executive officer, or significant shareholder of the company.
(vii) Professional services can be characterized as advisory in nature, generally involve access to sensitive company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include, but are not limited to the following: investment banking/financial advisory services; commercial banking (beyond deposit services); investment services; insurance services; accounting/audit services; consulting services; marketing services; legal services; property management services; realtor services; lobbying services; executive search services; and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit services; IT tech support services; educational services; and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject to the associated materiality test) rather than a professional relationship. “Of Counsel” relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or is a retired partner of, the firm providing the professional service. The case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional rather than a professional relationship. Insurance services and marketing services are assumed to be professional services unless the company explains why such services are not advisory.
(viii) A material transactional relationship, including grants to non-profit organizations, exists if the company makes annual payments to, or receives annual payments from, another entity exceeding the greater of $200,000 or 5 percent of the recipient’s gross revenues, in the case of a company which follows NASDAQ listing standards; or the greater of $1,000,000 or 2 percent of the recipient’s gross revenues, in the case of a company which follows NYSE/Amex listing standards. In the case of a
company which follows neither of the preceding standards, ISS will apply the NASDAQ-based materiality test. (The recipient is the party receiving the financial proceeds from the transaction).
(ix) Dissident directors who are parties to a voting agreement pursuant to a settlement arrangement, will generally be classified as independent unless determined otherwise taking into account the following factors: the terms of the agreement; the duration of the standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any conflicting relationships or related party transactions.
(x) Interlocks include: executive officers serving as directors on each other’s compensation or similar committees (or, in the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board).
(xi) The operating involvement of the founder with the company will be considered. Little to no operating involvement ever may cause ISS to deem the founder as an independent outsider.
(xii) For purposes of ISS’s director independence classification, “material” will be defined as a standard of relationship (financial, personal or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have a meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders.
Other Board-Related Proposals
Age/Term Limits
Vote AGAINST management and shareholder proposals to limit the tenure of outside directors through mandatory retirement ages.
Vote AGAINST management proposals to limit the tenure of outside directors through term limits. However, scrutinize boards where the average tenure of all directors exceeds 15 years for independence from management and for sufficient turnover to ensure that new perspectives are being added to the board.
Board Size
Vote FOR proposals seeking to fix the board size or designate a range for the board size.
Vote AGAINST proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval.
Classification/Declassification of the Board
Vote AGAINST proposals to classify (stagger) the board.
Vote FOR proposals to repeal classified boards and to elect all directors annually.
CEO Succession Planning
Generally vote FOR proposals seeking disclosure on a CEO succession planning policy, considering at a minimum, the following factors:
· The reasonableness/scope of the request; and
· The company’s existing disclosure on its current CEO succession planning process.
Cumulative Voting
Generally vote AGAINST proposals to eliminate cumulative voting.
Generally vote FOR shareholder proposals to restore or provide for cumulative voting unless:
· The company has proxy access, thereby allowing shareholders to nominate directors to the company’s ballot; and
· The company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections.
Vote FOR proposals for cumulative voting at controlled companies (insider voting power > 50%).
Director and Officer Indemnification and Liability Protection
Vote CASE-BY-CASE on proposals on director and officer indemnification and liability protection using Delaware law as the standard.
Vote AGAINST proposals that would:
· Eliminate entirely directors’ and officers’ liability for monetary damages for violating the duty of care.
· Expand coverage beyond just legal expenses to liability for acts, such as negligence, that are more serious violations of fiduciary obligation than mere carelessness.
· Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for, at the discretion of the company’s board (i.e., “permissive indemnification”), but that previously the company was not required to indemnify.
Vote FOR only those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was unsuccessful if both of the following apply:
· If the director was found to have acted in good faith and in a manner that he reasonably believed was in the best interests of the company; and
· If only the director’s legal expenses would be covered.
Establish/Amend Nominee Qualifications
Vote CASE-BY-CASE on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the criteria and the degree to which they may preclude dissident nominees from joining the board.
Vote CASE-BY-CASE on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:
· The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative to that of its peers;
· The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is sought;
· The company’s disclosure and performance relating to the issue for which board oversight is sought and any significant related controversies; and
· The scope and structure of the proposal.
Establish Other Board Committee Proposals
Generally vote AGAINST shareholder proposals to establish a new board committee, as such proposals seek a specific oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered:
· Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is sought;
· Level of disclosure regarding the issue for which board oversight is sought;
· Company performance related to the issue for which board oversight is sought;
· Board committee structure compared to that of other companies in its industry sector; and
· The scope and structure of the proposal.
Filling Vacancies/Removal of Directors
Vote AGAINST proposals that provide that directors may be removed only for cause.
Vote FOR proposals to restore shareholders’ ability to remove directors with or without cause.
Vote AGAINST proposals that provide that only continuing directors may elect replacements to fill board vacancies.
Vote FOR proposals that permit shareholders to elect directors to fill board vacancies.
Independent Chair (Separate Chair/CEO)
Generally vote FOR shareholder proposals requiring that the chairman’s position be filled by an independent director, unless the company satisfies all of the following criteria:
The company maintains the following counterbalancing governance structure:
· Designated lead director, elected by and from the independent board members with clearly delineated and comprehensive duties. (The role may alternatively reside with a presiding director, vice chairman, or rotating lead director; however, the director must serve a minimum of one year in order to qualify as a lead director.) The duties should include, but are not limited to, the following:
· presides at all meetings of the board at which the chairman is not present, including executive sessions of the independent directors;
· serves as liaison between the chairman and the independent directors;
· approves information sent to the board;
· approves meeting agendas for the board;
· approves meeting schedules to assure that there is sufficient time for discussion of all agenda items;
· has the authority to call meetings of the independent directors;
· if requested by major shareholders, ensures that he or she is available for consultation and direct communication;
· Two-thirds independent board;
· Fully independent key committees;
· Established governance guidelines;
· A company in the Russell 3000 universe must not have exhibited sustained poor total shareholder return (TSR) performance, defined as one- and three-year TSR in the bottom half of the company’s four-digit GICS industry group (using Russell 3000 companies only), unless there has been a change in the Chairman/CEO position within that time. For companies not in the Russell 3000 universe, the company must not have underperformed both its peers and index on the basis of both one-year and three-year total shareholder returns, unless there has been a change in the Chairman/CEO position within that time;
· The company does not have any problematic governance or management issues, examples of which include, but are not limited to:
· Egregious compensation practices;
· Multiple related-party transactions or other issues putting director independence at risk;
· Corporate or management scandals;
· Excessive problematic corporate governance provisions; or
· Flagrant actions by management or the board with potential or realized negative impacts on shareholders.
Majority of Independent Directors/Establishment of Independent Committees
Vote FOR shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS’ definition of independent outsider. (See Categorization of Directors.)
Vote FOR shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors unless they currently meet that standard.
Majority Vote Standard for the Election of Directors
Generally vote FOR management proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote AGAINST if no carve-out for a plurality vote standard in contested elections is included.
Generally vote FOR precatory and binding shareholder resolutions requesting that the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats.
Companies are strongly encouraged to also adopt a post-election policy (also known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.
Proxy Access
ISS supports proxy access as an important shareholder right, one that is complementary to other best-practice corporate governance features. However, in the absence of a uniform standard, proposals to enact proxy access may vary widely; as such, ISS is not setting forth specific parameters at this time and will take a case-by-case approach in evaluating these proposals.
Vote CASE-BY-CASE on proposals to enact proxy access, taking into account, among other factors:
· Company-specific factors; and
· Proposal-specific factors, including:
· The ownership thresholds proposed in the resolution (i.e., percentage and duration);
· The maximum proportion of directors that shareholders may nominate each year; and
· The method of determining which nominations should appear on the ballot if multiple shareholders submit nominations.
Require More Nominees than Open Seats
Vote AGAINST shareholder proposals that would require a company to nominate more candidates than the number of open board seats.
Shareholder Engagement Policy (Shareholder Advisory Committee)
Generally vote FOR shareholder proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate:
· Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information between shareholders and members of the board;
· Effectively disclosed information with respect to this structure to its shareholders;
· Company has not ignored majority-supported shareholder proposals or a majority withhold vote on a director nominee; and
· The company has an independent chairman or a lead director, according to ISS’ definition. This individual must be made available for periodic consultation and direct communication with major shareholders.
Proxy Contests—Voting for Director Nominees in Contested Elections
Vote CASE-BY-CASE on the election of directors in contested elections, considering the following factors:
· Long-term financial performance of the target company relative to its industry;
· Management’s track record;
· Background to the proxy contest;
· Qualifications of director nominees (both slates);
· Strategic plan of dissident slate and quality of critique against management;
· Likelihood that the proposed goals and objectives can be achieved (both slates);
· Stock ownership positions.
When the addition of shareholder nominees to the management card (“proxy access nominees”) results in a number of nominees on the management card which exceeds the number of seats available for election, vote CASE-BY-CASE considering the same factors listed above.
Vote-No Campaigns
In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly available information.
3. Shareholder Rights & Defenses
Advance Notice Requirements for Shareholder Proposals/Nominations
Vote CASE-BY-CASE on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory and shareholder review.
To be reasonable, the company’s deadline for shareholder notice of a proposal/ nominations must not be more than 60 days prior to the meeting, with a submittal window of at least 30 days prior to the deadline. The submittal window is the period under which a shareholder must file his proposal/nominations prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.
Amend Bylaws without Shareholder Consent
Vote AGAINST proposals giving the board exclusive authority to amend the bylaws.
Vote FOR proposals giving the board the ability to amend the bylaws in addition to shareholders.
Confidential Voting
Vote FOR shareholder proposals requesting that corporations adopt confidential voting, use independent vote tabulators, and use independent inspectors of election, as long as the proposal includes a provision for proxy contests as follows: In the case of a contested election, management should be permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in place. If the dissidents will not agree, the confidential voting policy is waived.
Vote FOR management proposals to adopt confidential voting.
Control Share Acquisition Provisions
Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.
Vote FOR proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders.
Vote AGAINST proposals to amend the charter to include control share acquisition provisions.
Vote FOR proposals to restore voting rights to the control shares.
Control Share Cash-Out Provisions
Control share cash-out statutes give dissident shareholders the right to “cash-out” of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.
Vote FOR proposals to opt out of control share cash-out statutes.
Disgorgement Provisions
Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company’s stock to disgorge, or pay back, to the company any profits realized from the sale of that company’s stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24 months) prior to the investor’s gaining control status are subject to these recapture-of-profits provisions.
Vote FOR proposals to opt out of state disgorgement provisions.
Exclusive Venue
Vote CASE-BY-CASE on exclusive venue proposals, taking into account:
· Whether the company has been materially harmed by shareholder litigation outside its jurisdiction of incorporation, based on disclosure in the company’s proxy statement; and
· Whether the company has the following good governance features:
· An annually elected board;
· A majority vote standard in uncontested director elections; and
· The absence of a poison pill, unless the pill was approved by shareholders.
Fair Price Provisions
Vote CASE-BY-CASE on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price.
Generally, vote AGAINST fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.
Freeze-Out Provisions
Vote FOR proposals to opt out of state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control of the company.
Greenmail
Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Vote FOR proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments.
Vote CASE-BY-CASE on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
Net Operating Loss (NOL) Protective Amendments
Vote AGAINST proposals to adopt a protective amendment for the stated purpose of protecting a company’s net operating losses (NOL) if the effective term of the protective amendment would exceed the shorter of three years and the exhaustion of the NOL.
Vote CASE-BY-CASE, considering the following factors, for management proposals to adopt an NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of the NOL:
· The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would
result in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder);
· The value of the NOLs;
· Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon exhaustion or expiration of the NOL);
· The company’s existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and
· Any other factors that may be applicable.
Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
Vote FOR shareholder proposals requesting that the company submit its poison pill to a shareholder vote or redeem it UNLESS the company has: (1) A shareholder approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a shareholder rights plan if either:
· Shareholders have approved the adoption of the plan; or
· The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a shareholder ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate.
If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote FOR the proposal, but add the caveat that a vote within 12 months would be considered sufficient implementation.
Management Proposals to Ratify a Poison Pill
Vote CASE-BY-CASE on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following attributes:
· No lower than a 20% trigger, flip-in or flip-over;
· A term of no more than three years;
· No dead-hand, slow-hand, no-hand or similar feature that limits the ability of a future board to redeem the pill;
· Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
Vote AGAINST proposals to adopt a poison pill for the stated purpose of protecting a company’s net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.
Vote CASE-BY-CASE on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
· The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent);
· The value of the NOLs;
· Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or expiration of NOLs);
· The company’s existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and
· Any other factors that may be applicable.
Reimbursing Proxy Solicitation Expenses
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When voting in conjunction with support of a dissident slate, vote FOR the reimbursement of all appropriate proxy solicitation expenses associated with the election.
Generally vote FOR shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one or more candidates in a contested election where the following apply:
· The election of fewer than 50% of the directors to be elected is contested in the election;
· One or more of the dissident’s candidates is elected;
· Shareholders are not permitted to cumulate their votes for directors; and
· The election occurred, and the expenses were incurred, after the adoption of this bylaw.
Reincorporation Proposals
Management or shareholder proposals to change a company’s state of incorporation should be evaluated CASE-BY-CASE, giving consideration to both financial and corporate governance concerns including the following:
· Reasons for reincorporation;
· Comparison of company’s governance practices and provisions prior to and following the reincorporation; and
· Comparison of corporation laws of original state and destination state.
Vote FOR reincorporation when the economic factors outweigh any neutral or negative governance changes.
Shareholder Ability to Act by Written Consent
Generally vote AGAINST management and shareholder proposals to restrict or prohibit shareholders’ ability to act by written consent.
Generally vote FOR management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:
· Shareholders’ current right to act by written consent;
· The consent threshold;
· The inclusion of exclusionary or prohibitive language;
· Investor ownership structure; and
· Shareholder support of, and management’s response to, previous shareholder proposals.
Vote CASE-BY-CASE on shareholder proposals if, in addition to the considerations above, the company has the following governance and antitakeover provisions:
· An unfettered(7) right for shareholders to call special meetings at a 10 percent threshold;
· A majority vote standard in uncontested director elections;
· No non-shareholder-approved pill; and
· An annually elected board.
Shareholder Ability to Call Special Meetings
Vote AGAINST management or shareholder proposals to restrict or prohibit shareholders’ ability to call special meetings.
(7) “Unfettered” means no restrictions on agenda items, no restrictions on the number of shareholders who can group together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no greater than 90 prior to the next annual meeting.
Generally vote FOR management or shareholder proposals that provide shareholders with the ability to call special meetings taking into account the following factors:
· Shareholders’ current right to call special meetings;
· Minimum ownership threshold necessary to call special meetings (10% preferred);
· The inclusion of exclusionary or prohibitive language;
· Investor ownership structure; and
· Shareholder support of, and management’s response to, previous shareholder proposals.
Stakeholder Provisions
Vote AGAINST proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.
State Antitakeover Statutes
Vote CASE-BY-CASE on proposals to opt in or out of state takeover statutes (including fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, and anti-greenmail provisions).
Supermajority Vote Requirements
Vote AGAINST proposals to require a supermajority shareholder vote.
Vote FOR management or shareholder proposals to reduce supermajority vote requirements. However, for companies with shareholder(s) who have significant ownership levels, vote CASE-BY-CASE, taking into account:
· Ownership structure;
· Quorum requirements; and
· Vote requirements.
4. CAPITAL/RESTRUCTURING
Capital
Adjustments to Par Value of Common Stock
Vote FOR management proposals to reduce the par value of common stock unless the action is being taken to facilitate an anti-takeover device or some other negative corporate governance action
Vote FOR management proposals to eliminate par value.
Common Stock Authorization
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:
· Past Board Performance:
· The company’s use of authorized shares during the last three years
· The Current Request:
· 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 by 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.
Dual Class Structure
Generally vote AGAINST proposals to create a new class of common stock unless:
· The company discloses a compelling rationale for the dual-class capital structure, such as:
· The company’s auditor has concluded that there is substantial doubt about the company’s ability to continue as a going concern; or
· The new class of shares will be transitory;
· The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term and long term; and
· The new class is not designed to preserve or increase the voting power of an insider or significant shareholder.
Issue Stock for Use with Rights Plan
Vote AGAINST proposals that increase authorized common stock for the explicit purpose of implementing a non- shareholder- approved shareholder rights plan (poison pill).
Preemptive Rights
Vote CASE-BY-CASE on shareholder proposals that seek preemptive rights, taking into consideration:
· The size of the company;
· The shareholder base; and
· The liquidity of the stock.
Preferred Stock Authorization
Vote FOR proposals to increase the number of authorized preferred 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 or series of preferred stock to increase the number of authorized shares of the class or series of preferred stock that has superior voting rights.
Vote CASE-BY-CASE on all other proposals to increase the number of shares of preferred stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following:
· Past Board Performance:
· The company’s use of authorized preferred shares during the last three years;
· The Current Request:
· Disclosure in the proxy statement of the specific purposes for the proposed increase;
· Disclosure in the proxy statement of specific and severe risks to shareholders of not approving the request;
· In cases where the company has existing authorized preferred stock, the dilutive impact of the request as determined by 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; and
· Whether the shares requested are blank check preferred shares that can be used for antitakeover purposes.
Recapitalization Plans
Vote CASE-BY-CASE on recapitalizations (reclassifications of securities), taking into account the following:
· More simplified capital structure;
· Enhanced liquidity;
· Fairness of conversion terms;
· Impact on voting power and dividends;
· Reasons for the reclassification;
· Conflicts of interest; and
· Other alternatives considered.
Reverse Stock Splits
Vote FOR management proposals to implement a reverse stock split when the number of authorized shares will be proportionately reduced.
Vote AGAINST proposals when there is not a proportionate reduction of authorized shares, unless:
· A stock exchange has provided notice to the company of a potential delisting; or
· The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.
Share Repurchase Programs
Vote FOR management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms.
Stock Distributions: Splits and Dividends
Vote FOR management proposals to increase the common share authorization for a stock split or share dividend, provided that the increase in authorized shares equal to or less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.
Tracking Stock
Vote CASE-BY-CASE on the creation of tracking stock, weighing the strategic value of the transaction against such factors as:
· Adverse governance changes;
· Excessive increases in authorized capital stock;
· Unfair method of distribution;
· Diminution of voting rights;
· Adverse conversion features;
· Negative impact on stock option plans; and
· Alternatives such as spin-off.
Restructuring
Appraisal Rights
Vote FOR proposals to restore or provide shareholders with rights of appraisal.
Asset Purchases
Vote CASE-BY-CASE on asset purchase proposals, considering the following factors:
· Purchase price;
· Fairness opinion;
· Financial and strategic benefits;
· How the deal was negotiated;
· Conflicts of interest;
· Other alternatives for the business;
· Non-completion risk.
Asset Sales
Vote CASE-BY-CASE on asset sales, considering the following factors:
· Impact on the balance sheet/working capital;
· Potential elimination of diseconomies;
· Anticipated financial and operating benefits;
· Anticipated use of funds;
· Value received for the asset;
· Fairness opinion;
· How the deal was negotiated;
· Conflicts of interest.
Bundled Proposals
Vote CASE-BY-CASE on bundled or “conditional” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote AGAINST the proposals. If the combined effect is positive, support such proposals.
Conversion of Securities
Vote CASE-BY-CASE on proposals regarding conversion of securities. When evaluating these proposals the investor should review the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest.
Vote FOR the conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans
Vote CASE-BY-CASE on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, after evaluating:
· Dilution to existing shareholders’ positions;
· Terms of the offer - discount/premium in purchase price to investor, including any fairness opinion; termination penalties; exit strategy;
· Financial issues - company’s financial situation; degree of need for capital; use of proceeds; effect of the financing on the company’s cost of capital;
· Management’s efforts to pursue other alternatives;
· Control issues - change in management; change in control, guaranteed board and committee seats; standstill provisions; voting agreements; veto power over certain corporate actions; and
· Conflict of interest - arm’s length transaction, managerial incentives.
Vote FOR the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.
Formation of Holding Company
Vote CASE-BY-CASE on proposals regarding the formation of a holding company, taking into consideration the following:
· The reasons for the change;
· Any financial or tax benefits;
· Regulatory benefits;
· Increases in capital structure; and
· Changes to the articles of incorporation or bylaws of the company.
Absent compelling financial reasons to recommend the transaction, vote AGAINST the formation of a holding company if the transaction would include either of the following:
· Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); or
· Adverse changes in shareholder rights.
Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)
Vote CASE-BY-CASE on going private transactions, taking into account the following:
· Offer price/premium;
· Fairness opinion;
· How the deal was negotiated;
· Conflicts of interest;
· Other alternatives/offers considered; and
· Non-completion risk.
Vote CASE-BY-CASE on going dark transactions, determining whether the transaction enhances shareholder value by taking into consideration:
· Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market research of the stock);
· Balanced interests of continuing vs. cashed-out shareholders, taking into account the following:
· Are all shareholders able to participate in the transaction?
· Will there be a liquid market for remaining shareholders following the transaction?
· Does the company have strong corporate governance?
· Will insiders reap the gains of control following the proposed transaction?
· Does the state of incorporation have laws requiring continued reporting that may benefit shareholders?
Joint Ventures
Vote CASE-BY-CASE on proposals to form joint ventures, taking into account the following:
· Percentage of assets/business contributed;
· Percentage ownership;
· Financial and strategic benefits;
· Governance structure;
· Conflicts of interest;
· Other alternatives; and
· Non-completion risk.
Liquidations
Vote CASE-BY-CASE on liquidations, taking into account the following:
· Management’s efforts to pursue other alternatives;
· Appraisal value of assets; and
· The compensation plan for executives managing the liquidation.
Vote FOR the liquidation if the company will file for bankruptcy if the proposal is not approved.
Mergers and Acquisitions
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.
Private Placements/Warrants/Convertible Debentures
Vote CASE-BY-CASE on proposals regarding private placements, warrants, and convertible debentures taking into consideration:
· Dilution to existing shareholders’ position: The amount and timing of shareholder ownership dilution should be weighed against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to existing shareholders, share price appreciation is often the necessary event to trigger the exercise of “out of the money” warrants and convertible debt. In these instances from a value standpoint, the negative impact of dilution is mitigated by the increase in the company’s stock price that must occur to trigger the dilutive event.
· Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features, termination penalties, exit strategy):
· The terms of the offer should be weighed against the alternatives of the company and in light of company’s financial condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement.
· When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry and anticipation of future performance.
· Financial issues:
· The company’s financial condition;
· Degree of need for capital;
· Use of proceeds;
· Effect of the financing on the company’s cost of capital;
· Current and proposed cash burn rate;
· Going concern viability and the state of the capital and credit markets.
· Management’s efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger or sale of part or all of the company.
· Control issues:
· Change in management;
· Change in control;
· Guaranteed board and committee seats;
· Standstill provisions;
· Voting agreements;
· Veto power over certain corporate actions; and
· Minority versus majority ownership and corresponding minority discount or majority control premium
· Conflicts of interest:
· Conflicts of interest should be viewed from the perspective of the company and the investor.
· Were the terms of the transaction negotiated at arm’s length? Are managerial incentives aligned with shareholder interests?
· Market reaction:
· The market’s response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be addressed by analyzing the one day impact on the unaffected stock price.
Vote FOR the private placement, or FOR the issuance of warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.
Reorganization/Restructuring Plan (Bankruptcy)
Vote CASE-BY-CASE on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to:
· Estimated value and financial prospects of the reorganized company;
· Percentage ownership of current shareholders in the reorganized company;
· Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an Official Equity Committee);
· The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s);
· Existence of a superior alternative to the plan of reorganization; and
· Governance of the reorganized company.
Special Purpose Acquisition Corporations (SPACs)
Vote CASE-BY-CASE on SPAC mergers and acquisitions taking into account the following:
· Valuation—Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target, if it is a private entity.
· Market reaction—How has the market responded to the proposed deal? A negative market reaction may be a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price.
· Deal timing—A main driver for most transactions is that the SPAC charter typically requires the deal to be complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date.
· Negotiations and process—What was the process undertaken to identify potential target companies within specified industry or location specified in charter? Consider the background of the sponsors.
· Conflicts of interest—How are sponsors benefiting from the transaction compared to IPO shareholders? Potential onflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80% rule (the charter requires that the fair market value of the target is at least equal to 80% of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a transaction to be completed within the 18-24 month timeframe.
· Voting agreements—Are the sponsors entering into enter into any voting agreements/ tender offers with shareholders who are likely to vote AGAINST the proposed merger or exercise conversion rights?
· Governance—What is the impact of having the SPAC CEO or founder on key committees following the proposed merger?
Spin-offs
Vote CASE-BY-CASE on spin-offs, considering:
· Tax and regulatory advantages;
· Planned use of the sale proceeds;
· Valuation of spinoff;
· Fairness opinion;
· Benefits to the parent company;
· Conflicts of interest;
· Managerial incentives;
· Corporate governance changes;
· Changes in the capital structure.
Value Maximization Shareholder Proposals
Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value by:
· Hiring a financial advisor to explore strategic alternatives;
· Selling the company; or
· Liquidating the company and distributing the proceeds to shareholders.
These proposals should be evaluated based on the following factors:
· Prolonged poor performance with no turnaround in sight;
· Signs of entrenched board and management (such as the adoption of takeover defenses);
· Strategic plan in place for improving value;
· Likelihood of receiving reasonable value in a sale or dissolution; and
· The company actively exploring its strategic options, including retaining a financial advisor.
5. 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)
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—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.
Vote AGAINST an equity plan on the ballot if:
· A pay for performance misalignment is found, and a significant portion of the CEO’s misaligned pay is attributed to non-performance-based equity awards, taking into consideration:
· Magnitude of pay misalignment;
· Contribution of non-performance-based equity grants to overall pay; and
· The proportion of equity awards granted in the last three fiscal years concentrated at the named executive officer (NEO) level.
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 index, this analysis considers the following:
1. Peer Group(8) Alignment:
· The degree of alignment between the company’s TSR rank and the CEO’s total pay rank within a peer group, as measured over one-year and three-year periods (weighted 40/60);
· The multiple of the CEO’s total pay relative to the peer group median.
2. Absolute Alignment — 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 non-Russell 3000 index companies, misaligned pay and performance are otherwise suggested, our analysis may include any of the following qualitative factors, if they are relevant to the analysis to determine 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 pay compared to grant pay; and
· Any other factors deemed relevant.
(8) 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 closest 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.
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
· Options Backdating.
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).
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.
Board 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”)
Vote FOR annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies’ executive pay programs.
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
Vote CASE-BY-CASE on say on Golden Parachute proposals, including consideration of existing change-in-control arrangements maintained with named executive officers rather than focusing primarily on new or extended arrangements.
Features that may result in an AGAINST recommendation include one or more of the following, depending on the number, magnitude, and/or timing of issue(s):
· Single- or modified-single-trigger cash severance;
· Single-trigger acceleration of unvested equity awards;
· Excessive cash severance (>3x base salary and bonus);
· Excise tax gross-ups triggered and payable (as opposed to a provision to provide excise tax gross-ups);
· Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or
· Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or
· The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote.
Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis. However, the presence of multiple legacy problematic features will also be closely scrutinized.
In cases where the golden parachute vote is incorporated into a company’s advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
Equity-Based and Other Incentive Plans
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity plan if any of the following factors apply:
· The total cost of the company’s equity plans is unreasonable;
· The plan expressly permits repricing;
· A pay-for-performance misalignment is found;
· The company’s three year burn rate exceeds the burn rate cap of its industry group;
· The plan has a liberal change-of-control definition; or
· The plan is a vehicle for problematic pay practices.
Each of these factors is described below:
Cost of Equity Plans
Generally, vote AGAINST equity plans if the cost is unreasonable. For non-employee director plans, vote FOR the plan if certain factors are met (see Director Compensation section).
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans, and shares granted but unexercised. All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types of awards (for example, full value awards), the assumption is made that all awards to be granted will be the most expensive types. See discussion of specific types of awards.
The Shareholder Value Transfer is reasonable if it falls below the company-specific allowable cap. The allowable cap is determined as follows: The top quartile performers in each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company-specific performance measures, size and cash compensation into the industry cap equations to arrive at the company’s allowable cap.
Repricing Provisions
Vote AGAINST plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without prior shareholder approval. “Repricing” includes the ability to do any of the following:
· Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs;
· Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise price of the original options or SARs.
Also, vote AGAINST OR WITHHOLD from members of the Compensation Committee who approved and/or implemented a repricing or an option/SAR exchange program, by buying out underwater options/SARs for stock, cash or other consideration or canceling underwater options/SARs and regranting options/SARs with a lower exercise price, without prior shareholder approval, even if such repricings are allowed in their equity plan.
Vote AGAINST plans if the company has a history of repricing without shareholder approval, and the applicable listing standards would not preclude them from doing so.
Pay-for-Performance Misalignment—Application to Equity Plans
If a significant portion of the CEO’s misaligned pay is attributed to non-performance-based equity awards, and there is an equity plan on the ballot with the CEO as one of the participants, ISS may recommend a vote AGAINST the equity plan. Considerations in voting AGAINST the equity plan may include, but are not limited to:
· Magnitude of pay misalignment;
· Contribution of non—performance-based equity grants to overall pay; and
· The proportion of equity awards granted in the last three fiscal years concentrated at the named executive officer level.
Three-Year Burn Rate/Burn Rate Commitment
Generally vote AGAINST equity plans for companies whose average three-year burn rates their burn rate caps.
Burn rate caps are calculated as the greater of: (1) the mean (μ) plus one standard deviation (σ) of the company’s GICS group segmented by Russell 3000 index and non-Russell 3000 index (per the Burn Rate Table published in December); and (2) two percent of weighted common shares outstanding. In addition, year-over-year burn-rate cap changes will be limited to a maximum of two (2) percentage points (plus or minus) the prior year’s burn-rate cap.
If a company fails to fulfill a burn rate commitment, vote AGAINST or WITHHOLD from the compensation committee.
In the absence of demonstrating reasonable use of equity awards under the first burn rate commitment, companies making consecutive burn rate commitments may not garner support on their proposed equity plan proposals.
Burn Rate Table for 2013
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| Russell 3000 |
| Non-Russell 3000 |
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| Standard |
| 2013 Burn |
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| Standard |
| 2013 Burn |
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GICS |
| Description |
| Mean |
| Deviation |
| Rate Cap* |
| Mean |
| Deviation |
| Rate Cap* |
|
1010 |
| Energy |
| 2.18 | % | 2.39 | % | 4.57 | % | 3.06 | % | 6.95 | % | 9.46 | %* |
1510 |
| Materials |
| 1.63 | % | 1.44 | % | 3.08 | % | 3.05 | % | 5.20 | % | 8.04 | %* |
2010 |
| Capital Goods |
| 1.94 | % | 1.76 | % | 3.70 | % | 2.96 | % | 3.53 | % | 6.69 | %* |
2020 |
| Commercial & Professional Services |
| 2.65 | % | 2.09 | % | 4.74 | % | 3.49 | % | 3.79 | % | 7.28 | % |
2030 |
| Transportation |
| 1.68 | % | 1.53 | % | 3.21 | % | 3.25 | % | 5.80 | % | 4.88 | %* |
2510 |
| Automobiles & Components |
| 1.79 | % | 1.49 | % | 3.28 | % | 3.41 | % | 4.20 | % | 7.60 | % |
2520 |
| Consumer Durables & Apparel |
| 2.79 | % | 2.04 | % | 4.83 | % | 3.28 | % | 3.73 | % | 7.01 | % |
2530 |
| Consumer Services |
| 2.50 | % | 1.39 | % | 3.88 | % | 2.55 | % | 2.11 | % | 4.99 | %* |
2540 |
| Media |
| 2.99 | % | 2.60 | % | 5.60 | % | 3.25 | % | 3.03 | % | 6.29 | % |
2550 |
| Retailing |
| 2.35 | % | 1.58 | % | 3.93 | % | 3.13 | % | 2.47 | % | 5.61 | % |
3010, 3020, 3030 |
| Consumer Staples |
| 1.62 | % | 1.20 | % | 2.82 | % | 1.93 | % | 2.45 | % | 5.17 | %* |
3510 |
| Health Care Equipment & Services |
| 3.14 | % | 1.95 | % | 5.09 | % | 3.91 | % | 3.13 | % | 9.92 | %* |
3520 |
| Pharmaceuticals & Biotechnology |
| 3.84 | % | 2.86 | % | 6.70 | % | 5.31 | % | 4.86 | % | 10.58 | %* |
4010 |
| Banks |
| 1.26 | % | 1.49 | % | 2.75 | % | 0.92 | % | 1.37 | % | 2.28 | % |
4020 |
| Diversified Financials |
| 4.59 | % | 4.94 | % | 9.53 | % | 4.29 | % | 5.27 | % | 9.56 | % |
4030 |
| Insurance |
| 1.71 | % | 1.32 | % | 3.02 | % | 0.94 | % | 1.44 | % | 2.38 | % |
4040 |
| Real Estate |
| 1.39 | % | 1.86 | % | 3.25 | % | 1.28 | % | 1.81 | % | 3.09 | % |
4510 |
| Software & Services |
| 4.47 | % | 2.79 | % | 7.26 | % | 4.98 | % | 4.35 | % | 9.58 | %* |
4520 |
| Technology Hardware & Equipment |
| 3.53 | % | 2.24 | % | 5.77 | % | 4.02 | % | 4.51 | % | 8.53 | % |
4530 |
| Seminconductor Equipment |
| 4.30 | % | 2.28 | % | 6.58 | % | 5.37 | % | 5.18 | % | 10.55 | % |
5010 |
| Telecommunication Services |
| 2.60 | % | 2.25 | % | 4.85 | % | 5.08 | % | 3.67 | % | 8.75 | % |
5510 |
| Utilities |
| 0.80 | % | 0.49 | % | 2.00 | %* | 2.23 | % | 2.76 | % | 4.99 | % |
The cap is generally the Mean + Standard Deviation, subject to minimum cap of 2% (de minimus allowance) and maximum +/- 2 percentage points relative to prior year burn rate cap for same industry/index group.
A premium (multiplier) is applied on full value awards for the past three fiscal years. The guideline for applying the premium is as follows:
Stock Price Volatility |
| Multiplier |
54.6% and higher |
| 1 full-value award will count as 1.5 option shares |
36.1% or higher and less than 54.6% |
| 1 full-value award will count as 2.0 option shares |
24.9% or higher and less than 36.1% |
| 1 full-value award will count as 2.5 option shares |
16.5% or higher and less than 24.9% |
| 1 full-value award will count as 3.0 option shares |
7.9% or higher and less than 16.5% |
| 1 full-value award will count as 3.5 option shares |
Less than 7.9% |
| 1 full-value award will count as 4.0 option shares |
Liberal Definition of Change in Control
Generally vote AGAINST equity plans if the plan has a liberal definition of change in control (it provides for the acceleration of vesting of equity awards even though an actual change in control may not occur) and the equity awards would automatically vest upon such liberal definition of change-in-control. Examples of such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a “potential” takeover, shareholder approval of a merger or other transactions, or similar language.
Problematic Pay Practices
If the equity plan on the ballot is a vehicle for problematic pay practices, vote AGAINST the plan.
Specific Treatment of Certain Award Types in Equity Plan Evaluations
Dividend Equivalent Rights
Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder equity to employees and non-employee directors and this cost should be captured.
Liberal Share Recycling Provisions
Under net share counting provisions, shares tendered by an option holder to pay for the exercise of an option, shares withheld for taxes or shares repurchased by the company on the open market can be recycled back into the equity plan for awarding again. All awards with such provisions should be valued as full-value awards. Stock-settled stock appreciation rights (SSARs) will also be considered as full-value awards if a company counts only the net shares issued to employees towards their plan reserve.
Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)
For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership (OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
Option Overhang Cost
Companies with sustained positive stock performance and high overhang cost attributable to in-the-money options outstanding in excess of six years may warrant a carve-out of these options from the overhang as long as the dilution
attributable to the new share request is reasonable and the company exhibits sound compensation practices. Consider CASE-BY-CASE a carve-out of a portion of cost attributable to overhang, considering the following criteria:
· Performance: Companies with sustained positive stock performance will merit greater scrutiny. Five-year total shareholder return (TSR), year-over-year performance, and peer performance could play a significant role in this determination.
· Overhang Disclosure: Assess whether optionees have held in-the-money options for a prolonged period (thus reflecting their confidence in the prospects of the company). Note that this assessment would require additional disclosure regarding a company’s overhang. Specifically, the following disclosure would be required:
· The number of in-the-money options outstanding in excess of six or more years with a corresponding weighted average exercise price and weighted average contractual remaining term;
· The number of all options outstanding less than six years and underwater options outstanding in excess of six years with a corresponding weighted average exercise price and weighted average contractual remaining term;
· The general vesting provisions of option grants; and
· The distribution of outstanding option grants with respect to the named executive officers;
· Dilution: Calculate the expected duration of the new share request in addition to all shares currently available for grant under the equity compensation program, based on the company’s three-year average burn rate (or a burn- rate commitment that the company makes for future years). The expected duration will be calculated by multiplying the company’s unadjusted (options and full-value awards accounted on a one-for-one basis) three-year average burn rate by the most recent fiscal year’s weighted average shares outstanding (as used in the company’s calculation of basic EPS) and divide the sum of the new share request and all available shares under the company’s equity compensation program by the product. For example, an expected duration in excess of five years could be considered problematic; and
· Compensation Practices: An evaluation of overall practices could include: (1) stock option repricing provisions, (2) high concentration ratios (of grants to top executives), or (3) additional practices outlined in the Poor Pay Practices policy.
Other Compensation Plans
401(k) Employee Benefit Plans
Vote FOR proposals to implement a 401(k) savings plan for employees.
Employee Stock Ownership Plans (ESOPs)
Vote FOR proposals to implement an ESOP or increase authorized shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares).
Employee Stock Purchase Plans—Qualified Plans
Vote CASE-BY-CASE on qualified employee stock purchase plans. Vote FOR employee stock purchase plans where all of the following apply:
· Purchase price is at least 85 percent of fair market value;
· Offering period is 27 months or less; and
· The number of shares allocated to the plan is ten percent or less of the outstanding shares.
Vote AGAINST qualified employee stock purchase plans where any of the following apply:
· Purchase price is less than 85 percent of fair market value; or
· Offering period is greater than 27 months; or
· The number of shares allocated to the plan is more than ten percent of the outstanding shares.
Employee Stock Purchase Plans—Non-Qualified Plans
Vote CASE-BY-CASE on nonqualified employee stock purchase plans. Vote FOR nonqualified employee stock purchase plans with all the following features:
· Broad-based participation (i.e., all employees of the company with the exclusion of individuals with 5 percent or more of beneficial ownership of the company);
· Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary;
· Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of 20 percent from market value;
· No discount on the stock price on the date of purchase since there is a company matching contribution.
Vote AGAINST nonqualified employee stock purchase plans when any of the plan features do not meet the above criteria. If the company matching contribution exceeds 25 percent of employee’s contribution, evaluate the cost of the plan against its allowable cap.
Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related Compensation Proposals)
Generally vote FOR proposals to approve or amend executive incentive bonus plans if the proposal:
· Is only to include administrative features;
· Places a cap on the annual grants any one participant may receive to comply with the provisions of Section 162(m);
· Adds performance goals to existing compensation plans to comply with the provisions of Section 162(m) unless they are clearly inappropriate; or
· Covers cash or cash and stock bonus plans that are submitted to shareholders for the purpose of exempting
compensation from taxes under the provisions of Section 162(m) if no increase in shares is requested.
Vote AGAINST such proposals if:
· The compensation committee does not fully consist of independent outsiders, per ISS’ director classification; or
· The plan contains excessive problematic provisions.
Vote CASE-BY CASE on such proposals if:
· In addition to seeking 162(m) tax treatment, the amendment may cause the transfer of additional shareholder value to employees (e.g., by requesting additional shares, extending the option term, or expanding the pool of plan participants). Evaluate the Shareholder Value Transfer in comparison with the company’s allowable cap; or
· A company is presenting the plan to shareholders for Section 162(m) favorable tax treatment for the first time after the company’s initial public offering (IPO). Perform a full equity plan analysis, including consideration of total shareholder value transfer, burn rate (if applicable), repricing, and liberal change in control. Other factors such as pay-for-performance or problematic pay practices as related to Management Say-on-Pay may be considered if appropriate.
Option Exchange Programs/Repricing Options
Vote CASE-BY-CASE on management proposals seeking approval to exchange/reprice options taking into consideration:
· Historic trading patterns—the stock price should not be so volatile that the options are likely to be back “in-the-money” over the near term;
· Rationale for the re-pricing—was the stock price decline beyond management’s control?
· Is this a value-for-value exchange?
· Are surrendered stock options added back to the plan reserve?
· Option vesting—does the new option vest immediately or is there a black-out period?
· Term of the option—the term should remain the same as that of the replaced option;
· Exercise price—should be set at fair market or a premium to market;
· Participants—executive officers and directors should be excluded.
If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration the company’s total cost of equity plans and its three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the company’s stock price demonstrates poor timing. Repricing after a recent decline in stock price triggers additional scrutiny and a potential AGAINST vote on the proposal. At a minimum, the decline should not have happened within the past year. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
Stock Plans in Lieu of Cash
Vote CASE-BY-CASE on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock.
Vote FOR non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote CASE-BY-CASE on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture the total cost of total compensation, ISS will not make any adjustments to carve out the in-lieu-of cash compensation.
Transfer Stock Option (TSO) Programs
One-time Transfers: Vote AGAINST or WITHHOLD from compensation committee members if they fail to submit one-time transfers to shareholders for approval.
Vote CASE-BY-CASE on one-time transfers. Vote FOR if:
· Executive officers and non-employee directors are excluded from participating;
· Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models;
· There is a two-year minimum holding period for sale proceeds (cash or stock) for all participants.
Additionally, management should provide a clear explanation of why options are being transferred to a third-party institution and whether the events leading up to a decline in stock price were beyond management’s control. A review of the company’s historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.
Ongoing TSO program: Vote AGAINST equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure and mechanics must be disclosed to shareholders. The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:
· Eligibility;
· Vesting;
· Bid-price;
· Term of options;
· Cost of the program and impact of the TSOs on company’s total option expense
· Option repricing policy.
Amendments to existing plans that allow for introduction of transferability of stock options should make clear that only options granted post-amendment shall be transferable.
Director Compensation
Equity Plans for Non-Employee Directors
Vote CASE-BY-CASE on compensation plans for non-employee directors, based on the cost of the plans against the company’s allowable cap.
On occasion, director stock plans that set aside a relatively small number of shares when combined with employee or executive stock compensation plans will exceed the allowable cap. Vote for the plan if ALL of the following qualitative factors in the board’s compensation are met and disclosed in the proxy statement:
· Director stock ownership guidelines with a minimum of three times the annual cash retainer.
· Vesting schedule or mandatory holding/deferral period:
· A minimum vesting of three years for stock options or restricted stock; or
· Deferred stock payable at the end of a three-year deferral period.
· Mix between cash and equity:
· A balanced mix of cash and equity, for example 40% cash/60% equity or 50% cash/50% equity; or
· If the mix is heavier on the equity component, the vesting schedule or deferral period should be more stringent, with the lesser of five years or the term of directorship.
· No retirement/benefits and perquisites provided to non-employee directors; and
· Detailed disclosure provided on cash and equity compensation delivered to each non-employee director for the most recent fiscal year in a table. The column headers for the table may include the following: name of each non- employee director, annual retainer, board meeting fees, committee retainer, committee-meeting fees, and equity grants.
Non-Employee Director Retirement Plans
Vote AGAINST retirement plans for non-employee directors.
Vote FOR shareholder proposals to eliminate retirement plans for non-employee directors.
Shareholder Proposals on Compensation
Advisory Vote on Executive Compensation (Say-on-Pay)
Generally, vote FOR shareholder proposals that call for non-binding shareholder ratification of the compensation of the Named Executive Officers and the accompanying narrative disclosure of material factors provided to understand the Summary Compensation Table.
Adopt Anti-Hedging/Pledging/Speculative Investments Policy
Generally vote FOR proposals seeking a policy that prohibits named executive officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan. However, the company’s existing policies regarding responsible use of company stock will be considered.
Bonus Banking/Bonus Banking “Plus”
Vote CASE-BY-CASE on proposals seeking deferral of a portion of annual bonus pay, with ultimate payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the named executive officers or a wider group of employees), taking into account the following factors:
· The company’s past practices regarding equity and cash compensation;
· Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at least 50 percent for full tenure); and
· Whether the company has a rigorous claw-back policy in place.
Compensation Consultants—Disclosure of Board or Company’s Utilization
Generally vote FOR shareholder proposals seeking disclosure regarding the Company, Board, or Compensation Committee’s use of compensation consultants, such as company name, business relationship(s) and fees paid.
Disclosure/Setting Levels or Types of Compensation for Executives and Directors
Generally, vote FOR shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders’ needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company.
Vote AGAINST shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation.
Vote AGAINST shareholder proposals seeking to eliminate stock options or any other equity grants to employees or directors.
Vote AGAINST shareholder proposals requiring director fees be paid in stock only.
Generally vote AGAINST shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Vote CASE-BY-CASE on all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long-term corporate outlook.
Golden Coffins/Executive Death Benefits
Generally vote FOR proposals calling companies to adopt a policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals that the broad-based employee population is eligible.
Hold Equity Past Retirement or for a Significant Period of Time
Vote CASE-BY-CASE on shareholder proposals asking companies to adopt policies requiring senior executive officers to retain all or a significant portion of the shares acquired through compensation plans, either:
· while employed and/or for two years following the termination of their employment ; or
· for a substantial period following the lapse of all other vesting requirements for the award (“lock-up period”), with ratable release of a portion of the shares annually during the lock-up period.
The following factors will be taken into account:
· Whether the company has any holding period, retention ratio, or officer ownership requirements in place. These should consist of:
· Rigorous stock ownership guidelines;
· A holding period requirement coupled with a significant long-term ownership requirement; or
· A meaningful retention ratio;
· Actual officer stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding period/retention ratio or the company’s own stock ownership or retention requirements;
· Post-termination holding requirement policies or any policies aimed at mitigating risk taking by senior executives;
· Problematic pay practices, current and past, which may promote a short-term versus a long-term focus.
A rigorous stock ownership guideline should be at least 10x base salary for the CEO, with the multiple declining for other executives. A meaningful retention ratio should constitute at least 50 percent of the stock received from equity awards (on a net proceeds basis) held on a long-term basis, such as the executive’s tenure with the company or even a few years past the executive’s termination with the company.
Vote CASE-BY-CASE on shareholder proposals asking companies to adopt policies requiring Named Executive Officers to retain 75% of the shares acquired through compensation plans while employed and/or for two years following the termination of their employment, and to report to shareholders regarding this policy. The following factors will be taken into account:
· Whether the company has any holding period, retention ratio, or officer ownership requirements in place. These should consist of:
· Rigorous stock ownership guidelines, or
· A holding period requirement coupled with a significant long-term ownership requirement, or
· A meaningful retention ratio,
· Actual officer stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding period/retention ratio or the company’s own stock ownership or retention requirements.
· Problematic pay practices, current and past, which may promote a short-term versus a long-term focus.
A rigorous stock ownership guideline should be at least 10x base salary for the CEO, with the multiple declining for other executives. A meaningful retention ratio should constitute at least 50 percent of the stock received from equity awards (on a net proceeds basis) held on a long-term basis, such as the executive’s tenure with the company or even a few years past the executive’s termination with the company.
Generally vote AGAINST shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board. While ISS favors stock ownership on the part of directors, the company should determine the appropriate ownership requirement.
Non-Deductible Compensation
Generally vote FOR proposals seeking disclosure of the extent to which the company paid non-deductible compensation to senior executives due to Internal Revenue Code Section 162(m), while considering the company’s existing disclosure practices.
Pay for Performance
Performance-Based Awards
Vote CASE-BY-CASE on shareholder proposal requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be performance-based and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:
· First, vote FOR shareholder proposals advocating the use of performance-based equity awards, such as performance contingent options or restricted stock, indexed options or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a premium of at least 25 percent and higher to be considered performance-based awards.
· Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based program is too low based on the company’s historical or peer group comparison, generally vote FOR the proposal. Furthermore, if target performance results in an above target payout, vote FOR the shareholder proposal due to program’s poor design. If the company does not disclose the performance metric of the performance-based equity program, vote FOR the shareholder proposal regardless of the outcome of the first step to the test.
In general, vote FOR the shareholder proposal if the company does not meet both of the above two steps.
Pay for Superior Performance
Vote CASE-BY-CASE on shareholder proposals that request the board establish a pay-for-superior performance standard in the company’s executive compensation plan for senior executives. These proposals generally include the following principles:
· Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group median;
· Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested, equity awards;
· Provide the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan;
· Establish performance targets for each plan financial metric relative to the performance of the company’s peer companies;
· Limit payment under the annual and performance-vested long-term incentive components of the plan to when the company’s performance on its selected financial performance metrics exceeds peer group median performance.
Consider the following factors in evaluating this proposal:
· What aspects of the company’s annual and long-term equity incentive programs are performance driven?
· If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates disclosed to shareholders or are they benchmarked against a disclosed peer group?
· Can shareholders assess the correlation between pay and performance based on the current disclosure?
· What type of industry and stage of business cycle does the company belong to?
Pre-Arranged Trading Plans (10b5-1 Plans)
Generally vote FOR shareholder proposals calling for certain principles regarding the use of prearranged trading plans (10b5-1 plans) for executives. These principles include:
· Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed within two business days in a Form 8-K;
· Amendment or early termination of a 10b5-1 Plan is allowed only under extraordinary circumstances, as determined by the board;
· Ninety days must elapse between adoption or amendment of a 10b5-1 Plan and initial trading under the plan;
· Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;
· An executive may not trade in company stock outside the 10b5-1 Plan.
· Trades under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the executive.
Prohibit CEOs from Serving on Compensation Committees
Generally vote AGAINST proposals seeking a policy to prohibit any outside CEO from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee.
Recoup Bonuses (Clawbacks)
Vote CASE-BY-CASE on proposals to recoup unearned incentive bonuses or other incentive payments made to senior executives if it is later determined that the figures upon which incentive compensation is earned later turn out to have been in error. This is line with the clawback provision in the Trouble Asset Relief Program. Many companies have adopted policies that permit recoupment in cases where fraud, misconduct, or negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. ISS will take into consideration:
· If the company has adopted a formal recoupment bonus policy;
· If the company has chronic restatement history or material financial problems; or
· If the company’s policy substantially addresses the concerns raised by the proponent.
Severance Agreements for Executives/Golden Parachutes
Vote FOR shareholder proposals requiring that golden parachutes or executive severance agreements be submitted for shareholder ratification, unless the proposal requires shareholder approval prior to entering into employment contracts.
Vote CASE-BY-CASE on proposals to ratify or cancel golden parachutes. An acceptable parachute should include, but is not limited to, the following:
· The triggering mechanism should be beyond the control of management;
· The amount should not exceed three times base amount (defined as the average annual taxable W-2 compensation during the five years prior to the year in which the change of control occurs);
· Change-in-control payments should be double-triggered, i.e., (1) after a change in control has taken place, and (2) termination of the executive as a result of the change in control. Change in control is defined as a change in the company ownership structure.
Share Buyback Holding Periods
Generally vote AGAINST shareholder proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote FOR the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks.
Supplemental Executive Retirement Plans (SERPs)
Generally vote FOR shareholder proposals requesting to put extraordinary benefits contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
Generally vote FOR shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement plan (SERP) by limiting covered compensation to a senior executive’s annual salary and excluding of all incentive or bonus pay from the plan’s definition of covered compensation used to establish such benefits.
Tax Gross-Up Proposals
Generally vote FOR proposals calling for companies to adopt a policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable to management employees of the company, such as a relocation or expatriate tax equalization policy.
Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity
Vote CASE-BY-CASE on shareholder proposals seeking a policy requiring termination of employment prior to severance payment and/or eliminating accelerated vesting of unvested equity.
The following factors will be considered:
· The company’s current treatment of equity in change-of-control situations (i.e. is it double triggered, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.);
· Current employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements.
Generally vote FOR proposals seeking a policy that prohibits acceleration of the vesting of equity awards to senior executives in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of any related performance goals between the award date and the change in control).
6. 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 term or long term.
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, timeframe, or cost) 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.
Animal Welfare
Animal Welfare Policies
Generally vote FOR proposals seeking a report on the company’s animal welfare standards unless:
· The company has already published a set of animal welfare standards and monitors compliance;
· The company’s standards are comparable to industry peers; and
· There are no recent, significant fines or litigation related to the company’s treatment of animals.
Animal Testing
Generally vote AGAINST proposals to phase out the use of animals in product testing unless:
· The company is conducting animal testing programs that are unnecessary or not required by regulation;
· �� The company is conducting animal testing when suitable alternatives are commonly accepted and used at industry peers; or
· There are recent, significant fines or litigation related to the company’s treatment of animals.
Animal Slaughter (Controlled Atmosphere Killing (CAK))
Generally vote AGAINST proposals requesting the implementation of CAK methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard.
Vote CASE-BY-CASE on proposals requesting a report on the feasibility of implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at the company.
Consumer Issues
Genetically Modified Ingredients
Generally vote AGAINST proposals asking suppliers, genetic research companies, restaurants and food retail companies to voluntarily label genetically engineered (GE) ingredients in their products and/or eliminate GE ingredients. The cost of labeling and/or phasing out the use of GE ingredients may not be commensurate with the benefits to shareholders and is an issue better left to regulators.
Vote CASE-BY-CASE on proposals asking for a report on the feasibility of labeling products containing GE ingredients taking into account:
· The company’s business and the proportion of it affected by the resolution;
· The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this disclosure compares with industry peer disclosure; and
· Company’s current disclosure on the feasibility of GE product labeling, including information on the related costs.
Generally vote AGAINST proposals seeking a report on the social, health, and environmental effects of genetically modified organisms (GMOs). Studies of this sort are better undertaken by regulators and the scientific community.
Generally vote AGAINST proposals to completely phase out GE ingredients from the company’s products or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products. Such resolutions presuppose that there are proven health risks to GE ingredients (an issue better left to regulators) that may outweigh the economic benefits derived from biotechnology.
Reports on Potentially Controversial Business/Financial Practices
Vote CASE-BY CASE on requests for reports on the company’s potentially controversial business or financial practices or products taking into account:
· Whether the company has adequately disclosed mechanisms in place to prevent abuses;
· Whether the company has adequately disclosed the financial risks of the products/practices in question;
· Whether the company has been subject to violations of related laws or serious controversies; and
· Peer companies’ policies/practices in this area.
Pharmaceutical Pricing, Access to Medicines, Product Reimportation, and Health Pandemics
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.
Vote CASE-BY-CASE on proposals requesting that the company evaluate report on their product pricing policies or their access to medicine policies, considering:
· The nature of the company’s business and the potential for reputational and market risk exposure;
· The existing disclosure of relevant policies;
· Deviation from established industry norms;
· The company’s existing, relevant initiatives to provide research and/or products to disadvantaged consumers;
· Whether the proposal focuses on specific products or geographic regions; and
· The potential cost and scope of the requested report.
Generally vote FOR proposals requesting that companies report on the financial and legal impact of their 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.
Health Pandemics
Vote CASE-BY-CASE on requests for reports outlining the impact of health pandemics (such as HIV/AIDS, malaria, tuberculosis, and avian flu) on the company’s operations and how the company is responding to the situation, taking into account:
· The scope of the company’s operations in the affected/relevant area(s);
· The company’s existing healthcare policies, including benefits and healthcare access; and
· Company donations to relevant healthcare providers.
Vote AGAINST proposals asking companies to establish, implement, and report on a standard of response to health pandemics (such as HIV/AIDS, malaria, tuberculosis, and avian flu), unless the company has significant operations in the affected markets and has failed to adopt policies and/or procedures to address these issues comparable to those of industry peers.
Product Safety and Toxic/Hazardous Materials
Generally vote FOR proposals requesting the company to report on its policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or product safety in its supply chain, unless:
· The company already discloses similar information through existing reports such as a Supplier Code of Conduct and/or a sustainability report;
· The company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and supply chain reporting and monitoring program based on industry norms or similar standards within a specified time frame; and
· The company has not been recently involved in relevant significant controversies, significant fines, or litigation.
Vote CASE-BY-CASE on resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials, considering:
· The company’s current level of disclosure regarding its product safety policies, initiatives and oversight mechanisms.
· Current regulations in the markets in which the company operates; and
· Recent significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company.
Generally vote AGAINST resolutions requiring that a company reformulate its products.
Tobacco-Related Proposals
Vote CASE-BY-CASE on resolutions regarding the advertisement of tobacco products, considering:
· Recent related fines, controversies, or significant litigation;
· Whether the company complies with relevant laws and regulations on the marketing of tobacco;
· Whether the company’s advertising restrictions deviate from those of industry peers;
· Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth;
· Whether restrictions on marketing to youth extend to foreign countries.
Vote CASE-BY-CASE on proposals regarding second-hand smoke, considering;
· Whether the company complies with all laws and regulations;
· The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness;
· The risk of any health-related liabilities.
Generally vote AGAINST resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.
Generally vote AGAINST proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.
Climate Change and the Environment
Climate Change/Greenhouse Gas (GHG) Emissions
Generally vote FOR resolutions requesting that a company disclose information on the impact of climate change on the company’s operations and investments considering:
· The company already provides current, publicly-available information on the impacts 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 provides 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:
· Overly prescriptive requests for the reduction in GHG emissions by specific amounts or within a specific time frame;
· Whether company disclosure lags behind industry peers;
· Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions;
· The feasibility of reduction of GHGs given the company’s product line and current technology and;
· Whether the company already provides meaningful disclosure on GHG emissions from its products and operations.
General Environmental Proposals and Community Impact Assessments, Concentrated Area Feeding Operations
General Environmental Proposals and Community Impact Assessments
Vote CASE-BY-CASE on requests for reports outlining policies and/or the potential (community) social and/or environmental impact of company operations considering:
· Current disclosure of applicable policies and risk assessment report(s) and risk management procedures;
· The impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations;
· The nature, purpose, and scope of the company’s operations in the specific region(s);
· The degree to which company policies and procedures are consistent with industry norms; and
· The scope of the resolution.
Concentrated Area Feeding Operations (CAFOs)
Generally vote FOR resolutions requesting companies report to shareholders on the risks and liabilities associated with CAFOs unless:
· The company has publicly disclosed its environmental management policies for its corporate and contract farming operations, including compliance monitoring; and
· The company publicly discloses company and supplier farm environmental performance data; or
· The company does not have company-owned CAFOs and does not directly source from contract farm CAFOs.
Energy Efficiency
Generally vote FOR on proposals requesting a company report on its comprehensive energy efficiency policies, unless:
· The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or
· The proponent requests adoption of specific energy efficiency goals within specific timelines.
Facility and Operational Safety/Security
Vote CASE-BY-CASE on resolutions requesting that companies report on safety and/or security risks associated with their operations and/or facilities, considering:
· The company’s compliance with applicable regulations and guidelines;
· The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance monitoring; and,
· The existence of recent, significant violations, fines, or controversy regarding the safety and security of the company’s operations and/or facilities.
Hydraulic Fracturing
Generally vote FOR proposals requesting greater disclosure of a company’s (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations, considering:
· The company’s current level of disclosure of relevant policies and oversight mechanisms;
· The company’s current level of such disclosure relative to its industry peers;
· Potential relevant local, state, or national regulatory developments; and
· Controversies, fines, or litigation related to the company’s hydraulic fracturing operations.
Operations in Protected Areas
Generally vote FOR requests for reports on potential environmental damage as a result of company operations in protected regions unless:
· Operations in the specified regions are not permitted by current laws or regulations;
· The company does not currently have operations or plans to develop operations in these protected regions; or,
· The company’s disclosure of its operations and environmental policies in these regions is comparable to industry peers.
Recycling
Vote CASE-BY-CASE on proposals to report on an existing recycling program, or adopt a new recycling program, taking into account:
· The nature of the company’s business;
· The current level of disclosure of the company’s existing related programs;
· The timetable prescribed by the proposal and the costs and methods of program implementation;
· The ability of the company to address the issues raised in the proposal; and
· The company’s recycling programs compared with the similar programs of its industry peers.
Renewable Energy
Generally vote FOR requests for reports on the feasibility of developing renewable energy resources unless the report is duplicative of existing disclosure or irrelevant to the company’s line of business.
Generally vote AGAINST proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management’s evaluation of the feasibility and financial impact that such programs may have on the company.
Diversity
Board Diversity
Generally vote FOR requests for reports on the 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 the 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;
· 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.
Equality of Opportunity
Generally vote FOR proposals requesting a company disclose its diversity policies or initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data, unless:
· The company publicly discloses its comprehensive equal opportunity policies and initiatives;
· The company already publicly discloses comprehensive workforce diversity data; and
· The company has no recent significant EEO-related violations or litigation.
Generally vote AGAINST proposals seeking information on the diversity efforts of suppliers and service providers. Such requests may pose a significant cost and administration burden on the company.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
Generally vote FOR proposals seeking to amend a company’s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would result in excessive costs for the company.
Generally vote AGAINST proposals to extend company benefits to, or eliminate benefits from domestic partners. Decisions regarding benefits should be left to the discretion of the company.
General Corporate Issues
Charitable Contributions
Vote AGAINST proposals restricting the company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if, contributions are in the best interests of the company.
Environmental, Social, and Governance (ESG) Compensation-Related Proposals
Vote CASE-BY-CASE on proposals to link, or report on linking, executive compensation to sustainability (environmental and social) criteria. The following factors will be considered:
· Whether the company has significant and/or persistent controversies or regulatory violations regarding social and/or environmental issues;
· Whether the company has management systems and oversight mechanisms in place regarding its social and environmental performance;
· The degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation practices; and
· The company’s current level of disclosure regarding its environmental and social performance.
Generally vote AGAINST proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees. The value of the information sought by such proposals is unclear.
Political Spending & Lobbying Activities
Generally vote AGAINST proposals asking the company to affirm political nonpartisanship in the workplace so long as:
· There are no recent, significant controversies, fines or litigation regarding the company’s political contributions or trade association spending; and
· The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and prohibit coercion.
Vote AGAINST proposals to publish in newspapers and other media the company’s political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Generally vote FOR proposals requesting greater disclosure of a company’s political contributions and trade association spending policies and activities. However, the following will be considered:
· The company’s current disclosure of policies and oversight mechanisms related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes, including information on the types of organizations supported and the business rationale for supporting these organizations; and
· Recent significant controversies, fines, or litigation related to the company’s political contributions or political activities.
Vote AGAINST proposals barring the company from making political contributions. Businesses are affected by legislation at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote AGAINST proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders.
Vote CASE-BY-CASE on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures, considering:
· The company’s current disclosure of relevant policies and oversight mechanisms;
· Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities; and
· The impact that the public policy issues in question may have on the company’s business operations, if specific public policy issues are addressed.
International Issues, Labor Issues, and Human Rights
International Human Rights Proposals
Generally vote FOR proposals requesting a report on company or company supplier labor and/or human rights standards and policies unless such information is already publicly disclosed.
Vote CASE-BY-CASE on proposals to implement company or company supplier labor and/or human rights standards and policies, considering:
· The degree to which existing relevant policies and practices are disclosed;
· Whether or not existing relevant policies are consistent with internationally recognized standards;
· Whether company facilities and those of its suppliers are monitored and how;
· Company participation in fair labor organizations or other internationally recognized human rights initiatives;
· Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse;
· Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers;
· The scope of the request; and
· Deviation from industry sector peer company standards and practices.
Internet Privacy and Censorship
Vote CASE-BY-CASE on resolutions requesting the disclosure and implementation of Internet privacy and censorship policies and procedures considering:
· The level of disclosure of company policies and procedures relating to privacy, freedom of speech, Internet censorship, and government monitoring of the Internet;
· Engagement in dialogue with governments and/or relevant groups with respect to the Internet and the free flow of information;
· The scope of business involvement and of investment in markets that maintain government censorship or monitoring of the Internet;
· The market-specific laws or regulations applicable to Internet censorship or monitoring that may be imposed on the company; and,
· The level of controversy or litigation related to the company’s international human rights policies and procedures.
MacBride Principles
Generally vote AGAINST proposals to endorse or increase activity on the MacBride Principles, unless:
· The company has formally been found to be out of compliance with relevant Northern Ireland fair employment laws and regulations;
· Failure to implement the MacBride Principles would put the company in an inconsistent position and/or at a competitive disadvantage compared with industry peers;
· Failure to implement the MacBride Principles would subject the company to excessively negative financial impacts due to laws that some municipalities have passed regarding their contracting operations and companies that have not implemented the MacBride Principles; or
· The company has had recent, significant controversies, fines or litigation regarding religious-based employment discrimination in Northern Ireland.
Operations in High Risk Markets
Vote CASE-BY-CASE on requests for a report on a company’s potential financial and reputational risks associated with operations in “high-risk” markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account:
· The nature, purpose, and scope of the operations and business involved that could be affected by social or political disruption;
· Current disclosure of applicable risk assessment(s) and risk management procedures;
· Compliance with U.S. sanctions and laws;
· Consideration of other international policies, standards, and laws; and
· Whether the company has been recently involved in recent, significant controversies, fines or litigation related to its operations in “high-risk” markets.
Outsourcing/Offshoring
Vote CASE-BY-CASE on proposals calling for companies to report on the risks associated with outsourcing/plant closures, considering:
· Controversies surrounding operations in the relevant market(s);
· The value of the requested report to shareholders;
· The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and
· The company’s existing human rights standards relative to industry peers.
Workplace Safety
Vote CASE-BY CASE on requests for workplace safety reports, including reports on accident risk reduction efforts, taking into account:
· The current level of company disclosure of its workplace health and safety performance data, health and safety management policies, initiatives, and oversight mechanisms;
· The nature of the company’s business, specifically regarding company and employee exposure to health and safety risks;
· Recent significant controversies, fines, or violations related to workplace health and safety; and
· The company’s workplace health and safety performance relative to industry peers.
Weapons and Military Sales
Foreign Military Sales/Offsets
Vote AGAINST reports on foreign military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales.
Nuclear and Depleted Uranium Weapons
Generally vote AGAINST proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses, and withdrawal from these contracts could have a negative impact on the company’s business.
Sustainability
Sustainability Reporting
Generally vote FOR proposals requesting the company to report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless:
· The company already discloses similar information through existing reports or policies such as an Environment,
Health, and Safety (EHS) report; a comprehensive Code of Corporate Conduct; and/or a Diversity Report; or
· The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame.
Water Issues
Vote CASE-BY-CASE on proposals requesting a company report on, or to adopt a new policy on, water-related risks and concerns, taking into account:
· The company’s current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics;
· Whether or not the company’s existing water-related policies and practices are consistent with relevant internationally recognized standards and national/local regulations;
· The potential financial impact or risk to the company associated with water-related concerns or issues; and
· Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers.
7. Mutual Fund Proxies
Election of Directors
Vote CASE-BY-CASE on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.
Converting Closed-end Fund to Open-end Fund
Vote CASE-BY-CASE on conversion proposals, considering the following factors:
· Past performance as a closed-end fund;
· Market in which the fund invests;
· Measures taken by the board to address the discount; and
· Past shareholder activism, board activity, and votes on related proposals.
Proxy Contests
Vote CASE-BY-CASE on proxy contests, considering the following factors:
· Past performance relative to its peers;
· Market in which fund invests;
· Measures taken by the board to address the issues;
· Past shareholder activism, board activity, and votes on related proposals;
· Strategy of the incumbents versus the dissidents;
· Independence of directors;
· Experience and skills of director candidates;
· Governance profile of the company;
· Evidence of management entrenchment.
Investment Advisory Agreements
Vote CASE-BY-CASE on investment advisory agreements, considering the following factors:
· Proposed and current fee schedules;
· Fund category/investment objective;
· Performance benchmarks;
· Share price performance as compared with peers;
· Resulting fees relative to peers;
· Assignments (where the advisor undergoes a change of control).
Approving New Classes or Series of Shares
Vote FOR the establishment of new classes or series of shares.
Preferred Stock Proposals
Vote CASE-BY-CASE on the authorization for or increase in preferred shares, considering the following factors:
· Stated specific financing purpose;
· Possible dilution for common shares;
· Whether the shares can be used for antitakeover purposes.
1940 Act Policies
Vote CASE-BY-CASE on policies under the Investment Advisor Act of 1940, considering the following factors:
· Potential competitiveness;
· Regulatory developments;
· Current and potential returns; and
· Current and potential risk.
Generally vote FOR these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the current SEC interpretation.
Changing a Fundamental Restriction to a Nonfundamental Restriction
Vote CASE-BY-CASE on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors:
· The fund’s target investments;
· The reasons given by the fund for the change; and
· The projected impact of the change on the portfolio.
Change Fundamental Investment Objective to Nonfundamental
Vote AGAINST proposals to change a fund’s fundamental investment objective to non-fundamental.
Name Change Proposals
Vote CASE-BY-CASE on name change proposals, considering the following factors:
· Political/economic changes in the target market;
· Consolidation in the target market; and
· Current asset composition.
Change in Fund’s Subclassification
Vote CASE-BY-CASE on changes in a fund’s sub-classification, considering the following factors:
· Potential competitiveness;
· Current and potential returns;
· Risk of concentration;
· Consolidation in target industry.
Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value
Vote FOR proposals authorizing the board to issue shares below Net Asset Value (NAV) if:
· The proposal to allow share issuances below NAV has an expiration date no more than one year from the date
shareholders approve the underlying proposal, as required under the Investment Company Act of 1940;
· The sale is deemed to be in the best interests of shareholders by (1) a majority of the company’s independent
directors and (2) a majority of the company’s directors who have no financial interest in the issuance; and
· The company has demonstrated responsible past use of share issuances by either:
· Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or
· Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts to NAV and economic dilution to existing non-participating shareholders.
Disposition of Assets/Termination/Liquidation
Vote CASE-BY-CASE on proposals to dispose of assets, to terminate or liquidate, considering the following factors:
· Strategies employed to salvage the company;
· The fund’s past performance;
· The terms of the liquidation.
Changes to the Charter Document
Vote CASE-BY-CASE on changes to the charter document, considering the following factors:
· The degree of change implied by the proposal;
· The efficiencies that could result;
· The state of incorporation;
· Regulatory standards and implications.
Vote AGAINST any of the following changes:
· Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series;
· Removal of shareholder approval requirement for amendments to the new declaration of trust;
· Removal of shareholder approval requirement to amend the fund’s management contract, allowing the contract to be modified by the investment manager and the trust management, as permitted by the 1940 Act;
· Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales charges and redemption fees that may be imposed upon redemption of a fund’s shares;
· Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements;
· Removal of shareholder approval requirement to change the domicile of the fund.
Changing the Domicile of a Fund
Vote CASE-BY-CASE on re-incorporations, considering the following factors:
· Regulations of both states;
· Required fundamental policies of both states;
· The increased flexibility available.
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval
Vote AGAINST proposals authorizing the board to hire or terminate subadvisers without shareholder approval if the investment adviser currently employs only one subadviser.
Distribution Agreements
Vote CASE-BY-CASE on distribution agreement proposals, considering the following factors:
· Fees charged to comparably sized funds with similar objectives;
· The proposed distributor’s reputation and past performance;
· The competitiveness of the fund in the industry;
· The terms of the agreement.
Master-Feeder Structure
Vote FOR the establishment of a master-feeder structure.
Mergers
Vote CASE-BY-CASE on merger proposals, considering the following factors:
· Resulting fee structure;
· Performance of both funds;
· Continuity of management personnel;
· Changes in corporate governance and their impact on shareholder rights.
Shareholder Proposals for Mutual Funds
Establish Director Ownership Requirement
Generally vote AGAINST shareholder proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Reimburse Shareholder for Expenses Incurred
Vote CASE-BY-CASE on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote FOR the reimbursement of the proxy solicitation expenses.
Terminate the Investment Advisor
Vote CASE-BY-CASE on proposals to terminate the investment advisor, considering the following factors:
· Performance of the fund’s Net Asset Value (NAV);
· The fund’s history of shareholder relations;
· The performance of other funds under the advisor’s management.
8. Foreign Private Issuers Listed on U.S. Exchanges
Vote AGAINST (or WITHHOLD from) non-independent director nominees at companies which fail to meet the following criteria: a majority-independent board, and the presence of an audit, a compensation, and a nomination committee, each of which is entirely composed of independent directors.
Where the design and disclosure levels of equity compensation plans are comparable to those seen at U.S. companies, U.S. compensation policy will be used to evaluate the compensation plan proposals. In all other cases, equity compensation plans will be evaluated according to ISS International Proxy Voting Guidelines.
All other voting items will be evaluated using ISS International Proxy Voting Guidelines.
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2013 Canadian Proxy Voting Guidelines
TSX-Listed Companies
December 19, 2012
Institutional Shareholder Services Inc.
Copyright © 2012 by ISS
www.issgovernance.com
ISS’ 2013 Canadian Proxy Voting Guidelines- TSX Companies
Effective for Meetings on or after Feb. 1, 2013
Published December 19, 2012
TABLE OF CONTENTS
1. ROUTINE/MISCELLANEOUS | 4 |
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Audit-Related | 4 |
Financial Statements/Director and Auditor Reports | 4 |
Ratification of Auditors | 4 |
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Other Business | 4 |
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2. BOARD OF DIRECTORS | 5 |
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Slate Ballots (Bundled director elections) | 5 |
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Voting on Director Nominees in Uncontested Elections | 5 |
ISS Canadian Definition of Independence | 7 |
Board Structure and Independence | 8 |
Insiders on Key Committees | 8 |
Audit Fee Disclosure | 10 |
Excessive Non-Audit Fees | 10 |
Meeting Attendance | 10 |
Overboarded Directors | 11 |
Former CEO/CFO on Audit/Compensation Committee | 12 |
Voting on Directors for Egregious Actions | 12 |
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Other Board-Related Proposals | 12 |
Classification/Declassification of the Board | 12 |
Independent Chairman (Separate Chairman/CEO) | 13 |
Majority of Independent Directors/Establishment of Committees | 13 |
Majority Vote Standard for the Election of Directors | 13 |
Proxy Contests - Voting for Director Nominees in Contested Elections | 14 |
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3. SHAREHOLDER RIGHTS & DEFENSES | 15 |
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Advance Notice Requirement | 15 |
Appointment of Additional Directors Between Annual Meetings | 15 |
By-Law Amendments | 16 |
Cumulative Voting | 16 |
Confidential Voting | 17 |
Poison Pills (Shareholder Rights Plans) | 17 |
Reincorporation Proposals | 19 |
Supermajority Vote Requirements | 19 |
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4. CAPITAL/RESTRUCTURING | 20 |
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Mergers and Corporate Restructurings | 20 |
Income Trust Conversions | 20 |
Increases in Authorized Capital | 22 |
Private Placement Issuances | 22 |
Blank Cheque Preferred Stock | 23 |
Dual-class Stock | 23 |
Escrow Agreements | 24 |
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5. COMPENSATION | 25 |
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Executive Pay Evaluation | 25 |
Advisory Vote on Executive Compensation (Say-on-Pay) Management Proposals | 25 |
Pay for Performance Evaluation | 26 |
Problematic Pay Practices | 28 |
Board Communications and Responsiveness | 29 |
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Equity Compensation Plans | 29 |
Cost of Equity Plans | 30 |
Dilution and Burn Rate Assessment | 30 |
Plan Amendment Provisions | 31 |
Non-Employee Director Participation | 33 |
Director Limit Considerations | 33 |
Repricing Options | 34 |
Repricing Proposals | 34 |
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Other Compensation Plans | 35 |
Employee Stock Purchase Plans (ESPPs, ESOPs) | 35 |
Deferred Share Unit Plans | 35 |
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Shareholder Proposals on Compensation | 36 |
Shareholder Advisory Vote Proposals | 36 |
Supplemental Executive Retirement Plans (SERPS) Proposals | 37 |
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6. SOCIAL/ENVIRONMENTAL ISSUES | 38 |
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DISCLOSURE/DISCLAIMER | 39 |
1. Routine/Miscellaneous
Audit-Related
Financial Statements/Director and Auditor Reports
Companies are required under their respective Business Corporations Acts (BCAs) to submit their financial statements and the auditor report, which is included in the company’s annual report, to shareholders at every AGM. This routine item is almost always non-voting.
Ratification of Auditors
Vote FOR proposals to ratify auditors, unless the following applies:
· Non-audit related fees paid to the auditor exceed audit-related fees.
RATIONALE: Multilateral Instrument 52-110 relating to Audit Committees defines “audit services” to include the professional services rendered by the issuer’s external auditor for the audit and review of the issuer’s financial statements or services that are normally provided by the external auditor in connection with statutory and regulatory filings or engagements.
The Instrument also sets out disclosure requirements related to fees charged by external auditors. Every issuer is required to disclose in its Annual Information Form with at least a cross-reference in the related Proxy Circular, fees billed by the external audit firm in each of the last two fiscal years, broken down into four categories: Audit Fees, Audit-Related Fees, Tax Fees, and All Other Fees.
In circumstances where “Other” fees include fees related to significant one-time capital structure events: initial public offerings, bankruptcy emergence, and spinoffs; and the company makes public disclosure of the amount and nature of those fees which are an exception to the standard “non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
Other Business
Vote AGAINST all proposals on proxy ballots seeking approval for unspecified “other business” that may be conducted at the shareholder meeting.
2. Board of Directors
Slate Ballots (Bundled director elections)
Generally WITHHOLD votes from all directors nominated by slate ballot at the annual/general or annual/special shareholders’ meetings. This policy will not apply to contested director elections.
RATIONALE: The Toronto Stock Exchange released amendments to Part IV of the Company Manual, on Oct. 4, 2012. The new rules focus on how a listed issuer elects its board of directors and becomes effective Dec. 31, 2012.
Highlights of the new rules include requirements for the:
· Annual election of directors,
· Election of directors by way of individual resolution rather than single slate ballots
· Public disclosure of the votes received for the election of each director,
· Adoption of a majority voting director resignation policy or explanation of why such policy has not been adopted, and
· Notice to the TSX if a director receives a majority of ‘withhold’ votes and the issuer has not adopted a majority voting policy.
The updated policy reflects the recent prohibition on single slate ballot election of directors at TSX-Listed issuers, while maintaining flexibility to address specific circumstances that would warrant a case-by-case approach.
Voting on Director Nominees in Uncontested Elections
The following fundamental principles apply when determining votes on director nominees:
Board Accountability: Practices that promote accountability and enhance shareholder trust begin with transparency into a company’s governance practices including risk management practices. These practices include the annual election of all directors by a majority of votes cast by all shareholders and provide shareholders with the ability to remove problematic directors, and include the detailed timely disclosure of voting results. Board accountability is facilitated through clearly defined board roles and responsibilities, regular peer performance review, and shareholder engagement.
Board Responsiveness: In addition to facilitating constructive shareholder engagement, boards of directors should be responsive to the wishes of shareholders as indicated by majority supported shareholder proposals or lack of majority support for management proposals including election of directors. In the case of a company controlled through a dual-class share structure, the support of a majority of the minority shareholders should equate to majority support.
Board Independence: Independent oversight of management is a primary responsibility of the board and while true independence of thought and deed is difficult to assess, there are corporate governance practices with regard to board structure and management of conflicts of interest that are meant to promote independent oversight. Such practices include the selection of an independent chair to lead the board; structuring board pay practices to eliminate the potential for self-dealing, reduce risky decision-making, and ensure the alignment of director interests with those of shareholders rather than management; structure separate independent key committees with defined mandates. Complete disclosure of all conflicts of interest and how they are managed is a critical indicator of independent oversight.
Board Capability: The skills, experience and competencies of board members should be a priority in director selection, but consideration should also be given to a board candidate’s ability to devote sufficient time and commitment to the increasing responsibilities of a public company director. Directors who are unable to attend board and committee meetings and/or who are overextended (i.e., serving on too many boards) raise concern regarding the director’s ability to effectively serve in shareholders’ best interests.
ISS Canadian Definition of Independence
Inside Director (I)
· Employees of the company or its affiliates(1);
· Non-employee officer of the company if he/she is among the five most highly compensated;
· Current interim CEO;
· Beneficial owner of company shares with more than 50 percent of the outstanding voting rights.
Affiliated Outside Director (AO)
· Former executive with the company within the last three years (excluding CEO);
· Former CEO (no cooling-off period);
· Former interim CEO if the service was longer than 18 months or if the service was between 12 and 18 months and the compensation was high relative to that of the other directors (5x their pay) or in line with a CEO’s compensation(2);
· Former executive of the company, an affiliate, or a firm acquired within the past three years;
· Executive of a former parent or predecessor firm at the time the company was sold or split off from parent/predecessor (subject to three-year cooling off other than CEO);
· Executive, former executive within last three years, general or limited partner of a joint venture or partnership with the company;
· Relative(3) of current executive officer(4) of the company;
· Relative of a person who has served as an executive officer of the company within the last three years;
· Currently provides (or a relative provides) professional services to the company or to its officers;
· Currently employed by (or a relative is employed by) a significant customer or supplier(5);
· Is (or a relative is) a trustee, director or employee of a charitable or non-profit organization that receives grants or endowments from the company;
· Has (or a relative has) a transactional relationship with the company excluding investments in the company through a private placement;
· Has a contractual/guaranteed board seat and is party to a voting agreement to vote in line with management on proposals being brought to shareholders;
· Founder(6) of the company but not currently an employee;
· Board attestation that an outside director is not independent.
Independent Directors (IO)
· No material(7) ties to the corporation other than board seat.
(1) “Affiliate” includes a subsidiary, sibling company, or parent company. ISS uses 50 percent control ownership by the parent company as the standard for applying its affiliate designation.
(2) ISS will look at the terms of the interim CEO’s compensation or employment contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. ISS will also consider if a formal search process was under way for a full-time CEO.
(3) Relative refers to immediate family members including spouse, parents, children, siblings, in-laws, and anyone sharing the director’s home.
(4) Based on the definition of Executive Officer used in Multilateral Instrument 52-110.
(5) If the company makes or receives annual payments exceeding the greater of $200,000 or 5 percent of recipient’s gross revenues (the recipient is the party receiving proceeds from the transaction).
(6) The operating involvement of the Founder with the company will be considered. Little or no operating involvement may cause ISS to deem the Founder as an independent outsider.
(7) “Material” is defined as a standard of relationship (financial, personal or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have a meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders.
Vote CASE-BY-CASE on director nominees, examining the following factors when disclosed:
· Independence of the board and key board committees;
· Attendance at board and committee meetings;
· Corporate governance provisions and takeover activity;
· Long-term company performance;
· Directors’ ownership stake in the company;
· Compensation practices;
· Responsiveness to shareholder proposals;
· Board accountability; and
· Adoption of a Majority Voting (director resignation) policy.
Board Structure and Independence
Generally vote WITHHOLD from any insider or affiliated outside director where:
· The board is less than majority independent, OR
· The board lacks a separate compensation or nominating committee.
RATIONALE: The balance of board influence should reside with independent directors free of any pressures or conflicts which might prevent them from objectively overseeing strategic direction, evaluating management effectiveness, setting appropriate executive compensation, maintaining internal control processes, and ultimately driving long-term shareholder value creation. Best practice corporate governance standards do not advocate that no inside directors sit on boards. Company insiders have extensive company knowledge and experience that provides a significant contribution to business decisions at the board level. In order to maintain the independent balance of power necessary for independent directors to fulfill their oversight mandate and make difficult decisions that may run counter to management’s self-interests, insiders, former insiders, and other related directors should not dominate the board or continue to be involved on key board committees charged with the audit, compensation, and nomination responsibilities.
Best practice as set out in National Policy 58-201 Corporate Governance Guidelines recommends that the board should have:
· A majority of independent directors.
· A nominating committee and a compensation committee composed entirely of independent directors (Nomination of Directors 3.10; Compensation 3.15).
Guideline Six of the CCGG publication “2010 Building High Performance Boards” indicates that boards “Establish mandates for board committees and ensure committee independence.” It is further recommended that key board committees “review committee charters every year and amend or confirm the mandate and procedures based on information received from the board and committee evaluation process.”
Insiders on Key Committees
Vote WITHHOLD from individual directors who:
· Are insiders on the audit, compensation, or nominating committee.
Include cautionary language for all affiliated outside directors who sit on the audit, compensation, or nominating committee, to the effect that corporate governance best practices dictate that such committees should be comprised entirely of independent directors.
RATIONALE: In order to promote independent oversight of management, the board as a whole and its key board committees should meet minimum best practice expectations of no less than majority independence. Director elections are seen to be the single most important use of the shareholder franchise.
Multilateral Instrument 52-110 Audit Committees sets out best practice with regard to the composition of the audit committee. The Instrument requires that every reporting issuer, other than an investment fund, issuer of asset-backed securities, designated foreign issuer, SEC issuer, or issuers that are subsidiary entities as long as the subsidiary does not issue securities and the parent is subject to compliance with this instrument, must have an audit committee and that the committee must comprise a minimum of three members and that every audit committee member must be independent.
Policy Considerations for Majority Owned Companies(8)
ISS policies support a one-share, one-vote principle. In recognition of the substantial equity stake held by certain shareholders, on a CASE-BY-CASE basis, director nominees who are or who represent a controlling shareholder of a majority owned company, who will be designated as controlling insiders, may generally be supported under ISS’ board and committee independence policies, if the company meets all of the following independence and governance criteria:
· Individually elected directors;
· The number of Related Directors should not exceed the proportion of the common shares controlled by the Controlling Shareholder, to a maximum of two-thirds, however if the CEO is related to the Controlling Shareholder, then at least two-thirds of the directors should be independent of management;
· If the CEO and chair roles are combined or the CEO is or is related to the Controlling Shareholder, then there should be an independent lead director and the board should have an effective and transparent process to deal with any conflicts of interest between the company, minority shareholders, and the Controlling Shareholder; and
· A majority of the Audit and Nominating committees should be either Independent Directors or Related Directors who are independent of management. All members of the compensation committee should be independent of management and if the CEO is related to the Controlling Shareholder, no more than one member of the compensation committee should be a Related Director;
· Prompt disclosure of detailed vote results following each shareholder meeting;
· Adoption of a majority vote standard with director resignation policy for uncontested elections OR public commitment to adopt a majority voting standard with director resignation policy for uncontested elections if the controlling shareholder ceases to control 50 percent or more of the common shares(9).
ISS will also consider the following:
· The nominating committee’s process to receive and discuss suggestions from shareholders for potential director nominees;
(8) A majority owned company is defined for the purpose of this policy as a company controlled by a shareholder or group of shareholders who together have an economic ownership interest under a single class common share capital structure that is commensurate with their voting entitlement of 50% or more of the outstanding common shares.
(9) On October 4, 2012, the TSX announced a further amendment to proposed listing requirements for TSX listed companies mandating majority voting which may take the form of a policy with a director resignation requirement, and disclosure of detailed vote results for director elections, which are intended to take effect as of December 31, 2013.
· If the CEO is related to the Controlling Shareholder, the board’s process to evaluate the performance, leadership, compensation, and succession of management should be led by independent directors;
ISS will also take into consideration any other concerns related to the conduct of the subject director and any controversy or questionable actions on the part of the subject director that are deemed not to be in the best interests of all shareholders.
RATIONALE: Canadian corporate law provides significant shareholder protections, for example a shareholder or group of shareholders having a 5 percent ownership stake in a company may requisition a special meeting for the purposes of replacing or removing directors. Directors may be removed by a simple majority vote. Shareholders also benefit from the ability to bring an oppression action against the board or individual directors of Canadian incorporated public companies.
Against this legal backdrop, Canadian institutions have taken steps to acknowledge and support the premise that a shareholder who has an equity stake in the common shares of a reporting issuer under a single class common share structure has a significant interest in protecting the value of that equity stake in the company and is therefore deemed to have significant alignment of interests with minority shareholders. This policy firmly supports the one-share, one-vote principle and is intended to recognize the commonality of interests between certain shareholders having a majority equity stake under a single class share structure and minority shareholders in protecting the value of their investment. This policy will not be considered at dual class companies having common shares with unequal voting or board representation rights.
Audit Fee Disclosure
Generally vote WITHHOLD from the members of the audit committee as reported in the most recently filed public documents if:
· No audit fee information is disclosed by the company within a reasonable period of time prior to a shareholders’ meeting at which ratification of auditors is a voting item.
RATIONALE: In addition to audit fee disclosure by category now being a regulatory requirement, such information is of great importance because of the concern that audit firms could compromise the independence of a company audit in order to secure lucrative consulting services from the company.
Excessive Non-Audit Fees
Generally vote WITHHOLD from individual directors who are members of the audit committee as constituted in the most recently completed fiscal year if:
· Non-audit fees (Other Fees) paid to the external audit firm exceed audit and audit-related fees.
RATIONALE: Part 2 of Multilateral Instrument 52-110 Audit Committees states that the audit committee must be directly responsible for overseeing the work of the external auditor and the audit committee must pre-approve all non-audit services provided to the issuer or its subsidiary entities by the issuer’s external auditor. It is therefore appropriate to hold the audit committee accountable for payment of excessive non-audit fees.
Meeting Attendance
Vote WITHHOLD from individual director nominees if:
· (i) The company has NOT adopted a majority voting policy and (ii) the individual director has attended less than 75 percent of the board and committee meetings(10) held within the past year without a valid reason for these absences;
· (i) The company has adopted a majority voting policy and (ii) the individual director has attended less than 75 percent of the board and committee meetings held within the past year without a valid reason for the absences AND a pattern of low attendance exists based on prior years’ meeting attendance.
The following should be taken into account:
· Valid reasons for absence at meetings include illness or absence due to company business;
· Participation via telephone is acceptable;
· �� If the director missed one meeting or one day’s meetings, votes should not be withheld even if such absence dropped the director’s attendance below 75 percent;
· Board and committee meetings include all regular and special meetings of the board duly called for the purpose of conducting board business;
· Out of country location or residence is not a sufficient excuse not to attend board meetings, especially given technological advances in communications equipment.
RATIONALE: Corporate governance best practice supports board structures and processes that promote independent oversight and accountability. Nominating competent, committed, and engaged directors to the board also necessitates full participation in the conduct of board business in order to fulfill the many responsibilities and duties now required to meet requisite standards of care. A director who commits to serve on a public company board should be prepared and able to make attendance at and contribution to the board’s meetings a priority. A pattern of absenteeism may be an indicator of a more serious concern with a director’s ability to serve, warranting a board review and potentially the director’s resignation.
Overboarded Directors
Directors are overboarded if they sit on a number of boards which could result in excessive time commitments and an inability to carry out their oversight duties. Cautionary language will be included regarding the number of additional public company board seats held by directors if:
· The director is a CEO and sits on more than 2 outside public company boards in addition to his/her own company.
· The director is an outside professional director and sits on more than 6 public company boards in total.
National Policy 58-201 Corporate Governance Guidelines, state that they are not meant to be prescriptive and that issuers are encouraged to consider the guidelines in developing their own corporate governance practices. Further that “The Policy provides guidance that has been formulated to be sensitive to the realities of the greater numbers of small companies and controlled companies in the Canadian corporate landscape.” NP 58-201 does not address the number of boards appropriate for directors but simply instructs that the board should appoint a nominating committee and that one of the committee’s duties should be to “consider whether or not each new nominee can devote sufficient time and resources to his or her duties as a board member.”
2010 Building High Performance Boards published by the Canadian Coalition for Good Governance indicates that, “directors who hold a full-time executive position should have only one or two outside public company directorships ... and that directors who are not employed full time should generally hold no more than four outside corporate directorships that take up a significant amount of time.”
(10) Where a WITHHOLD is based on meeting attendance for board meetings only due to lack of disclosure on committee meeting attendance, particulars will be provided in the analysis.
The Pension Investment Association of Canada’s Corporate Governance Principles state more generally that “In order for directors to devote the required amount of time to their board responsibilities, they must limit the number of other directorships that they accept.” But PIAC does not specify what an acceptable number might be, presumably in recognition of Canada’s more flexible comply-or-explain governance regime.
Former CEO/CFO on Audit/Compensation Committee
Generally vote WITHHOLD from any director on the audit or compensation committee if:
· The director has served as the CEO of the company at any time;
· The director has served as the CFO of the company within the past three years.
RATIONALE: Although such directors are designated as affiliated outsiders under ISS policy, a WITHHOLD vote will be recommended as if they were insiders on these key committees due to concerns of independent oversight of financials for which they were previously responsible or compensation arrangements that they may have orchestrated and over which they may still wield considerable influence thus potentially compromising the Audit or Compensation Committee’s independence.
Voting on Directors for Egregious Actions
Under extraordinary circumstances, vote WITHHOLD from directors individually, one or more committee members, or the entire board, due to:
· Material failures of governance, stewardship, risk oversight or fiduciary responsibilities at the company;
· Failure to replace management as appropriate; or
· Egregious actions related to the 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.
RATIONALE: Director accountability and competence have become issues of prime importance given the failings in oversight exposed by the global financial crisis. There is also concern over the environment in the boardrooms of certain markets, where past failures appear to be no impediment to continued or new appointments at major companies and may not be part of the evaluation process at companies in considering whether an individual is, or continues to be, fit for the role and best able to serve shareholders’ interests.
Under exceptional circumstances that raise substantial doubt on a director’s ability to serve as an effective monitor of management and in the best interests of shareholders including past performance on other boards, we may consider a negative recommendation on directors.
Other Board-Related Proposals
Classification/Declassification of the Board
Vote AGAINST proposals to classify the board.
Vote FOR proposals to repeal classified boards and to elect all directors annually.
Independent Chairman (Separate Chairman/CEO)
Generally vote FOR shareholder proposals seeking separation of the offices of CEO and chair if the company has a single executive occupying both positions.
RATIONALE: The separation of the positions of chairman and CEO in favour of an independent chairman of the board is superior to the lead director concept. The positions of chairman and CEO are two distinct jobs with different job responsibilities. The chairman is the leader of the board of directors, which is responsible for selecting and replacing the CEO, setting executive pay, evaluating managerial and company performance, and representing shareholder interests. The CEO, by contrast, is responsible for maintaining the day-to-day operations of the company and being the company’s spokesperson. It therefore follows that one person cannot fulfill both roles without conflict. An independent lead director may be an acceptable alternative as long as the lead director has clearly delineated and comprehensive duties including the full authority to call board meetings and approve meeting materials and engage with shareholders. A counterbalancing lead director alternative must be accompanied by majority independence on the board and key committees, and the absence of any problematic governance practices.
Best practice as set out in National Policy 58-201 Corporate Governance Guidelines recommends that:
· The chair of the board should be an independent director or where this is not appropriate, an independent director should be appointed as “lead director.”
Majority of Independent Directors/Establishment of Committees
Vote FOR shareholder proposals asking that a majority or up to two-thirds of directors be independent unless:
· The board composition already meets the proposed threshold based on the ISS definition of independence.
Vote FOR shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors unless:
· The board’s committees already meet that standard.
Majority Vote Standard for the Election of Directors
Vote FOR resolutions requesting that: (i) the board adopt a majority vote standard and director resignation policy for director elections or (ii) the company amend its bylaws to provide for majority voting, whereby director nominees are elected by the affirmative vote of the majority of votes cast, unless:
· A majority voting policy is codified in the company’s bylaws, corporate governance guidelines, or other governing documents prior to an election to be considered, and;
· The company has adopted formal corporate governance principles that provide an adequate response to both new nominees as well as “holdover” nominees (i.e,. incumbent nominees who fail to receive 50 percent of votes cast).
Proxy Contests - Voting for Director Nominees in Contested Elections
Vote CASE-BY-CASE in contested elections taking into account:
· Long-term financial performance;
· Board performance;
· Management’s track record and compensation;
· Qualifications of director nominees (both slates); and
· Evaluation of what each side is offering shareholders.
Overall Approach
When analyzing proxy contests, ISS focuses on two central questions:
1. Have the dissidents met the burden of proving that board change is warranted? And, if so;
2. Will the dissident nominees be more likely to affect positive change (i.e., increase shareholder value) versus the incumbent nominees?
When a dissident seeks a majority of board seats, ISS will require from the dissident a well-reasoned and detailed business plan, including the dissident’s strategic initiatives, a transition plan and the identification of a qualified and credible new management team. ISS will then compare the detailed dissident plan against the incumbent plan and the dissident director nominees and management team against the incumbent team in order to arrive at our vote recommendation.
When a dissident seeks a minority of board seats, the burden of proof imposed on the dissident is lower. In such cases, ISS will not require from the dissident a detailed plan of action, nor is the dissident required to prove that its plan is preferable to the incumbent plan. Instead, the dissident will be required to prove that board change is preferable to the status quo and that the dissident director slate will add value to board deliberations including by, among other factors, considering issues from a different viewpoint than the current board members.
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Reimbursing Proxy Solicitation Expenses
Vote CASE-BY-CASE taking into account:
· Whether ISS recommends in favour of the dissidents, in which case we may recommend approving the dissident’s out of pocket expenses if they are successfully elected and the expenses are reasonable.
3. Shareholder Rights & Defenses
Advance Notice Requirement
Vote CASE-BY-CASE on proposals to adopt an Advance Notice Board Policy or to adopt or amend bylaws containing or adding an advance notice requirement, giving support to those proposals which provide a reasonable framework for shareholders to nominate directors by allowing shareholders to submit director nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review.
To be reasonable, the company’s deadline for notice of shareholders’ director nominations must not be more than 65 days and not less than 30 days prior to the meeting date. If notice of annual meeting is given less than 50 days prior to the meeting date a provision to require shareholder notice by close of business on the 10th day following first public announcement of the annual meeting is supportable. In the case of a special meeting, a requirement that a nominating shareholder must provide notice by close of business on the 15th day following first public announcement of the special shareholders’ meeting is also acceptable.
In general, support additional efforts by companies to ensure full disclosure of a dissident shareholder’s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review any proposed director nominees.
RATIONALE: All shareholders should be provided with sufficient disclosure and time to make appropriate decisions on the election of their board representatives. Advance Notice Requirement Policies typically provide a transparent, structured and fair director nomination process, whereby all shareholders, irrespective of whether they are voting by proxy or attending the meeting, are made aware of potential proxy contests in advance of the meeting. Shareholders are also provided with important information pertaining to proposed dissident director nominees within a specified time frame, allowing shareholders to fully participate in the director election process in an informed and effective manner.
Appointment of Additional Directors Between Annual Meetings
Generally vote FOR these resolutions where:
· The company is incorporated under a statute (such as the CBCA) that permits removal of directors by simple majority vote;
· The number of directors to be appointed between meetings does not exceed one-third of the number of directors appointed at the previous annual meeting; and
· Such appointments must be approved by shareholders at the annual meeting immediately following the date of their appointment.
Bylaw Amendments
Generally vote FOR proposals to adopt or amend Articles/Bylaws unless the resulting document contains any of the following:
· The quorum for a meeting of shareholders is set below two persons holding 25 percent of the eligible vote (this may be reduced to no less than 10 percent in the case of a small company that can demonstrate, based on publicly disclosed voting results, that it is unable to achieve a higher quorum and where there is no controlling shareholder);
· The quorum for a meeting of directors is less than 50 percent of the number of directors;
· The chair of the board has a casting vote in the event of a deadlock at a meeting of directors;
· An alternate director provision that permits a director to appoint another person to serve as an alternate director to attend board or committee meetings in place of the duly elected director;
· Other corporate governance concerns, such as granting blanket authority to the board with regard to future capital authorizations or alteration of capital structure without further shareholder approval.
RATIONALE: Alternate directors have neither been elected nor has their appointment been ratified by shareholders. As such, the use of a director substitute or replacement to fill in for a duly elected board representative raises serious concerns, including whether an alternate may be bound to serve in the best interests of shareholders. Also, regular directors must be willing to earmark sufficient time and effort to serving on the board, once they have accepted the responsibility entrusted to them by shareholders.
Article or bylaw provisions permitting alternate directors generally indicate that the alternate director will be counted for quorum purposes, may attend and vote on matters raised at board meetings and act on behalf of the regular elected director in all respects, and may act as alternate for more than one director in some cases. As well, this provision may also provide that there is no limit to the number of alternates that may be appointed for any meeting.
Allowing shareholders the opportunity to elect directors is a fundamental shareholder right. As shareholders continue to push for increased rights such as majority voting with a director resignation policy to ensure that they have a meaningful voice in the election of their board representatives, the inclusion of an alternate director provision in a reporting issuer’s articles or bylaws runs counter to the higher director accountability being sought by these shareholder rights improvements. Furthermore, based on discussions with several institutional investors, the majority of them raised concerns with alternate director provisions.
Cumulative Voting
In general, support cumulative voting. However there may be situations where such a structure may be detrimental to shareholder interests.
Generally vote AGAINST proposals to eliminate cumulative voting.
Generally vote FOR proposals to restore or permit cumulative voting but exceptions may be made depending on the company’s other governance provisions such as the adoption of a majority vote standard for the election of directors.
Confidential Voting
Generally vote FOR shareholder proposals requesting that corporations adopt confidential voting, use independent vote tabulators, and use independent inspectors of election, as long as:
· The proposal includes a provision for proxy contests as follows: In the case of a contested election, management should be permitted to request that the dissident group honor its confidential voting policy. If the dissidents agree, the policy remains in place. If the dissidents will not agree, the confidential voting policy is waived for that particular vote.
Generally vote FOR management proposals to adopt confidential voting.
Poison Pills (Shareholder Rights Plans)
As required by the Toronto Stock Exchange, the adoption of a shareholder rights plan must be ratified by shareholders within six months of adoption.
Vote CASE-BY-CASE on management proposals to ratify a shareholder rights plan (poison pill) taking into account whether it conforms to ‘new generation’ rights plans and its scope is limited to the following two specific purposes:
· To give the board more time to find an alternative value enhancing transaction; and
· To ensure the equal treatment of all shareholders.
Vote AGAINST plans that go beyond these purposes if:
The plan gives discretion to the board to either:
· Determine whether actions by shareholders constitute a change in control;
· Amend material provisions without shareholder approval;
· Interpret other provisions;
· Redeem the rights or waive the plan’s application without a shareholder vote; or
· Prevent a bid from going to shareholders.
The plan has any of the following characteristics:
· Unacceptable key definitions;
· Reference to Derivatives Contracts within the definition of Beneficial Owner;
· Flip over provision;
· Permitted bid period greater than 60 days;
· Maximum triggering threshold set at less than 20 percent of outstanding shares;
· Does not permit partial bids;
· Includes a Shareholder Endorsed Insider Bid (SEIB) provision;
· Bidder must frequently update holdings;
· Requirement for a shareholder meeting to approve a bid; and
· Requirement that the bidder provide evidence of financing.
The plan does not:
· Include an exemption for a “permitted lock up agreement”;
· Include clear exemptions for money managers, pension funds, mutual funds, trustees, and custodians who are not making a takeover bid; and
· Exclude reference to voting agreements among shareholders.
RATIONALE: The evolution of “new generation” shareholder rights plans in Canada has been the result of reshaping the early antitakeover provision known as a “poison pill” into a shareholder protection rights plan that serves only two legitimate purposes: (i) to increase the time period during which a Permitted Bid may remain outstanding to a maximum of 60 days in order to the give the board of directors of a target company sufficient time over and above the current statutory 35 day limit, to find an alternative to a takeover bid that would increase shareholder value; and (ii) to ensure that all shareholders are treated equally in the event of a bid for their company.
Elimination of board discretion to interpret the key elements of the plan was critical to this evolution. Definitions of Acquiring Person, Beneficial Ownership, Affiliates, Associates and Acting Jointly or in Concert are the terms that set out the who, how, and when of a triggering event. These definitions in early poison pills contained repetitive, circular, and duplicative layering of similar terms which created confusion and made interpretation difficult. Directors were given broad discretion to interpret the terms of a rights plan to determine when it was triggered, in other words, whether a takeover bid could proceed. This in turn, created enough uncertainty for bidders or potential purchasers, to effectively discourage non-board negotiated transactions. It can be seen how the early poison pill became synonymous with board and management entrenchment.
“New generation” rights plans have therefore been drafted to remove repetitive and duplicative elements along with language that gives the board discretion to interpret the terms of the plan. Also absent from “new generation” plans are references to similar definitions in regulation. These definitions found in various regulations often contain repetitive elements and references to other definitions in regulation that are unacceptable and not intended to serve the same purpose as those found in a “new generation” rights plan.
A number of other definitions are relevant to the key definitions mentioned above and are therefore equally scrutinized. Exemptions under the definition of Acquiring Person, for example, such as Exempt Acquisitions and Pro Rata Acquisitions, are sometimes inappropriately drafted to permit acquisitions that should trigger a rights plan. In order for an acquisition to be pro rata, the definition must ensure that a person may not acquire a greater percentage of the shares outstanding that the percentage owned immediately prior to the acquisition, by any means. It should also be noted that “new generation” rights plans are premised on the acquisition of common shares and ownership at law or in equity, therefore references to the voting of securities or the extension of beneficial ownership to encompass derivative securities that may result in deemed beneficial ownership of securities that a person has no right to acquire, goes beyond the acceptable purpose of a rights plan.
Equally important to the acceptability of a shareholder rights plan is the treatment of institutional investors who have a fiduciary duty to carry out corporate governance activities in the best interests of the beneficial owners of the investments that they oversee. These institutional investors should not trigger a rights plan through their investment and corporate governance activities for the accounts of others. The definition of Independent Shareholders should make absolutely clear these institutional investors acting in a fiduciary capacity for the accounts of others are independent for purposes of approving a takeover bid or other similar transaction, as well as approving future amendments to the rights plan.
Probably one of the most important and most contentious definitions in a shareholder rights plan is that of a Permitted Bid. ISS guidelines provide that an acceptable Permitted Bid definition must permit partial bids. Canadian takeover bid legislation is premised on the ability of shareholders to make the determination of the acceptability of any bid for their shares, partial or otherwise, provided that it complies with regulatory requirements. In the event that a partial bid is accepted by shareholders, regulation requires that their shares be taken up on a pro rata basis. Shareholders of a company may welcome the addition of a significant new shareholder for a number of reasons.
Also unacceptable to the purpose of a rights plan is the inclusion of a “Shareholder Endorsed Insider Bid” (SEIB) provision which would allow an “Insider” and parties acting jointly or in concert with an Insider an additional less rigorous avenue to
proceed with a take-over bid without triggering the rights plan, in addition to making a Permitted Bid or proceeding with board approval. The SEIB provision allows Insiders the ability to take advantage of a less stringent bid provision that is not offered to other bidders who must make a Permitted Bid or negotiate with the board for support.
Finally, a “new generation” rights plan must contain an exemption for lockup agreements and the definition of a permitted lockup agreement must strike the proper balance so as not to discourage either (i) the potential for a bidder to lock up a significant shareholder and thus give some comfort of a certain degree of success, or (ii) the potential for competitive bids offering a greater consideration and which would also necessitate a locked up person be able to withdraw the locked up shares from the first bid in order to support the higher competing bid.
New generation rights plans are limited to achieving the two purposes identified here. They ensure that shareholders are treated equally in a control transaction by precluding creeping acquisitions or the acquisition of a control block through private agreements between a few large shareholders; and they provide a reasonable time period to allow a corporation’s directors and management to develop an alternative to maximize shareholder value.
Reincorporation Proposals
Vote CASE-BY-CASE on proposals to change a company’s jurisdiction of incorporation taking into account:
· Financial and corporate governance concerns, including: the reasons for reincorporating, a comparison of the governance provisions, and a comparison of the jurisdictional laws.
Generally vote FOR reincorporation when:
· Positive financial factors outweigh negative governance implications; or
· Governance implications are positive.
Generally vote AGAINST reincorporation if business implications are secondary to negative governance implications.
Supermajority Vote Requirements
Vote AGAINST proposals to require a supermajority shareholder vote at a level above that required by statute.
Vote FOR proposals to lower supermajority vote requirements.
4. Capital/Restructuring
Mergers and Corporate Restructurings
Overall Approach
For mergers and acquisitions, review and evaluate the merits and drawbacks of the proposed transaction, balancing the 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 value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favourable track record of successful integration of historical acquisitions.
· Negotiations and process — Were the terms of the transaction negotiated at arms-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.
Income Trust Conversions
For an income trust, or in a broader sense, a Specified Investment Flow-Through Trust (SIFT), including REITs, ISS will recommend votes as follows:
· Generally AGAINST a trust conversion if the conversion itself will trigger any change-in-control payments or acceleration of options vesting;
· Generally AGAINST a trust conversion if bundled with an equity compensation plan resolution and the equity compensation plan itself does not warrant shareholder support;
· Generally AGAINST an equity compensation plan proposal on the same agenda if the vesting of options is accelerated under the plan in connection with a trust conversion.
In addition, the authorization of newly created blank cheque preferred shares, particularly on an unlimited basis, as part of the new capital structure of the resulting corporate entity is unacceptable from a corporate governance perspective and will generally result in a vote AGAINST the proposed conversion.
Otherwise, recommendations will be on a CASE-BY-CASE basis taking into account the following factors:
· Method of Conversion — Exchange Method by way of a statutory plan of arrangement; Distribution Method;
· Rationale of Conversion Ahead of Expiry of Tax Benefit — Pursuing growth rate higher than the rate limited by the “normal growth guideline”; enhancing access to capital; overcoming the foreign ownership restriction; timing of the conversion versus availability of unused pool of tax credits (certain tax credits may offset the unused pool); superiority to other strategic alternatives;
· Change of Annualized Payout Level — Comparison of one-year and three-year annualized distribution yield prior to the conversion and the proposed annualized dividend yield;
· Equity Based Compensation Plan — Effect on the old plan (Vote AGAINST if the vesting of options is accelerated), features of the new plan; whether or not bundled with the conversion as a single agenda item (a bundled agenda might trigger a vote AGAINST its approval);
· �� Change-in-Control — Whether or not the conversion will be treated as a change-in-control event (vote AGAINST if the conversion by itself will trigger change-in-control payment); note both 4) and 5) are related to conflicts of interest;
· Cost of Implementing the Conversion — Legal fees, investment bank fees, etc., if disclosed;
· Market Reaction — Historical market performance dating back to Oct. 30, 2006, the day before the announcement of changing tax rules; market response to the conversion announcement;
· Corporate Governance — Examine the relative strength of the company’s corporate governance going forward (from two-tier board structure to one-tier board; equity capital from unit plus exchangeable shares to common shares);
· Dissent Rights — Whether or not unit holders are specifically granted dissent rights for the conversion.
RATIONALE: The criteria as set out here were developed based on the principle that early Trust conversion to a corporate structure results in a loss of the tax benefit for SIFTs, and therefore must be justified on the basis of the trade-off between cost and benefit of the conversion. In addition, it is unacceptable from a corporate governance perspective for a Trust conversion to be treated as a change in control and trigger change in control payments. The successive equity compensation plan for the corporation should be considered and voted on its own merits and should not be bundled with a trust conversion resolution.
The authorization of blank cheque preferred shares, particularly on an unlimited basis, that may subordinate the rights and value of outstanding common shares is unsupportable from a corporate governance perspective. Board discretion to issue one or more classes of preferred shares for which the terms and rights have not been defined and disclosed in order to afford shareholders the ability to give fully informed approval is anathema to the preservation of the full integrity and value of the ownership characteristics of issued and outstanding common shares. Furthermore, issuances of blank cheque preferreds may be used as an antitakeover mechanism at the discretion of the board by placing these shares in management friendly hands in the event of a takeover bid not supported by management, the result of which may be to deny shareholders of the ability to consider a bid for their shares.
1. Income Trust Overview
An income trust (including a REIT), or in a broader sense, a Specified Investment Flow-Through Trust (SIFT), is an exchange traded equity-type investment that is similar to common stock. By owning securities or assets of an underlying business (or businesses), an income trust is structured to distribute cash flows from those businesses to unit holders in a tax efficient manner. That is, by maintaining a certain distribution ratio, a trust will pay little to no corporate income tax. Because of the focus on distributions, income trusts are usually based on mature businesses with steady cash flows.
2. SIFT Rules
On Oct. 31, 2006. the Canadian federal government announced a new tax regime for specified investment flow-through trusts (SIFTs) under which certain amounts distributed by SIFTs will be subject to tax at corporate income tax rates. SIFT trusts will not be able to deduct distributions for tax purposes, and distributions will be treated as dividends to unit holders.
The new tax was deferred until 2011 for SIFTs that were publicly traded on Oct. 31, 2006, subject to “normal growth guidelines” which permit SIFTs to grow their equity capital through new equity issuances by the greater of $50 million and a “safe harbour” amount of up to 100 percent of the SIFT’s market cap as of Oct. 31, 2006, over the four-year transition period, without triggering the new tax treatment.
As a result of the new tax treatment it was expected that SIFTs would want to convert into corporations prior to 2011. On July 14, 2008, the government released the long-awaited draft amendments (the “Conversion Amendments”) to the Income Tax Act (Canada), allowing the conversion of certain income trusts into corporations on a tax-deferred basis. The Conversion Amendments apply to conversions which occur after July 14, 2008, and before 2013, and are applicable to SIFT trusts, SIFT partnerships, or REITs that were in existence at any time between the period of Oct. 31, 2006, and July 14, 2008 (a “Qualifying SIFT”). The Conversion Amendments were necessary to facilitate conversions prior to 2011 without unit holders or SIFTs having adverse tax implications. The final tranche of tax-deferred REIT conversions were anticipated prior to the 2013 deadline.
Increases in Authorized Capital
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock authorized for issuance. Generally vote FOR proposals to approve increased authorized capital if:
· A company’s shares are in danger of being de-listed;
· A company’s ability to continue to operate as a going concern is uncertain.
Generally vote AGAINST proposals to approve unlimited capital authorization.
RATIONALE: Canadian jurisdictions generally, and most recently the British Columbia Corporations Act (BCCA), permit companies to have an unlimited authorized capital. ISS prefers to see companies with a fixed maximum limit on authorized capital, with at least 30 percent of the authorized stock issued and outstanding. Limited capital structures protect against excessive dilution and can be increased when needed with shareholder approval.
Private Placement Issuances
Vote CASE-BY-CASE on private placement issuances taking into account:
· Whether other resolutions are bundled with the issuance;
· The financial consequences for the company if the issuance is not approved.
Generally vote FOR private placement proposals if:
· The issuance represents no more than 30 percent of the company’s outstanding shares;
· The use of the proceeds from the issuance is disclosed.
RATIONALE: The Toronto Stock Exchange (TSX) requires shareholder approval for private placements:
· For an aggregate number of listed securities issuable greater than 25 percent of the number of securities of the issuer which are listed and outstanding, on a non-diluted basis, prior to the date of closing of the transaction if the price per security is less than the market price; or
· That during any six month period are placed with insiders for listed securities or options, rights or other entitlements to listed securities greater than 10 percent of the number of the issuer’s listed and outstanding securities, on a non-diluted basis, prior to the date of closing of the first private placement to an insider during the six-month period.
· Allowable discounts for private placements not requiring shareholder approval are as follows:
Market Price |
| Maximum Discount |
|
$0.50 or less |
| 25 | % |
$0.51 to $2.00 |
| 20 | % |
Above $2.00 |
| 15 | % |
The TSX will allow the price per listed security for a particular transaction to be less than that specified above provided that the listed issuer has received the approval of non-interested shareholders.
Blank Cheque Preferred Stock
Generally vote AGAINST proposals to create unlimited blank cheque preferred shares or increase blank cheque preferred shares where:
· The shares carry unspecified rights, restrictions, and terms;
· The company does not specify any specific purpose for the increase in such shares.
Generally vote FOR proposals to create a reasonably limited(11) number of preferred shares where both of the following apply:
· The company has stated in writing that the shares will not be used for antitakeover purposes;
· The voting, conversion, and other rights, restrictions, and terms of such stock are specified in the articles and are reasonable.
Dual-class Stock
Generally vote AGAINST proposals to create a new class of common stock that will create a class of common shareholders with diminished voting rights.
(11) Institutional investors have indicated low tolerance for dilutive preferred share issuances, therefore if the authorized preferreds may be assigned conversion rights or voting rights when issued, the authorization should be limited to no more than 20% of the outstanding common shares as of record date. If the preferred share authorization proposal prohibits the assignment of conversion, voting or any other right attached to the that could dilute or negatively impact the common shares or the rights of common shareholders when such preferred shares are issued, a maximum authorization limit of 50% of the outstanding common shares as of record date may be supported taking into account the stated purpose for the authorization and other details of the proposal.
The following is an exceptional set of circumstances under which we would generally support a dual class capital structure. Such a structure must meet all of the following criteria:
· It is required due to foreign ownership restrictions and financing is required to be done out of country;
· It is not designed to preserve the voting power of an insider or significant shareholder;
· The subordinate class may elect some board nominees;
· There is a sunset provision; and
· There is a coattail provision that places a prohibition on any change in control transaction without approval of the subordinate class shareholders.
Escrow Agreements
Generally vote AGAINST an amendment to an existing escrow agreement where the company is proposing to delete all performance-based release requirements in favour of time-driven release requirements.
RATIONALE: On going public, certain insiders of smaller issuers must place a portion of their shares in escrow. The primary objective of holding shares in escrow is to ensure that the key principals of a company continue their interest and involvement in the company for a reasonable period after public listing.
5. Compensation
Executive Pay Evaluation
Evaluate executive pay and practices, as well as certain aspects of outside director compensation on a CASE-BY-CASE basis.
Vote AGAINST management say-o- pay (MSOP) proposals, WITHHOLD from compensation committee members (or in rare cases where the full board is deemed responsible, all directors including the CEO), and/or AGAINST an equity-based incentive plan proposal if:
· There is a misalignment between CEO pay and company performance (pay for performance);
· The company maintains problematic pay practices;
· The board exhibits poor communication and responsiveness to shareholders.
Advisory Vote on Executive Compensation (Say-on-Pay) Management Proposals
Vote CASE-BY-CASE on management proposals for an advisory shareholder vote on executive compensation. Vote AGAINST these resolutions in cases where boards have failed to demonstrate good stewardship of investors’ interests regarding executive compensation practices.
The following five global principles apply to all markets:
· 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 linkage between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs;
· Avoid arrangements that risk “pay for failure”: This principle addresses the use and appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation;
· 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);
· 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;
· 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.
Voting Alternatives
In general, the management say-on-pay (MSOP) ballot item is the primary focus of voting on executive pay practices— dissatisfaction with compensation practices can be expressed by voting against MSOP rather than withholding or voting against the compensation committee. However, if there is no MSOP on the ballot, then the negative vote will apply to members of the compensation committee. In addition, in egregious cases, or if the board fails to respond to concerns raised by a prior MSOP proposal, then vote withhold or against compensation committee members (or, if the full board is deemed accountable, all directors). If the negative factors involve equity-based compensation, then vote AGAINST an equity-based plan proposal presented for shareholder approval.
Pay for Performance:
· Rationale for determining compensation (e.g., why certain elements and pay targets are used, how they are used in relation to the company’s business strategy, and specific incentive plan goals, especially retrospective goals) and linkage of compensation to long-term performance;
· Evaluation of peer group benchmarking used to set target pay or award opportunities;
· Analysis of company performance and executive pay trends over time, taking into account ISS’ Pay for Performance policy;
· Mix of fixed versus variable and performance versus non-performance-based pay.
Pay Practices:
· Assessment of compensation components included in the Problematic Pay Practices policy such as: perks, severance packages, employee loans, supplemental executive pension plans, internal pay disparity, and equity plan practices (including option backdating, repricing, option exchanges, or cancellations/surrenders and re-grants etc).;
· Existence of measures that discourage excessive risk taking which include but are not limited to: clawbacks, holdbacks, stock ownership requirements, deferred compensation practices, etc.
Board Communications and Responsiveness:
· Clarity of disclosure (e.g., whether the company’s Form 51-102F6 disclosure provides timely, accurate, clear information about compensation practices in both tabular format and narrative discussion);
· Assessment of board’s responsiveness to investor concerns on compensation issues (e.g., whether the company engaged with shareholders and / or responded to majority-supported shareholder proposals relating to executive pay).
Pay for Performance Evaluation
This policy will be applied at all S&P/TSX Composite Index Companies and for all Management Say-On-Pay Resolutions.
On a CASE-BY-CASE basis, ISS will evaluate the alignment of the CEO’s total compensation with company performance over time, focusing particularly on companies that have underperformed their peers over a sustained period. From a shareholder’s perspective, performance is predominantly gauged by the company’s share price performance over time. Even when financial or operational measures are used as the basis for incentive awards, the achievement related to these measures should ultimately translate into superior shareholder returns in the long term.
Generally vote AGAINST management say-on-pay (MSOP) proposals, and/or AGAINST/WITHHOLD on compensation committee members (or, in rare cases where the full board is deemed responsible, all directors including the CEO), and/or AGAINST an equity-based incentive plan proposal if:
· There is significant long-term misalignment between CEO pay and company performance.
The determination of long-term pay for performance alignment is a two step process: step one is a quantitative screen, which includes a relative and absolute analysis on pay for performance, and step two is a qualitative assessment of the CEO’s pay and company performance. A P4P disconnect will be determined as follows:
Step I: Quantitative Screen
Relative:
1. The Relative Degree of Misalignment (RDA) is the difference between the company’s TSR rank and the CEO’s total pay rank within a peer group(12), measured over a one-year and three-year period;
2. Multiple of Median (MOM) is the total compensation in the last reported fiscal year relative to the median compensation of the peer group; and
Absolute:
3. The CEO pay-to-TSR Alignment (PTA) over the prior five fiscal years, i.e., the difference between absolute pay changes and absolute TSR changes during the prior five-year period (or less as company disclosure permits);
STEP II: Qualitative Analysis
Companies identified by the methodology as having potential P4P misalignment will receive a qualitative assessment to determine the ultimate recommendation, considering a range of case-by-case factors which may include:
· The ratio of performance- to time-based equity grants and the overall mix of performance-based compensation relative to total compensation (considering whether the ratio is more than 50 percent); standard time-vested stock options and restricted shares are not considered to be performance-based for this consideration.
· The quality of disclosure and appropriateness of the performance measure(s) and goal(s) utilized, so that shareholders can assess the rigor of the performance program. The use of non-GAAP financial metrics also makes it challenging for shareholders to ascertain the rigor of the program as shareholders often cannot tell the type of adjustments being made and if the adjustments were made consistently. Complete and transparent disclosure helps shareholders to better understand the company’s pay for performance linkage.
· The trend in other financial metrics, such as growth in revenue, earnings, return measures such as ROE, ROA, ROIC, etc.
· The trend considering prior years’ P4P concern.
· Extraordinary situation due to a new CEO in the last reported FY.(13)
· Any other factors deemed relevant.
RATIONALE: The two part methodology is a combination of quantitative and qualitative factors that more effectively drive a Case-By-Case evaluation and will improve the analysis of: longer term compensation versus company performance and weight the longer term factors accordingly; absolute CEO pay levels; and, circumstances under which there is a change in
(12) The peer group is generally comprised of 11-24 companies that meet the following criteria:
· Revenue/assets between 0.25X and 4X the subject company’s size;
· In the closest GICS industry group (8-digit, 6-digit, 4-digit, or 2-digit) to the subject company’s GICS category; and
· Market Cap between 0.25X and 4X of the company’s market cap expanded out to four market cap buckets (micro, small, mid, and large) as needed.
In exceptional cases, peer groups may be determined on a customized basis.
(13) Note that the longer-term emphasis of the new methodology alleviates concern about impact of CEO turnover. Thus, except in extenuating circumstances, a “new” CEO will not exempt the company from consideration under the methodology since the compensation committee is also accountable when a company is compelled to significantly “overpay” for new leadership due to prior poor performance.
CEO during the most recent year. Please refer to Canadian Pay for Performance Evaluation FAQ for a more detailed discussion of ISS’ quantitative pay-for-performance screen and peer group construction methodology.
Problematic Pay Practices
Generally, vote AGAINST management advisory vote proposals, and/or WITHHOLD from compensation committee members if the company has problematic compensation practices. In general, WITHHOLD on the entire slate if individual director elections are not permitted and the company has demonstrated problematic compensation practices. Also, generally vote AGAINST equity plans if the plan is a vehicle for problematic compensation practices.
Generally vote based on the preponderance of problematic elements; however, certain adverse practices may warrant Withhold or Against votes on a stand-alone basis in particularly egregious cases. The following practices, while not an exhaustive list, are examples of problematic compensation practices that may warrant a vote against or withholding votes:
· Poor disclosure practices:
· General omission of timely information necessary to understand the rationale for compensation setting process and outcomes, or omission of material contracts, agreements or shareholder disclosure documents;
· New CEO with overly generous new hire package:
· Excessive “make whole” provisions;
· Any of the problematic pay practices listed in this policy;
· Egregious employment contracts:
· Contracts containing multiyear guarantees for salary increases, bonuses and equity compensation;
· Employee Loans:
· Interest free or low interest loans extended by the company to employees for the purpose of exercising options or acquiring equity to meet holding requirements or as compensation;
· Excessive severance and/or change-in-control provisions:
· Inclusion of excessive change-in-control or severance payments, especially those with a multiple in excess of 2X cash pay (salary + bonus);
· Severance paid for a “performance termination” (i.e., due to the executive’s failure to perform job functions at the appropriate level);
· Employment or severance agreements that provide for modified single triggers, under which an executive may voluntarily leave following a change of control for any reason and still receive the change-in-control severance package;
· Perquisites for former executives such as car allowance, personal use of corporate aircraft, or other inappropriate arrangements;
· Change-in-control payouts without loss of job or substantial diminution of job duties (single-triggered);
· Abnormally large bonus payouts without justifiable performance linkage or proper disclosure:
· Performance metrics that are changed, canceled, or replaced during the performance period without adequate explanation of the action and the link to performance;
· Egregious pension/SERP (supplemental executive retirement plan) payouts:
· Inclusion of performance-based equity awards in the pension calculation;
· Inclusion of target (unearned) or excessive bonus amounts in the pension calculation;
· Addition of extra years service credited without compelling rationale;
· No absolute limit on SERP annual pension benefits (any limit should ideally be expressed in $ terms); o No reduction in benefits on a pro-rata basis in the case of early retirement;
· Excessive perks:
· Overly generous cost and/or reimbursement of taxes for personal use of corporate aircraft, personal security systems maintenance and/or installation, car allowances, and/or other excessive arrangements relative to base salary;
· Payment of dividends on performance awards:
· Performance award grants for which dividends are paid during the period before the performance criteria or goals have been achieved, and therefore not yet earned;
· Problematic option granting practices:
· Backdating options, or retroactively setting a stock option’s exercise price lower than the prevailing market value at the grant date;
· Springloading options, or timing the grant of options;
· Cancellation and subsequent re-grant of options;
· Internal Pay Disparity:
· Excessive differential between CEO total pay and that of next highest-paid named executive officer (NEO);
· Absence of pay practices that discourage excessive risk taking:
· These provisions include but are not limited to: clawbacks, holdbacks, stock ownership requirements, deferred bonus and equity award compensation practices, etc;
· Financial institutions will be expected to have adopted or at least addressed the provisions listed above in accordance with the Financial Stability Board’s (FSB) Compensation Practices and standards for financial companies;
· Other excessive compensation payouts or problematic pay practices at the company.
RATIONALE: Shareholders are not generally permitted to vote on provisions such as change-in-control provisions or the ability of an issuer to extend loans to employees to exercise stock options, for example, when reviewing equity based compensation plan proposals. Nor do shareholders in Canada have the ability to approve employment agreements, severance agreements, or pensions; however, these types of provisions, agreements, and contractual obligations continue to raise shareholder concerns. Therefore, ISS will review disclosure related to the various components of executive compensation and may recommend withholding from the compensation committee or against an equity plan proposal if compensation practices are unacceptable from a corporate governance perspective.
Board Communications and Responsiveness
Consider the following on a Case-by-Case basis when evaluating ballot items related to executive pay:
· Poor disclosure practices, including: insufficient disclosure to explain the pay setting process for the CEO and how CEO pay is linked to company performance and shareholder return; lack of disclosure of performance metrics and their impact on incentive payouts; no disclosure of rationale related to the use of board discretion when compensation is increased or performance criteria or metrics are changed resulting in greater amounts paid than that supported by previously established goals.
· Board’s responsiveness to investor input and engagement on compensation issues, for example: failure to respond to majority-supported shareholder proposals on executive pay topics, or failure to respond to concerns raised in connection with significant opposition to MSOP proposals.
Equity Compensation Plans
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the plan if any of the following factors applies:
· Cost of Equity Plans: The total cost of the company’s equity plans is unreasonable;
· Dilution and Burn Rate: Dilution and burn rate are unreasonable, where the cost of the plan cannot be calculated due to lack of relevant historical data.
· Plan Amendment Provisions: The provisions do not meet ISS guidelines as set out in this section.
· Non-Employee Director Participation: Participation of directors is discretionary or unreasonable.
· Pay for performance: There is a disconnect between CEO pay and the company’s performance.
· Repricing Stock Options: The plan expressly permits the repricing of stock options without shareholder approval and the company has repriced options within the past three years.
· Problematic Pay Practices: The plan is a vehicle for problematic pay practices.
Each of these factors is examined below.
Cost of Equity Plans
Generally vote AGAINST equity plans if the cost is unreasonable.
RATIONALE: Section 613 of the TSX Company Manual, requires shareholder approval for equity-based compensation arrangements under which securities listed on the TSX may be issued from treasury. Such approval is also required for equity-based plans that provide that awards issued may be settled either in treasury shares or cash. Cash only settled arrangements or those which are only funded by securities purchased on the secondary market are not subject to shareholder approval.
In addition, certain equity awards made outside of an equity plan, stock purchase plans using treasury shares where financial assistance or share matching is provided, and security purchases from treasury where financial assistance is provided, are also subject to shareholder approval.
Our methodology for reviewing share-based compensation plans primarily focuses on the transfer of shareholder wealth (the dollar cost of share plans to shareholders) instead of simply focusing on dilution. Using information disclosed by the company and assuming the broadest definition of plan terms, ISS will value equity-based awards using a binomial option pricing model. ISS will include in its analyses an estimated dollar cost for the proposed plan and all continuing plans. This total cost will be expressed as a percentage of market value (i.e. 200-day average share price times common shares outstanding). This result is tested for reasonableness by comparing the figure to an allowable cap derived from compensation plan costs of the top performing quartile of peer companies in each industry group (using Global Industry Classification Standard or “GICS” codes). Benchmark SVT levels for each industry are established based on these top performers’ historic SVT. Regression analyses are run on 44 different variables including company size, market-based performance metrics, and accounting-based performance metrics in order to identify the variables most strongly correlated to SVT within each industry group. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by incorporating company-specific performance measures, size and cash compensation into the industry cap equations to arrive at the company’s allowable cap.
Shareholder Value Transfer is reasonable if it falls below the company-specific allowable cap.
Volatility and Stock Price Assumptions in Equity Plan Proposals (SVT)
The 200-day volatility and 200-day average stock price will be calculated and used for the shareholder value transfer policy.
Dilution and Burn Rate Assessment
In cases where the cost of the plan cannot be calculated using the binomial model due to lack of historic data for a newly created or merged corporate entity, ISS will apply a dilution and burn rate analysis.
Generally vote AGAINST the proposed equity plan if:
· Dilution under all company plans would be more than 10 percent of the outstanding shares on a non-diluted basis, OR
· The historic burn rate for all company plans has been more than 2 percent per year (generally averaged over most recent three-year period). If equity has been granted as part of the resolution subject to shareholder approval and the grants made exceed 2 percent of the outstanding shares a vote AGAINST is warranted.
Plan Amendment Provisions
Generally vote AGAINST the approval of proposed Amendment Procedures that do not require shareholder approval for the following types of amendments under any security based compensation arrangement, whether or not such approval is required under current regulatory rules:
· Any increase in the number of shares reserved for issuance under a plan or plan maximum;
· Any reduction in exercise price or cancellation and reissue of options or other entitlements;
· Any amendment that extends the term of options beyond the original expiry.
· Amendments to eligible participants that may permit the introduction or reintroduction of non-employee directors on a discretionary basis or amendments that increase limits previously imposed on non-employee director participation.
· Any amendment which would permit options granted under the Plan to be transferable or assignable other than for normal estate settlement purposes.
· Amendments to the plan amendment provisions.
To clarify application of the above criteria, all items will apply to all equity-based compensation arrangements under which treasury shares are reserved for grants of, for example: restricted stock, restricted share units, or deferred share units, except those items that specifically refer to option grants.
RATIONALE: In response to the rule changes affected by the Toronto Stock Exchange (TSX) related to Part IV, Subsection 613 of the TSX Company Manual and Staff Notices #2004-0002, and #2006-0001 which came into effect in 2007, ISS has revised its policy with regard to Equity Compensation Plan Amendment Procedures. This policy addresses the removal by the TSX of previously established requirements for shareholder approval of certain types of amendments to Security-Based Compensation Arrangements of its listed issuers. For the purposes of the rule change, security-based compensation arrangements include: stock option plans for the benefit of employees, insiders and service providers; individual stock options granted to any of these specified parties outside of a plan; stock purchase plans where the issuer provides financial assistance or where the employee contribution is matched in whole or in part by an issuer funded contribution; stock appreciation rights involving the issuance of treasury shares; any other compensation or incentive mechanism involving the issuance or potential issuance of securities of the listed issuer; security purchases from treasury by an employee, insider or service provider which is financially assisted by the issuer in any manner. Issuers had until June 30, 2007, to adopt the proper Amendment Procedure in their Plans. After such date, issuers who have “general amendment” provisions in their Plans are no longer able to make any amendments to their Plans without security holder approval, including amendments considered to be of a “housekeeping” nature until they have put a shareholder approved detailed Plan Amendment Provision in place.
According to the TSX Guide to Security-Based Compensation Arrangements, the following amendments will continue to be subject to security holder approval according to TSX rules notwithstanding the amendment provisions included in the plan:
· Any increase in the number of shares reserved for issuance under a plan or plan maximum;
· Any reduction in exercise price of options or other entitlements which benefits an insider(14);
· Any amendment that extends the term of options beyond the original expiry and that benefits an insider of the issuer;
(14) Security holder approval, excluding the votes of securities held by insiders benefiting from the amendment, is required for a reduction in the exercise price, purchase price, or an extension of the term of options or similar securities held by insiders. If an issuer cancels options or similar securities held by insiders and then reissues those securities under different terms, the TSX will consider this an amendment to those securities and will require security holder approval, unless the regrant occurs at least 3 months after the related cancellation. Staff Notice #2005-0001, Section 613 Security Based Compensation Arrangements, S.613(h)(iii) Amendments to Insider Securities.
· Changes to insider participation limits which result in the security holder approval to be required on a disinterested basis;
· Amendment provisions granting additional powers to the board of directors to amend the plan or entitlements without security holder approval.
The TSX has further clarified that shareholder approval is required for any amendment to the Plan Amendment Provision.
In addition, the TSX requires that the exercise price for any stock option granted under a security based compensation arrangement or otherwise, must not be lower than the market price of the securities at the time the option is granted.
Any proposal to increase the maximum number of shares reserved under a plan requires specific shareholder approval for the increase even if the plan includes a shareholder-approved general amendment procedure permitting increases to such maximum numbers.
Sections 613(d) and (g) set out a list of disclosure requirements in respect of materials that must be provided to security holders in meeting materials issued prior to a meeting at which the approval of any security based compensation arrangement is requested. The disclosure requirements include annual disclosure by listed issuers in their information circular or other annual disclosure document distributed to all security holders, the terms of any security based compensation arrangement as well as any amendments that were adopted in the most recently completed fiscal year, including whether or not security holder approval was obtained for the amendment. Staff Notice #2005-0001 goes on to clarify that such disclosure must be as of the date of the information circular containing the relevant disclosure and that issuers must update disclosure for the most recently completed fiscal year end to include grants, exercises, amendments, etc. which may occur after the fiscal year-end is completed, but prior to the filing of the information circular.
ISS has reiterated the need for shareholder approval for the amendments that currently still require shareholder approval by the TSX due to the ability of the TSX to change or eliminate these requirements at any time in future which we believe would not be in the best interests of shareholders or consistent with institutional investor proxy voting guidelines. Note however that from a corporate governance viewpoint, ISS does not support re-pricing of any outstanding options and does not limit this policy to only those options held by insiders. ISS has for many years recommended against any re-pricing of outstanding options. Our reasons are based on the original purpose of stock options as at-risk, incentive compensation that is meant to align the interests of option-holders with those of shareholders. The incentive value of stock options is diminished when the exercise price of out-of-the-money options can be adjusted downwards, and is not supportable when shareholders must suffer the consequences of a downturn in share price.
Discretionary participation by non-employee directors in equity compensation plans is unacceptable from a corporate governance and accountability viewpoint because administrators of the plan should not have the unrestricted ability to issue awards to themselves. Directors who are able to grant themselves equity awards without limit could find their independence compromised. Therefore, the inclusion of non-employee directors in management equity based compensation plans, while not preferable, must at a minimum be subject to shareholder-approved limits. Issuer discretion to change eligible participants may result in discretionary director participation. For clarification purposes, in keeping with ISS’ policy regarding acceptable limits on non-employee director participation, if directors are included in an employee equity compensation plan according to a shareholder approved limit, then any amendment that would remove or increase such limit should be approved by shareholders.
The ability of plan participants to assign options by means of Option Transfer Programs or any other similar program which results in option holders receiving value for underwater options when shareholders must suffer the consequences of declining share prices does not align the interests of option holders with those of shareholders and removes the intended incentive to increase share price which was originally approved by shareholders.
Non-Employee Director Participation
Vote AGAINST discretionary non-employee director participation in management equity compensation plans.
RATIONALE: Due to the continuing use of options in compensation plans in Canada, we have not opposed the use of options for outside directors per se, but have tried to address potential governance concerns by ensuring a reasonable limit on grants to independent non-employee directors who are charged with overseeing not only a company’s compensation scheme but also corporate governance and long-term sustainability. To this end, ISS policy established an acceptable range for aggregate non-employee director option grants of 0.25 percent to 1 percent of the outstanding shares. A company was expected to fall within this range based on its size and stage of development, so that larger, more mature companies would be limited to something closer to 0.25 percent, and smaller companies with less cash and much lower share prices would be at the upper end of the range and have a larger pool of shares, options typically, from which to draw. This range was originally established based on an underlying policy that an upper limit of $1 million worth of stock acquired by means of option grants for each director over the life of a typical 10-year plan seemed reasonable to prevent misalignment of purpose.
Director Limit Considerations
Generally vote AGAINST an equity compensation plan proposal which provides that: (i) non-employee director participation exceeds our established 1 percent director pool limit, or (ii) non-employee director participation exceeds a $100,000 per director per year maximum within the 0.25 percent to 1 percent of the outstanding shares range, taking into account:
· The overall mix of pay elements (cash vs. equity)
· The type of equity awards granted (deferred stock units, restricted stock, stock options)
· Director share holding requirements and how they are achieved (stock granted outright until a target is met vs. some “skin in the game” in the form of directors taking DSUs in lieu of cash fees)
· Rigor of mandatory and disclosed vesting requirements (i.e., vest when director leaves the board)
· Overall company performance as well as director pay levels vs. peers.
Generally vote AGAINST an equity plan proposal if the $100,000 per director per year equity award maximum is exceeded.
Generally vote AGAINST individual equity grants to non-employee directors outside of an equity compensation plan if:
· The director’s annual grant would exceed the above per director maximum other than a reasonable one-time grant upon joining the board.
RATIONALE: ISS will assess the non-employee director component (or reserve) of equity-based compensation plans based on the ISS compensation model (binomial) award value that is used for employee compensation purposes. This will be consistent with our methodology for establishing the value of awards for employee participants and the plan generally.
The proposed maximum for non-employee director equity grants including options will then factor in: the difference between options and full value awards (i.e., time-vesting restricted stock); option terms (five, seven, or 10 years usually); share price volatility; expected forfeiture rate; and any other criteria factored into a binomial type evaluation.
Using the binomial equity award value, we have established a maximum non-employee director participation limit of the lesser of: (i) an aggregate reserve of 1 percent of the shares outstanding for all non-executive directors; and (ii) an annual equity award value of $100,000 per director. Equity award refers to options, restricted stock, deferred stock units, or any
other equity grant made outside of or under an equity compensation plan, other than shares granted or taken in lieu of cash fees.
However, there may be director pay structures that have addressed institutional investor concerns so that directors truly have substantial “at risk” pay that achieves alignment of directors’ interests closely with those of shareholders, therefore some limited flexibility in implementing this guideline is necessary.
Repricing Options
Generally vote AGAINST an equity-based compensation plan proposal if the plan expressly permits the repricing of options without shareholder approval and the company has repriced options within the past three years.
Repricing Proposals
Generally vote AGAINST proposals to reprice outstanding options, unless:
Repricing is part of a broader plan amendment that substantially improves the plan and provided that the following conditions are met:
A value-for-value exchange is proposed;
The five top paid officers and all non-employee directors are excluded;
Options exercised do not go back into the plan OR the company commits to an annual burn rate cap.
RATIONALE: Security Based Compensation Arrangements Section 613(h)(iii) of the TSX Company Manual requires security holder approval (excluding the votes of securities held directly or indirectly by insiders benefiting from the amendment) for a reduction in the exercise price or purchase price or an extension of the term of an award under a security based compensation arrangement benefiting an insider of the issuer notwithstanding that the compensation plan may have been approved by security holders.
ISS has long opposed option repricing and believes that any proposal to reduce the price of outstanding options including those held by non-insiders, should be approved by shareholders before being implemented (see discussion under Plan Amendment Provisions). Market deterioration, in and of itself, is not an acceptable reason for companies to reprice stock options and/or reset goals under performance plans.
The extension of option terms is also unacceptable. Options are not meant to be a no-risk proposition and may lose their incentive value if the term can be extended when the share price dips below the exercise price. Shareholders approve option grants on the basis that recipients have a finite period during which to increase shareholder value, typically five to ten years. As a company would not shorten the term of an option to rein in compensation during profitable bull market runs, it is not expected to extend the term during a market downturn when shareholders must suffer a decrease in shareholder value.
Other Compensation Plans
Employee Stock Purchase Plans (ESPPs, ESOPs)
Generally vote FOR broadly based (preferably all employees of the company with the exclusion of individuals with 5 percent or more beneficial ownership of the company) employee stock purchase plans where the following apply:
· Reasonable limit on employee contribution (may be expressed as a fixed dollar amount or as a percentage of base salary excluding bonus, commissions and special compensation);
· Employer contribution of up to 25 percent of employee contribution and no purchase price discount or employer contribution of more than 25 percent of employee contribution and SVT cost of the company’s equity plans is within the allowable cap for the company;
· Purchase price is at least 80 percent of fair market value with no employer contribution;
· Potential dilution together with all other equity-based plans is 10 percent of outstanding common shares or less; and
· The Plan Amendment Provision requires shareholder approval for amendments to:
· The number of shares reserved for the plan;
· The allowable purchase price discount;
· The employer matching contribution amount.
Treasury funded ESPPs, as well as market purchase funded ESPPs requesting shareholder approval, will be considered to be incentive based compensation if the employer match is greater than 25 percent of the employee contribution. In this case, the plan will be run through the ISS compensation model to assess the Shareholder Value Transfer (SVT) cost of the plan together with the company’s other equity-based compensation plans.
Eligibility and administration are also key factors in determining the acceptability of an ESPP/ESOP plan.
ISS will also take into account other compensation and benefit programs, in particular pensions.
Deferred Share Unit Plans
Generally vote FOR Deferred Compensation Plans if:
· Potential dilution together with all other equity-based compensation is 10 percent of the outstanding common shares or less.
Other elements of director compensation to evaluate in conjunction with deferred share units include:
· Director stock ownership guidelines of a minimum of three times annual cash retainer
· Vesting schedule or mandatory deferral period which requires that shares in payment of deferred units may not be paid out until the end of three years
· The mix of remuneration between cash and equity
· Other forms of equity-based compensation, i.e. stock options, restricted stock.
RATIONALE: Deferrred compensation plans generally encourage a sense of ownership in the company. These types of deferred compensation arrangements are usually designed to compensate outside directors by allowing them the
opportunity to take all or a portion of their annual retainer in the form of deferred units, the payment of which is postponed to some future time, typically retirement or termination of directorship and may be in cash and/or stock.
A DSU plan only requires shareholder approval if it reserves treasury shares. However, a number of companies continue to request shareholder approval for DSU plans funded by shares purchased in the open market. This type of plan will be evaluated on a qualitative basis in the same manner that ESPPs (see above) are evaluated. Eligibility and administration are key factors in determining the acceptability of such plans.
Treasury Funded Plans
Deferred share units awarded under any equity compensation plan where: i) the authorization of treasury shares for issuance is in payment of the DSUs; and ii) the DSU grants are not in-lieu of cash, would be evaluated by running the compensation model.
Shareholder Proposals on Compensation
Vote on a CASE-BY-CASE basis for shareholder proposals targeting executive and director pay, taking into account:
· The target company’s performance, absolute and relative pay levels as well as the wording of the proposal itself.
Generally vote FOR shareholder proposals requesting that the exercise of some, but not all stock options be tied to the achievement of performance hurdles.
Shareholder Advisory Vote Proposals
Generally vote FOR shareholder proposals requesting the adoption of a non-binding advisory shareholder vote to ratify the report of the compensation committee.
Generally vote AGAINST shareholder proposals requesting a binding vote on executive or director compensation as being overly prescriptive and which may lead to shareholder micro-management of compensation issues that are more appropriately within the purview of the compensation committee of the board of directors.
RATIONALE: Based on the experience of other global markets where advisory votes are permitted, the consensus view is that advisory votes serve as a catalyst for dialogue between investors and public issuers on questionable or contentious compensation practices and can lead to a higher level of board accountability, a stronger link between pay and performance, significantly improved disclosure, and in some cases a noticed deceleration in the rate of increase in executive compensation overall.
Supplemental Executive Retirement Plans (SERPS) Proposals
Generally vote AGAINST shareholder proposals requesting the exclusion of bonus amounts and extra service credits to determine SERP payouts, unless the company’s SERP disclosure includes the following problematic pay practices:
· Inclusion of equity-based compensation in the pension calculation;
· Inclusion of target (unearned) or excessive bonus amounts in the pension calculation;
· Addition of extra years service credited in other than exceptional circumstances and without compelling rationale;
· No absolute limit on SERP annual pension benefits (ideally expressed in money terms);
· No reduction in benefits on a pro-rata basis in the case of early retirement.
In addition, consideration will also be given to the extent to which executive compensation is performance driven and “at risk,” as well as whether bonus payouts can exceed 100 percent of base salary.
RATIONALE: The inclusion of bonus and incentive compensation amounts along with base salary as the basis for calculating supplemental pension benefits is generally viewed as an unacceptable market practice. Proposals that aim to limit excessive pension payments for executives are laudable. The inclusion of variable compensation or other enhancements under SERP provisions can significantly drive up the cost of such plans, a cost that is ultimately absorbed by the company and its shareholders.
Investor pressure to structure executive compensation so that the majority is “at risk” has driven down base salary and therefore it may be reasonable in certain cases to include short-term cash bonus amounts in the bonus calculation. Therefore, ISS will assess limits imposed on extra service credits and the overall mix of guaranteed (salary) and at risk (performance driven incentive compensation) executive compensation, as well as the size of potential cash bonus amounts, when determining vote recommendations on SERP shareholder proposals asking for elimination of these elements in SERP calculations. Given the conservative general market practice in this regard, support for such proposals should be limited to those companies that exceed standard market practice thus qualifying as problematic pay practices as outlined above.
6. 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 term or long term.
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 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, timeframe, or cost) 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.
RATIONALE: This policy update codifies the overarching principles that are applied to all markets, globally, and clarifies the factors that ISS considers in its case-by-case evaluation of environmental and social shareholder proposals. In markets where shareholder proposals on specific environment and social issues are routinely or frequently observed on company ballots, ISS has more nuanced policies that stem from these principles to address those issues.
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