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08 Nov. 2017 | Comments (0)

On Governance is a new series of guest blog posts from corporate governance thought leaders. The series, which is curated by the Governance Center research team, is meant to serve as a way to spark discussion on some of the most important corporate governance issues.

Institutional Shareholder Services (ISS) is proposing changes to its proxy voting policies in the areas of:

  •  Gender pay gap;
  • Non-employee director (NED) compensation; and
  • Shareholder approval of poison pills.

 The proxy advisor is accepting comments on the proposed changes until 5 p.m. EST on November 9. Next week, it plans to release its final voting recommendation policies for annual meetings being held on or after February 1, 2018.

ISS based its proposed changes on the results of its annual Governance Principles Survey. In total, ISS received 602 responses, 131 representing investors and 382 from corporate issuers. (We blogged earlier about the results of this survey that relate to the new pay ratio disclosure requirement.)  Here are descriptions and comments on these ISS proposed policy changes from Governance Center member law firms that have issued related client memos:

Director elections – non-employee director compensation

The current ISS policy is that companies should generally avoid inappropriate pay for NEDs. The proposed new policy would explicitly provide for negative vote recommendations for board committee members, such as the compensation committee chair, who are responsible for approving and setting such compensation when there are two or more consecutive years of “excessive” NED pay without an explanation. (ISS does not define what it means by “excessive,” but it reports that median NED pay at S&P 1500 firms has steadily increased every year since 2012 and stood at approximately $211,000 in 2016.) It is important to note that ISS says it expects the proposed policy change would not affect the 2018 proxy season and would have minimal impact in 2019.

Weil, Gotshal & Manges

“Management and the committee charged with oversight of non-employee director compensation should take a critical year-over-year review of NED compensation in relation to the company’s peers (including ISS selected peers).”

Wachtell Lipton Rosen & Katz

“Among other things, ISS is seeking feedback regarding the circumstances for which large non-employee director pay magnitude would merit support on an exceptional basis, e.g., one-time onboarding grants for new directors.”

Gender pay gap shareholder proposals

Over the past three years, shareholders have increasingly filed more resolutions requesting that companies report whether a gender pay gap exists, and if so, what measures will be taken to address the gap. Proponents have claimed in shareholder proposal filings at companies in the technology, financial services, insurance, healthcare and telecommunications sectors that women are underrepresented in the C-suite and have wider pay gaps by gender than other industries.

To date, ISS has applied its global approach on social/environmental issues when analyzing gender pay gap proposals. The proposed new policy provides more specificity but is not a major shift in ISS' current policy approach. While the proposed new policy continues to call for voting on gender pay equity proposals on a case-by-case basis, it highlights the factors that it will consider:

• The company's current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy and fair and equitable compensation practices;

 • Whether the company has been the subject of recent controversy or litigation related to gender pay gap issues; and

 • Whether the company's reporting regarding gender pay gap policies or initiatives is lagging its peers.

 Weil, Gotshal & Manges

 “None of the gender pay equity proposals that have been submitted to a shareholder vote to date have passed – although Ebay notably received support from 51% of the votes cast (a majority of the outstanding shares was required for the vote to pass). Some companies have been able to negotiate the withdrawal of these proposals by demonstrating a commitment to gender pay equity through public reports and other analysis of pay practices along gender lines. We expect that these proposals will continue to grow in number and perhaps support this season. Companies that have received a gender pay equity proposal in the past, or may expect to receive such a proposal, should consider the company’s policy in that regard in order to understand how it would respond to shareholders on this issue.”

Wachtell Lipton Rosen & Katz

“ISS will also take into account whether the company has been the subject of recent controversy or litigation related to gender pay gap issues and whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers.”

Director elections – poison pills

 ISS is proposing to update the policies it has regarding different types of poison pill takeover defenses, and recommend against all board nominees, every year, at companies who maintain a long-term poison pill that has not been approved by shareholders. Therefore, annually elected boards would receive negative vote recommendations on an annual basis, rather than every 3 years. Commitments to put a long-term pill to a vote the following year would no longer be considered a mitigating factor. The boards with the 10-year pills currently grandfathered from 2009 would no longer be exempt and would receive negative recommendations. The intent of the proposed policy update is to simplify ISS' approach to poison pills, and strengthen the principle that poison pills should be approved by shareholders.

 Weil Gotshal & Manges

"ISS indicates that directors at about 140 companies will be impacted by the revised policy: directors at 90 companies with 10-year pills adopted or renewed in 2008 and 2009 will now receive negative recommendations, and directors at 50 companies with annually elected boards that adopted or renewed pills after 2008 will now receive negative recommendations every year, rather than every three years. Boards of directors at companies that have a poison pill in place that has not been approved by shareholders should be educated on ISS’s new policy. Management and the board should consider whether to maintain the poison pill or whether shareholder approval is feasible.”

 Wachtell Lipton Rosen & Katz

“ISS notes that short-term rights plans would continue to be assessed on a case-by-case basis, but states that the updated policy would focus more on the rationale for the rights plan’s adoption than on the company’s governance and track record.”

The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.

  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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