- 2004 Institutional Shareholder Services Meeting
- August 3, 2004 | Author: Gary P. Kreider
- Law Firm: Keating Muething & Klekamp PLL - Cincinnati Office
As those of you involved in public corporations have become aware, institutions, often aided by advisory services, such as Institutional Shareholder Services (ISS), have become more and more important in determining the outcome of voting at shareholder meetings. The advice given by such advisors to institutions, which include mutual funds, bank fiduciaries and others, is generally followed.
We are aware of the following initiatives that are being promoted by ISS for 2004 shareholder meetings. These are:
1. ISS will recommend withholding votes from directors that sit on more than six public boards.
2. ISS will recommend withholding votes from insiders and affiliated outsiders that sit on key committees where the Board does not have a majority of independent members.
3. ISS will favor shareholder proposals asking for open access to the nomination process.
4. ISS will support shareholder proposals to separate the Chairman and CEO positions.
5. ISS will generally support shareholder proposals asking companies to adopt holding periods for stock in the company owned by executives.
6. ISS will recommend votes against compensation committee members where there is not a relationship of pay to performance. Should there be a material increase in compensation in a time of declining earnings, this position would come into play.
7. ISS will recommend a vote for shareholder proposals advocating use of performance-based equity awards unless the proposal is deemed to be restrictive or if the company already has a substantial portion of its awards based on performance.
8. ISS will recommend votes for shareholder proposals requesting extraordinary benefits in SERP agreements be put to a shareholder vote.
9. ISS will recommend votes for shareholder proposals to exclude pension fund income in the calculation of earnings used in determining executive bonuses and compensation.
10. ISS will consider recommending votes for shareholder proposals seeking auditor rotation. Factors that will influence their decision include the tenure of the audit firm, the establishment and disclosure of a renewal process by the audit committee in changing auditors, the length of the rotation period advocated and any significant related audit issues.
11. ISS will consider recommending votes against auditor ratification where non-audit fees exceed audit and audit-related fees.
For example, Teachers' Insurance and Annuity Association -- College Retirement Equities Fund, generally known as TIAA-CREF, is a large institutional holder. It is now publishing some of its own guidelines. In addition, we understand there is another group being formed like ISS to publish guidelines. In the case of ISS and rival groups, they will be seeking memberships from companies for a fee, and the member company then would be able to discuss its proposals with ISS and also discuss in more detail ISS reactions to shareholder as well as company proposals.
TIAA-CREF has expressed several positions including:
1. Directors should have a material stock interest in the company. Director compensation programs may include shares of stock or restricted stock, but stock options are discouraged.
2. The efforts of directors to improve their capacity through director education programs should be disclosed.
3. TIAA-CREF supports a system whereby proxy votes are kept confidential from management.
4. TIAA-CREF will support shareholder resolutions requesting reasonable disclosure about environmental impact from the company's operations, reports concerning activities in countries with records of repression of human rights and those that call for companies to increase the diversity of their workforce and implement non-discrimination policies.
5. TIAA-CREF will support proposals for shareholder ratification of golden parachute arrangements.
TIAA-CREF states that it will make its policies available to companies in which it invests and will communicate directly with them. However, TIAA-CREF will occasionally institute its own shareholder proposals.
TIAA-CREF has listed the following red flags with respect to equity compensation plans:
1. Where potential dilution from plans exceeds 15% over the duration of the plans or 2% in any one year.
2. Plans containing reload features, evergreen plans, plans which provide for mega-grants and plans with exercise prices below 100% of fair market value on the date of grant.
3. Restricted stock plans with an excess of 3% dilution.
4. Plans containing repricing features.
Suggested Courses of Action
We suggest that those concerned take the following steps:
1. Determine now the extent to which your shares are held by institutions. The first place to look is filings by institutions with over 5% ownership. The second is your registered shareholder list. However, the registered list generally will contain only a minority of your actual shareholders. You should ask your transfer agent to obtain for you a NOBO list. A NOBO list will show those shareholders whose shares are held in the names of institutions or depositories and who have not objected to having their names released. This will expand the universe of shareholders that you can view but will not include all since many larger shareholders do file the objection and their names cannot be obtained. One way of ascertaining the number of actual beneficial owners you hold as opposed to registered holders and NOBO list holders is to measure the quantity of proxy materials requested by nominees, brokers, etc. for your last shareholders meeting against the numbers you are actually able to obtain from the registered and NOBO list. Be aware that if an outside shareholder requests your shareholder list and you have obtained a NOBO list, you will have to turn it over along with the registered shareholder list.
2. You should also consider allowing more time between the submission of the proxy statement and the securing of votes. The process of obtaining proxy voting instructions from the record holders to the beneficial holders and back again is very cumbersome to begin with. In addition, if you have a sensitive situation, you will want the time to enable you to react to a close vote and attempt to sway the votes of major shareholders.
3. Consider engaging ISS to analyze any compensation plans you are presenting for shareholder vote. For a fee, ISS will analyze your plan, make suggestions for changes they require for recommendation and then sign-off with an approval which will be conveyed to its institutional clients.
It appears that the institutions are now primarily concentrating on compensation plans. Most institutional investors, and ISS, want to see plans linked to performance. Previously, performance plans caused stock option plans to be expensed. If, as anticipated, all options will be expensed, options will be performance neutral and you can expect this pressure for performance linked to plans to increase. Benchmarks followed by institutions are that the plans provide no more than 15% dilution with no more than 2-1/2-3% annual run rate on equity compensation granted. Options are falling out of favor and institutions are favoring restricted stock plans. With restricted plans, as well as options, however, the institutions want to see a performance test versus a passage of time as the measure of vesting. They also favor plan provisions that require persons to retain ownership of shares vested or options exercised, after the sale of sufficient shares to pay taxes, for a 2-5 year period.
If it appears you have a high percentage of institutional shareholders or you wish to be assured of a vote, it may be beneficial to contact ISS and secure their analysis of your recommended plan. However, if ISS recommends against your plan, and you do not revise it in a manner approved by ISS, ISS is also likely to recommend withholding votes from the members of the compensation committee and all of the independent directors. As you know, companies are required to list the number of votes received by each director in the next 10-Q or 10-K filing following the annual shareholders' meeting.