Recent 2013 Proxy Season Developments: ISS Publishes Proposed Updates to Its 2013 Proxy Voting Guidelines, Including Making Board Responsiveness Policy More Stringent and Revising Pay-for-Performance Test to Account for Company Peer Group and Realizable Compensation; SEC Staff Issues Legal Bulletin on Shareholder Proposal Process

Sullivan & Cromwell LLP - October 22, 2012

As issuers and shareholders plan for the 2013 proxy season, they should take into account recent publications by Institutional Shareholder Services, proposing changes to its voting policies on director elections, management say-on-pay proposals and other matters, and by the SEC’s Division of Corporation Finance, providing guidance under Rule 14a-8 on shareholder proposal process issues.


ISS, the influential proxy advisory firm, published for public comment on October 16 the following proposed changes to its proxy voting guidelines for 2013:

  • Recommending a vote against or withhold from directors who did not act to implement a shareholder proposal that received a majority of votes cast in the prior year. Under ISS’s current policy, it would recommend such a vote only if the shareholder proposal had received a majority of votes outstanding in the prior year, or a majority of votes cast in the prior year and one of the two previous years;
  • Modifying its executive compensation 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) and pledging of company shares by executives and directors as two new qualitative factors;
  • 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; and
  • Changing its recommendation to “vote case-by-case” on shareholder proposals seeking sustainability metrics (as compared to its current recommendation of “generally vote against”).

The proposed change to the board responsiveness policy would not only increase the pressure on boards to implement precatory shareholder proposals but could also cause issuers to take steps to prevent such a proposal from coming to a vote and passing in the first place, such as by implementing or proposing a different form of the proposed action. Furthermore, ISS apparently contemplates that this proposed change may have retroactive effect, in that it may apply to vote recommendations in 2013 based on the outcome of a 2012 shareholder vote.

The comment period for the policy changes ends on October 31, 2012, and the new policies would apply for annual meetings on or after February 1, 2013. All public companies are invited to comment on the proposal.


SEC Staff Legal Bulletin No. 14G, also issued on October 16, provides guidance on a number of technical issues relating to the Rule 14a-8 shareholder proposal process, including clarifications of the SEC staff’s position on proof of share ownership by indirect owners, requirements for deficiency letters and the use of website references in proposals and supporting statements.