ISS readies for a busy proxy season amid scrutiny

The proxy advisory service firm expands its scope and depth of analysis for 2014

Amid debate over the role and influence of proxy advisory firms, Institutional Shareholder Services finalized updated policies this week and will begin implementing them starting Feb. 1.

Among the changes to its policies--which are considered by lawyers and governance-watchers to be fairly minor this year--are an emphasis on a case-by-case approach when analyzing majority-supported shareholder proposals. This includes a consideration of the board's outreach, actions and rationale for not implementing the proposal, as described in a company proxy statement.

In addition, ISS tweaked its pay-for-performance quantitative screen to focus on the relationships between CEO pay and total shareholder return over a three-year period only, rather than a combination of one and three-year periods.

And the firm said it will now crunch realizable pay numbers for all companies in the Standard and Poor's 1500, not just the S&P 500.

Although it may still be important to receive ISS's blessing, the changes suggest that's an achievable goal if a board contacts concerned shareholders, meets with them, implements what is possible and fully explains why any proposal, or any part of a proposal, is not being fully implemented.

In fact, in 2013, ISS recommended against say-on-pay votes at just over a quarter of companies scrutinized, and even then, only eight plans did not pass.

Still, companies should not take anything for granted, as Davis Polk & Wardwell counsel Ning Chiu pointed out in an online briefing, highlighted by Broc Romanek at The

"Even companies that did well need to remain vigilant, given that one year's good results do not guarantee the next," she wrote.

While ISS prepares to scrutinize companies' proxies, the firm itself is under the regulatory microscope.

The Securities and Exchange Commission held a roundtable on proxy advisory service firms on Dec. 5, with panelists including law firms, investors such as BlackRock and CalSTRS and the Council of Institutional Investors.

One Commissioner, Michael Piwowar, said at the roundtable that he is "increasingly concerned that proxy advisory firms may exercise outsized influence on shareholder voting," the New York Times Dealbook reported. "As an economist, my concern is heightened by the lack of competition in the proxy advisory market, which appears to be a stable duopoly preserved by near-impenetrable barriers for new entrants."

Given the heightened scrutiny, it remains to be seen what company will be bold enough to purchase ISS.

For more:
- read this BusinessWeek article about the SEC's roundtable on proxy advisors
- read Ning Chiu's blog post on the past proxy season say on pay votes
- read the New York Times Dealbook story on the roundtable

Related articles:
Critics see conflicts of interest at proxy advisory firms
ISS on the block as criticsm mounts





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