Proxy adviser ISS to focus on long-term CEO pay for performance

Lawyers in the corporate governance arena would be well advised to keep close tabs on recently proposed changes to the way in which proxy advisers evaluate CEO pay for performance.

Shareholders enter the the Annual General Meeting of Canadian Pacific Railway in Calgary, Alberta May 17, 2012. Fred Green, President and Chief Executive Officer resigned from the railway before the meeting. REUTERS/Jack Cusano

Hard on the heels of the TSX’s proposal to mandate majority-voting policies for all issuers — a procedural shift that would lend more power to institutional investors like pension funds — powerful proxy adviser Institutional Shareholder Services has issued an update to its proxy voting guidelines that would change its methodology for evaluating pay for performance.

The revised methodology, while complex, would generally place more emphasis on long-term performance; the mix of performance-based compensation elements (such as bonuses, stock options and restricted share units); and the quality of disclosure. Needless to say, the updated guidelines will leave boards with a narrower scope of discretion.

The comment period for ISS’s proposals ends today, so it seems the proxy adviser will be moving full steam ahead on these plans.

While securities regulators, stock exchanges, institutional shareholders and proxy advisers create a formidable coalition against corporate boards that may wish to maintain a level of independent oversight, directors are not without options.

About a year ago, Lexpert writer Julius Melnitzer wrote an in-depth feature (“Enter the Proxy Solicitor,” October 2011) on the burgeoning field of proxy solicitation, which aims to provide a counterweight to the growing power of pension and hedge funds.

In Melnitzer’s feature, he surveys the landscape of proxy-solicitation agents and legal partners in the space. Here are just a few of the comments from his piece:

“The proxy system in North America is so byzantine that proxy solicitors can provide a lot of value because they can work the street and get to the real decision makers.” — Gordon Chambers, Lawson Lundell LLP

“As soon as there’s a proxy battle on the horizon, we tell our clients that one of the most important decisions they make will be which proxy-solicitation agent to hire.” — Andrew MacDougall, Osler, Hoskin & Harcourt LLP.

“Eighty per cent of Canadian companies have no idea who their major shareholders are.” — Wes Hall, president and CEO of Kingsdale Shareholder Services Inc.

“It’s not even clear what constitutes a solicitation. And that’s an issue that matters very much because dissidents trying to take over a company can’t speak to more than 15 people without putting out a proxy circular.” — Walied Solimon, Norton Rose Canada LLP.

“Nobody cared about proxy-solicitation companies 15 or 16 years ago. But what became apparent around the turn of the century was that a company that didn’t motivate its shareholder base to turn out in decent numbers at meetings would find itself in aheap of trouble. Then we started to get into more contested environments and things took off.” — Glenn Keeling, Phoenix Advisory Partners.

“The point is that hiring a proxy-solicitation company is becoming more or less the norm, so it’s hard not to hire them if you have a contentious meeting coming up. People have concluded that not hiring them leaves you making your case to shareholders with one arm tied behind your back.” — David Woollcombe, McCarthy Tétrault LLP.

Lexpert readers with an interest in the area should also stay tuned for the November/December issue (out Dec. 3), which goes beyond the reported chronology of the CPP proxy battle to provide a revealing perspective from lawyers involved.

-David Dias

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