New ISS policies on CEO pay, overboarding, independent directors

Proxy advisory firm ISS will increase its scrutiny of directors’ response to majority-supported shareholder proposals in the US in next year’s proxy season, according to its 2014 benchmark policies.

The firm will also change its method for assessing the relationship between CEO pay and performance in North America, alter analysis of whether directors in Canada serve on too many boards, and intensify scrutiny of board independence in Europe, according to an ISS announcement of its plans for next year.

‘Our 2014 benchmark voting policy updates reflect wide-ranging feedback solicited through our annual policy survey, regional roundtables, and direct engagement with groups of investors, issuers and corporate directors,’ says Martha Carter, head of global research at ISS, in the announcement. ‘We firmly believe our commitment to this approach enhances the value of the research we deliver to clients and informs our vote recommendations.’

In US proxy votes, ISS will start analyzing board responsiveness to shareholder proposals supported by a majority of votes cast in a single year, the firm says. Previously, ISS would begin analysis only after a shareholder proposal was backed by a majority of votes cast in two years out of a three-year period, or after a single year when a proposal was backed by a majority of shares outstanding.

For both the US and Canada, ISS will change its methods for judging the performance of a CEO in relation to compensation. Starting next year, ISS will use three years of total shareholder returns and CEO pay as the basis for its recommendation. Previously, ISS used a combination of one-year and three-year periods. The firm said the new method will ‘be less impacted by periods of high volatility’. 

In Canada, ISS will start using director attendance records to help determine which directors are ‘overboarded’ (serve on too many boards). To be considered overboarded, a director must now serve on more than six boards and have attended less than 75 percent of his or her board and committee meetings.   

For Europe, ISS says it will ‘generally’ start making recommendations in line with local codes when considering board independence at companies that are majority controlled by a single shareholder. But it adds that it will continue to recommend votes against non-independent directors on boards that are already less than one-third independent.