ISS Finalizes 2013 Proxy Voting Updates: Hedging or Pledging of Stock Can Now Lead to Director Withhold Votes; More Stringent Board Responsiveness Policy Delayed to 2014, with Potential Credit for Partial Implementation; Pay-for-Performance Test Revised to Account for Company Peer Group and Realizable Pay

Sullivan & Cromwell LLP - November 20, 2012

On November 16, 2012, Institutional Shareholder Services, the influential proxy advisory firm, issued final updates to its policies governing voting recommendations on shareholder and management proposals. The final updates, which include some significant changes from the draft policies published for public comment last month, include:

  • Viewing any amount of hedging or the significant pledging of stock by directors or executives as a “failure of risk oversight” that can lead to recommendations against some or all directors;
  • Beginning in 2014, recommending a vote against or withhold from some or all directors if the board does not act on a shareholder proposal that received a majority of votes cast in the prior year. In a change from the proposal, ISS will continue to apply its current policy for director recommendations in 2013, recommending such a vote only if the shareholder proposal had received a majority of shares outstanding in the prior year, or a majority of votes cast in the prior year and one of the two previous years. The final policies also provide more flexibility as to what it means to “act on” a proposal, short of full implementation;
  • Modifying ISS’s pay-for-performance analysis for purposes of management say-on-pay proposals to align its peer group selection more closely with company-selected peer groups and to add “realizable” pay (as compared to grant date pay) as a new qualitative factor;
  • Placing greater emphasis on all change-in-control arrangements (as compared to recent changes to those arrangements) in connection with say-on-golden-parachute votes now required under the Dodd-Frank Act;
  • Changing its recommendation to “vote case-by-case” on shareholder proposals seeking sustainability metrics (as compared to its current policy of “generally vote against”);
  • Counting service on a publicly traded subsidiary board for purposes of determining whether a director serves on too many public company boards; and
  • Simplifying or clarifying the descriptions of certain of its voting policies, including those relating to director attendance, director independence, lobbying proposals and social policy proposals generally.

The updates, which are available at, are in many ways consistent with ISS’s proposed updates issued last month. The stringent policy with regard to hedging and pledging, however, was not among the proposals. In addition, the final policies address widespread concern regarding the treatment of majority-supported shareholder proposals by delaying the implementation for one year and by giving companies credit for partial implementation of a proposal under certain circumstances.

These updates will apply to shareholder meetings held on or after February 1, 2013. Issuers should review the updates and consider any impact they may have on the expected level of support for the directors, the company’s say-on-pay proposal, or other shareholder or company proposals in 2013. ISS has stated that it will release revised FAQ documents in December that provide additional guidance related to some of the new policies.