ISS adopts a 2-strikes policy for its US guidelines

In an interesting development brewing for a while, ISS has borrowed an Australian concept to apply to US non-executive directors’ compensation.

For shareholder meetings occurring on or after February 1, 2020, ISS may issue a negative recommendation for board members responsible for approving non-executive director pay if it identifies a pattern (two consecutive years) of “excessive” non-executive director pay. ISS may consider non-executive director pay “excessive” if it exceeds pay received by the top 2–3% of directors within the same index and sector. While this “two strike” rule may appear to enable companies to take a wait-and-see approach, for most companies’ compensation for the 2020 financial year will be set prior to receiving ISS feedback on 2019 director compensation.

The focus stems from several instances of high NED pay, which most notably included a litigation case against directors of Goldman Sachs in May 2019 decision of the Delaware Court of Chancery (Stein v. Blankfein, et. al.) which supported a breach of fiduciary duty claim predicated on allegations that discretionary equity awards the non-executive directors of The Goldman Sachs Group awarded themselves were excessive. While the legal argument probably would not be applicable to Australia, the background and findings are worth a read (see, for example, HERE) .

The ISS policy, interestingly, allows a benefit of the doubt (i.e. in that a “transgression” is permitted in the 1st year without “penalty”) that does not appear to comply with black letter approach to the application of  their proxy voting guidelines, especially when it comes to executive pay. This is unfortunate, given there are arguably more shades of grey in executive pay in regard to performance outcomes and incentive payments.

Practically, an ISS “2 strikes” standard would be a useful consideration for future ISS guidelines more broadly.


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