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Today, February 20, ISS has posted a preview of its updated GRId 2.0 data profiles for U.S. companies.  Company representatives can access the GRId profile (for free) through the ISS data verification site to review the information and alert ISS as to any mistakes or other areas for corrections.  To obtain a data verification user name and password if you do not already have one, contact ISS by email at or call 301 556 0570.

As we previously discussed, GRId 2.0 adds many new questions, particularly in the compensation area, and adjusts the scoring system.  For the first time, actual scores in each of the categories of Board, Compensation, Audit and Shareholder Rights, will be displayed in addition to the overall “high,” “medium,” or “low” system.  A copy of the lengthy technical document with all the questions being scored is available here.

The revised GRId score will be available for the entire GRId universe of US companies, largely the Russell 3000 companies, on Monday, February 27.  ISS will make the data available for the Yahoo Finance page of companies on March 1 (a company's GRId score can be found under Business Summary - Company Profile on its Yahoo Finance page).  A page showcasing the GRId data is also part of a company's ISS annual meeting voting recommendation report. 

• Just in time before most proxy statements are issued, the SEC staff has issued a CDI on how say-on-pay resolutions should be described on proxy cards and voting instruction forms, with specific examples given of resolutions that would be considered compliant.  The four examples (To approve the company’s executive compensation; Advisory approval of the company’s executive compensation; Advisory resolution to approve executive compensation; and Advisory vote to approve named executive officer compensation) all contain the notion of "approval" in casting the vote.   The Staff indicated it was concerned that some resolutions, such as "To hold an advisory vote on executive compensation," are not sufficiently clear.
• Western Union has announced that it will drop its plans to adopt a proxy access bylaw, in light of its decision to declassify its board and "its ongoing assessment of whether proxy access should be included in the Company’s corporate governance structure."
• CalPERS, other pension funds and investors submitted a letter to the SEC asking that the Commission focus on certain priorities in the next 12 months.  The list includes proxy access, the remaining executive compensation provisions required under the Dodd-Frank Act, International Financial Reporting Standards (IFRS) and corporate disclosure on sustainability issues, such as environmental matters and board diversity. 
• As noted on TheCorporateCounsel.net, Apache and John Chevedden have reached a settlement in the Southern District of Texas, permitting Apache to exclude Chevedden's shareholder proposal, which Apache had disputed with respect to Chevedden's proof of ownership.  Chevedden's appeal in the Fifth Circuit with respect to a similar prior case (KBR v. Apache), is pending. 
• The NY Post reports that a whistleblower has filed a complaint with the SEC alleging that an employee in the Boston office of ISS has been providing proxy solicitors with shareholder voting data in exchange for cash and gifts. 

Instead of being the first company with a proxy access shareholder proposal voted on at its meeting, Hewlett-Packard recently became the third company to agree to implement proxy access.  If approved at the 2013 meeting, HP would allow shareholder groups that own at least 3% for 3 years to nominate candidates for up to 20% of the board.  HP follows in the steps of Western Union and KSW, in making efforts to permit proxy access in response to these shareholder proposals.  HP managed to get its proposal, submitted from Amalgamated Bank, withdrawn, but Western Union and KSW are seeking exclusion through the SEC no-action letter process and are still waiting to hear. 

Contact Ning Chiu.

As companies are in the midst of preparing their proxy statements, some may have forgotten an interpretation that the SEC Staff issued last summer regarding the use of non-GAAP financial measures in CD&As that could affect your disclosure.  The CDI in Question 118.08 indicates that if the non-GAAP financial measure is not a target level that is subject to exemption from the non-GAAP disclosure rules, but rather, included in CD&A or other parts of the proxy statement to perhaps explain the company's results in relation to compensation paid, then some form of GAAP reconciliation is necessary.

Contact Ning Chiu. Contact Kyoko Takahashi Lin.

ISS issued several helpful FAQs to further explain how it will evaluate pay-for-performance, management responses to prior say-on-pay votes and equity compensation plans.  A particularly interesting comment indicates that ISS may not be as quick to reverse negative recommendations based on company commitments to make prospective changes to pay packages, indicating that "…with annual management say on pay proposals, commitments on strengthening the company's pay for performance alignment in the future are not as relevant...Additional filing materials made after the publication of our report that indicate future changes planned for the pay program will have minimum impact on the vote recommendation." (emphasis added).  This would not include actions taken by companies such as GE and Disney during the 2011 proxy season, as those companies made changes to existing compensation arrangements.  However, it appears to cover, for example, commitments to no longer provide gross-ups to executives in the future. 

Contact . Contact .

The Oregon district court provided a ray of hope for companies fearing the possibility of shareholder say on pay litigation when it handed down its January 11, 2012 decision granting Umpqua’s motion to dismiss a shareholder derivative suit alleging directors’ breach of duty and officers’ unjust enrichment after an increase in executive compensation.  In the decision, Magistrate Judge Acosta rejected the shareholders’ arguments that demand was futile because the directors were not independent or disinterested.

Contact . Contact .

Western Union recently submitted a no-action letter to the SEC Staff seeking to exclude a binding proxy access shareholder proposal from Norges Bank, arguing under Rule 14a-8(i)(9) that the company is submitting a conflicting management proposal to amend their bylaws allowing for proxy access.  The Norges Bank proposal sought to provide proxy access to shareholders who own at least 1% of shares for a year, while Western Union's provision would permit shareholders to make nominations if they own 5% for at least 3 years. 

Another company, KSW, has already amended its bylaws to allow for shareholder nominations by shareholders who own 5% or more shares for at least one year, in response to a different binding shareholder proposal it received seeking to give proxy access rights to shareholders who own 2% for one year.  KSW is arguing exclusion of the shareholder proposal on the basis of Rule 14a-8(i)(10), that it has substantially implemented the essential elements of the shareholder proposal.

Both no-action letters can be considered against the backdrop of similar efforts to exclude special meeting shareholder proposals, which usually ask companies to allow shareholders owning 10% or more to call special meetings. Companies that have adopted, or plan to adopt, similar provisions but at higher thresholds of ownership (usually 25%) have argued substantial implementation (unsuccessfully) and conflicting proposals (successfully).  The downside of making the exclusion argument on the basis of a conflicting proposal is that the proponent may submit the same proposal to the company next year. 

While we believe the SEC Staff will likely grant Western Union's no-action letter request, what is more interesting is that two companies have taken the steps of adopting, or will soon adopt, proxy access in response to these untested shareholder proposals, given that there is still a great deal of uncertainty as to the level of support the proposals will receive from institutional investors.  Even at these higher ownership thresholds, supporters of proxy access may still view these actions as quite positive in response to the first year that proxy access shareholder proposals have been submitted, when none have been voted on yet.  There have been fewer than 20 proxy access proposals submitted this year, but these actions may motivate proponents to submit many more for next season.

Several other companies (Textron, Bank of America and Goldman Sachs among them) are arguing to exclude the proposal on numerous other grounds that do not call for implementing the proposal in any form. 

Contact . Contact .

While the SEC Staff's recent pronouncements in Staff Legal Bulletin 14F was intended to provide clarity and stem the tide of no-action letters citing procedural deficiencies, at least in the short term, it has spawned a new set of arguments.  As noted in our memo, SLB 14F makes clear that only DTC participants are viewed as record holders of securities that are deposited at DTC.

Contact .

The Shareholder Communications Coalition, a group that includes the Business Roundtable, the National Investors Relations Institute and the Society of Corporate Secretaries and Governance Professionals, recently sent a letter to the SEC advocating for a proposed regulatory framework for proxy advisory firms, as a result of recent public statements from the SEC indicating that the agency may finally move forward on the proxy plumbing concept release issued in July 2010. The Coalition recommends that the SEC develop rulemaking that includes:

Contact .

As 2011 neared a close, ISS announced that it will update its Governance Risk Indicators (called GRId 2.0) on February 24, 2012 to score all Russell 3000 companies.  For the first time, actual scores in each of the categories of Board, Compensation, Audit and Shareholder Rights, will be displayed in addition to the overall “high,” “medium,” or “low” system.  This could allow shareholders to measure companies against each other.  Other major changes include:

Contact .  Contact .

In December, ISS issued a whitepaper providing further guidance on its new pay-for-performance review framework first introduced in its 2012 proxy voting guidelines update (effective for meetings on or after February 1, 2012).  As described in our memo New ISS Policies Overhaul Say-on-Pay Analysis (November 29, 2011), the revised pay-for-performance methodology includes both a three-part quantitative analysis and a qualitative analysis.  The quantitative analysis is made up of two relative measures (“Relative Degree of Alignment,” comparing CEO pay and TSR performance against a comparison group over 1- and 3-year periods, and “Multiple of Median,” comparing the prior year’s CEO pay to the median pay of a comparison group for the same period) and one absolute measure (“Pay-TSR Alignment,” comparing trends in CEO annual pay and the value of an investment in the company over the prior 5-year period).

Contact . Contact .

As we remarked back in August 2011, the SEC website with its rulemaking schedule on Dodd-Frank initiatives is changed with little notice, as it has been again.  Back in August 2011 we even speculated whether the corporate governance rules would apply to the 2012 proxy season, but the SEC did not meet most of its previously stated timeline with the exception of the rules on mine safety.  The current schedule for January to June 2012 is as follows:

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After receiving comments and hosting a roundtable, the PCAOB has reproposed for comment an auditing standard on Communications with Audit Committees by making modifications to its original proposal from March 29, 2010.  Both proposals update existing AU 380.  Comments are due by February 29, 2012, with the new standard anticipated to be effective for audits of fiscal years ending on or after December 15, 2012.

Overall, the proposal as it currently stands covers almost all of the existing topics under AU 380, and in addition contains specific enhancements or new requirements, such as:

Contact . Contact .

Proxy season 2012 has begun and we’re beginning to see disclosure on the impact of last year’s say on pay voting results. As of December 16, 2011, 14 large accelerated filer companies have filed proxy statements for the 2012 season. These proxy statements disclose whether, and to what extent, the companies considered the results of their 2011 management say on pay proposal and how that affected their compensation decisions and practices. Unsurprisingly, the ten companies with high shareholder approval ratings (83% and higher) have provided simple and unremarkable disclosure. These companies generally acknowledge their high ratings and cite them as support for continuing their compensation practices.

Contact . Contact .

SEC Chairman Schapiro recently made a speech about corporate governance at the Transatlantic Corporate Governance Dialogue which provides some insight into upcoming SEC initiatives in this area.  In her speech, she indicated that the Commission is considering:  

Contact .

During its 2012 North American Proxy Season review, proxy advisory services firm Glass Lewis looked back to the 2011 proxy season and also gave insights as to what we can expect from them in 2012.  Highlights included:

Contact .

In what would appear to be the first filing of proxy access proposals by an institutional investor, Norges Bank Investment Management (NBIM), manager of the Norwegian Government Pension Fund, has recently filed proxy access shareholder proposals at six U.S. companies. The Norwegian Government Pension Fund held approximately $98 billion in U.S. equities and $63 billion in U.S. bonds as of the end of November.

According to its press release, NBIM filed shareholder proposals at Wells Fargo, Charles Schwab, Western Union, Staples, Pioneer Natural Resources and CME Group, asking each of the companies to establish procedures for shareholders to nominate candidates to the company’s boards of directors.  The NBIM proposal would require that shareholders own a minimum of 1% of the company’s stock for at least one year in order to nominate directors.  Under the proposal, up to 25 percent of the board may be nominated by shareholders. These proposals provide a lower threshold of stock ownership required for nomination than that of  the SEC’s vacated Rule 14a-11, which required ownership of 3% of a company’s shares for a period of three years in order to nominate a director.

All but one of the companies targeted by NBIM has seen a drop in its stock price over the last year.  In its press release, a spokesperson for NBIM said that it “will continue to identify companies with unsatisfactory performance.” According to an article in the Wall Street Journal today, NBIM selected the six targeted companies after a review more than 2000 of the fund’s U.S. holdings.  A spokesperson also said in the article that NBIM is “not planning [on nominating directors] now; we would much rather have a good dialogue with the board.”

ISS has asked that we encourage interested parties to register for its free webinar to discuss its new proxy voting guidelines, which we recently summarized in a client publication.  The session focused on U.S. policies will take place on Wednesday, December 7, at 11:00 a.m. EST and will feature Martha Carter, Head of Governance Research; Carol Bowie, Head of U.S. Compensation Research; and Pat McGurn, Special Counsel. 

Contact .

In what may be the first major decision this proxy season on shareholder proposals, the SEC staff has granted no-action letters to two companies, Hewlett-Packard Company and Deere & Company, that had sought to exclude proposals submitted by the United Brotherhood of Carpenters Pension Funds.  The proposals had requested that the boards and audits committees establish policies that require the respective audit firms, at least every seven years, to rotate off the engagement for a minimum of three years. 

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Exclusive forum provisions in charters and bylaws, under which derivative suits and other shareholder litigation must be brought in the courts of the company's state of incorporation, drew some attention during the 2011 proxy season.  My recent piece summarizing the state of the law and the practice on this subject is here.  No consensus on this topic has yet emerged among institutional investors, and the 2011 votes were close and had mixed results.

Contact Bill Kelly.