Risk & Compliance

ISS Lays Out 2005 Proxy Strategy

Compensation practices, ''overboarding,'' director independence, and poison pills are priority issues for the governance research firm.
Stephen TaubJanuary 4, 2005

Institutional Shareholder Services (ISS) announced that it will continue to shine a spotlight on boards of directors and hold compensation committees responsible for linking executive pay to performance during the upcoming annual meeting season.

The governance research firm elaborated that it will continue to apply its quantitative methodology to assess the cost of equity-based compensation plans, but this year will broaden its compensation evaluation to include analysis of burn rates, pay-for-performance metrics, director pay, and various other qualitative factors.

Compensation practices, however, are just one among a large number of issues for which ISS intends to hold companies and boards accountable in 2005. Others include:

“Overboarding.” ISS will withhold recommendations from chief executive officers who serve on more than three boards, including their own; the threshold for other directors will remain at six boards.

Independence. ISS is revising its definition of “relative” to mean only “immediate family member,” since “distant familial relationships would likely not influence the director’s independent judgment.” The firm added that after a five-year “cooling off” period, it will consider former executives of a company to be independent outsiders. Former CEOs will be the only exception because of their direct influence in the composition of the board and their legacy within the company.

Poison pills. ISS said that it will continue to recommend withholding votes from sitting directors whose companies have “dead hand” features — that is, poison pills that only they can remove. It will also recommend withholding votes from sitting directors if the company has adopted or renewed a poison pill without shareholder approval since the last annual meeting, does not put it to a vote at the current meeting, and there is no requirement to put it to a vote within 12 months of its adoption. “The policy will be applied prospectively,” added ISS. “Pills adopted prior to this policy will not be considered.”

Independent chairmen. ISS will continue to recommend voting in favor of shareholder proposals requiring that the position of chairman be filled by an independent director, unless there are compelling reasons to oppose them, such as “a counterbalancing governance structure with all the same features as before.”

High ”withhold” votes. ISS will recommend to withhold votes from all sitting directors at a company when any director received more than 50 percent withhold votes out of those cast at the prior meeting and underlying cause has not been addressed. The firm added that it would analyze the adequacy of the company’s response, if any, on a case-by-case basis.

Change-in-control payments. ISS will examine “whether inside directors have conflicts arising from special employment agreements with the surviving firm, grants of bonuses or stock options, etc., which may have enticed them to enter into deals which were not in the best interest of shareholders.”