Updated Proxy Adviser Guidelines
02/11/2015
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In addition to ACSI (see HERE), proxy advisers CGI Glass Lewis and ISS have both recently published their updated proxy guidelines for 2015. This continues the long proxy adviser tradition of publishing the rules of the game after the game has started.

In general, there have been no drastic recommendation changes by either adviser, but the few adjustments made since 2014 reports will be discussed below.

CGI Glass Lewis 2015 Proxy Guidelines

The CGI Glass Lewis 2015 Proxy Guidelines remain largely similar to those released in 2014. With regards to executive remuneration, Glass Lewis once again this year recommends voting against the following:

  • Quantum based issues – total fixed remuneration and variable remuneration opportunities are high without explanation as to why
  • Inappropriate short-term incentives – outcomes not demonstrably tied to outcomes
  • Inappropriate incentive plan terms – ie. Cliff vesting
  • Irregular performance grants
  • Adjustments to performance conditions or vesting terms
  • Poor pay for performance – High pay and poor performance
  • Unchallenging performance hurdles
  • Ex-gratia, sign-on and/or retention payments
  • Excessive termination benefits
  • Change of control provisions for automatic vesting
  • Re-testing after performance period has ended
  • Failure to disclose employment contracts
  • Awarding NED equity grants with same terms as executives
  • Paying dividends on unvested shares during the vesting period

New to this year’s list of items to vote against is determining the number of equity grants based on the fair value. This leads to executives receiving a much higher number of grants in order to mitigate the risk of the equity not vesting. Rather, Glass Lewis recommends determining the number of grants by using the equity’s face value.

Though in general Glass Lewis is against the items on this list, they concede that there are always exceptions. Varying from the general recommendations by proxy guidelines can be acceptable if sufficient rationale behind the change is disclosed, with “tailoring” incentive plans provided as an example.

The Glass Lewis guidelines can be found HERE.

ISS 2015 Proxy Guidelines Guidelines

ISS has not made any major changes to its newest Guidelines either. They continue to emphasise the following recommendations:

  • Avoid arrangements that risk “pay for failure”
  • Provide shareholders with clear, comprehensive remuneration disclosures
  • Avoid inappropriate pay to non-executive directors
  • Exercise price for options shouldn’t be at discount to market price at grant date
  • Vesting period should be appropriate. For example, 50% vesting at 2 years or before is too short
  • Relative performance hurdles are preferred to hurdles that specify an absolute share price target or accounting measure of performance. Why? “Where an absolute share-price target is used, executives can be rewarded by a rising market even if their company does relatively poorly.”
  • In cases of relative hurdles, peer group must be appropriate and of sufficient size
  • Sliding scale hurdle is preferred
  • Two types of options (traditional options and ZEPOs, which have no exercise price) should be distinguished

New to this list is noting that operational hurdles are not ideal since they are non-market and non-financial targets, which are both difficult to assess.

This year they also state that remuneration plans should maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value. When making recommendations, ISS will take into consideration the link between pay and performance, the mix between fixed and variable pay, performance goals, and equity- based plans.

Lastly, this year ISS includes a new section on Non-Executive Director Perks/Fringe Benefits. They recommend voting against the payment of post-employment fringe benefits to non-executive directors. An example of a fringe benefit is allowing a non-executive director to charge travel time fees; fringe benefits can create a conflict of interest to incentivise longevity on the board.

Notably, ISS recommends using share price as a performance metric for long-term incentives instead of an accounting measure, such as EPS. Recently, CGI Glass Lewis and Macquarie Research published a report over their research regarding executive incentives. Conversely to the recommendation by ISS, CGI Glass Lewis states that EPS is a better LTI metric to use in order to improve performance. To see our summary of this research, see HERE.

The ISS guidelines can be found HERE.

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