On November 21, 2016 Institutional Shareholder Services (ISS) published the updates to its 2017 benchmark policy recommendations which are to be included in its UK and Ireland Proxy Voting Guidelines. These updates will, for the most part, take effect for shareholder meetings held on or after February 1, 2017. ISS set out its proposed updates for consultation in October 2016.
The 2017 updates include the following:
Where directors have multiple board appointments, ISS may recommend a vote against the election/re-election of directors who appear to hold an excessive number of board roles at publicly-listed companies. ISS has amended the definition of overboarding to provide clarification on the precise number of board seats ISS believes can be held. A vote could be recommended against directors who hold more than five non-chair non-executive director positions, as well as against a non-executive chairman who also holds more than three other non-chair non-executive director positions, more than one other non-executive chair position and one non-chair non-executive director position or any executive position. In addition, a vote may be recommended against any executive director who holds more than two non-chair non-executive director positions, any other executive position or any non-executive chair position. The voting policy has also been amended to provide that an adverse vote recommendation in relation to a chairman will not generally be applied at the company where the individual is chairman unless that chairman exclusively holds other chair and/or executive positions or is being elected as chairman for the first time.
- The wording of the remuneration sections has been amended to reflect developments in market practice and investor expectations. As a result, the introduction to the remuneration sections includes a direct reference to companies which seek to implement pay structures (for example, non-performance related restricted shares) which sit outside the typical UK model, making it clear that structures which involve a greater level of certainty of reward should be matched by lower levels of award.
- In relation to the voting recommendation on the remuneration policy, one of the factors ISS will now consider is whether the remuneration policy or specific scheme structure has an appropriate long-term focus and has been sufficiently justified in light of the company’s specific circumstances and strategic objectives. Again, in relation to variable pay, it is made clear that any increase in the level of certainty of reward must be accompanied by a material reduction in the size of award.
- The policy now states that where a serious breach of good practice is identified in relation to the company’s remuneration policy, and typically where issues have been raised over a number of years, ISS might make a negative voting recommendation against the chair of the remuneration committee (or, where relevant, another member of the remuneration committee).
- In terms of the general recommendation on the remuneration report, ISS will now, where relevant, take into account its European Pay for Performance methodology (EP4P) and a definition of EP4P has been included.
- One of the factors ISS will consider in relation to the remuneration report will be whether exit payments to good leavers were reasonable, with appropriate pro-rating (if any) applied to the outstanding long-term share awards, and special arrangements for new joiners should be in line with good market practice.
- Again, if a serious breach of good practice is identified in relation to the company’s remuneration report, and typically where issues have been raised over a number of years, ISS might make a negative voting recommendation against the chair of the remuneration committee or, where relevant, another member of that committee.
Approval of new or amended LTIP
Factors ISS will consider when considering a resolution to approve a new or amended long-term incentive plan (LTIP) will include whether it is over-complex, and ISS will want to ensure that any increase in the level of certainty of reward is matched by a material reduction in the size of award.
Committee composition of smaller companies
ISS has now made it clear that for companies listed on AIM, and for other companies which are not a member of the FTSE All Share or FTSE Fledgling Indices, the membership of their audit and remuneration committees should reflect the standard set out in the QCA Corporate Governance Code for Small and Mid-Size Quoted Companies. This requires that audit and remuneration committees should include independent non-executive directors only, with half the membership of the nomination committee being independent directors.
Timing of changes to Guidelines
As mentioned above, these updates will apply to shareholder meetings taking place on or after February 1, 2017. However, the policy with respect to committee composition of smaller companies will not apply until February 2018 since ISS recognises that this is a significant change and smaller companies will need time to comply with the new requirements if they wish to do so.
(ISS, EMEA Proxy Voting Guidelines Updates: 2017 Benchmark Policy Recommendations, 21.11.16)