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December 11, 2012


CORPORATE GOVERNANCE-ISS Updates Corporate Governance Policy With New Executive Compensation Policies, New Standards on Board Responsiveness and Overboarding

By Anne Sherry, J.D.

Institutional Shareholder Services Inc. released the 2013 updates to its U.S. Corporate Governance Policy and an executive summary of the changes. The updates, which ISS approved on November 16, are effective for meetings on or after February 1, 2013, and are toned down somewhat from the proposals that ISS released for comment in October, noted Wachtell, Lipton partner David A. Katz in a blog post.

Previously, ISS expected companies to act on a shareholder proposal that was supported by a majority of votes cast in the most recent vote and in at least one of the two previous years. It will now expect companies to implement such a proposal or put it to a vote - depending on the wording of the proposal - after just one vote in which it receives support from the majority of votes cast. This tighter standard is not retroactive and will first apply to shareholder proposals appearing in 2013 proxy statements.

ISS has also updated certain executive compensation issues. It is adding realizable pay as a supplemental tool in pay-for-performance analysis, rather than just considering the grant date value of a warrant. This is only a factor for large-cap companies that do not survive ISS's initial quantitative analysis. Realizable pay will consist of the sum of relevant cash- and equity-based grants and awards made during a specified performance period being measured, based on equity award values for actual earned awards, or target values for ongoing awards, calculated using the stock price at the end of the performance measurement period. Stock options or stock appreciation rights will be re-valued using the remaining term and updated assumptions, as of the performance period, using a Black-Scholes option pricing model.

With respect to golden parachute say-on-pay voting, ISS will now consider grandfathered change-of-control arrangements, not only newly adopted agreements as under its current standards. The ISS updates also include several significant changes to peer group determinations. The new methodology will initially focus on a broader group determined by the eight-digit GICS code (rather than a narrower four- or even two-digit code). ISS will also consider company-selected peers.

ISS will newly consider the board of a company's public subsidiary to be a separate board for determining whether a director sits on more than six public company boards and thus is overboarded. ISS will recommend against or withhold votes for individual directors who attend less than 75 percent of board and committee meetings or whose level of participation cannot be determined by the proxy disclosure.

Finally, ISS will not automatically recommend voting against proposals linking executive compensation to environmental and social criteria. Instead, its determination will be on a case-by-case basis depending on the company's history regarding sustainability issues; whether it has management and oversight mechanisms regarding these issues; the degree to which industry peers have similar criteria in their compensation practices; and the company's current level of disclosure of sustainability issues.

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