ISS AN MSCI BRAND: 2012-2013 Policy Survey Summary of Results

2012-2013 Policy Survey Summary of Results September 2012 Copyright © 2012 by ISS All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from the publisher. Requests for permission to make copies of any part of this work should be sent to: ISS Marketing Department, 702 King Farm Boulevard, Suite 400, Rockville, MD 20850 or marketing@issgovernance.com. www.issgovernance.com About the Survey For the past nine years, ISS has sought feedback on emerging corporate governance issues as a critical component of its annual policy formulation process. ISS seeks input from both its institutional investor clients and the corporate issuer community, in order to get a better understanding of the breadth of financial market views on a range of topics including boards of directors, shareholder rights, and executive compensation/remuneration. This year’s survey was conducted from July 24, 2012, through Aug. 31, 2012. ISS’ institutional investor clients, as well as a broad global contact list of corporate issuers, were invited to participate in an online survey covering corporate governance developments worldwide. Issuers and investors completed the same survey. More than 370 total responses were received. A total of 97 institutional investors responded. Approximately 71 percent of investor respondents were located in the United States, with the remainder divided between U.K., Europe, Canada, and Asia-Pacific. 273 corporate issuers responded, with 79 percent of them located in the United States and the remainder divided between U.K., Europe, and Canada. Institutions-Category Alternative asset management 1% Commercial or investment bank 4% Foundation/endowment 2% Government- or state-sponsored pension fund 8% Insurance company 3% Investment manager or asset manager 62% Investor industry group 1% Labor union-sponsored pension fund 2% Mutual fund or mutual fund company 8% Private bank/wealth management/brokerage 1% Other 8% Size of Organization* Over $100 billion $10 billion - $100 billion $1 billion - $10 billion $500 million - $1 billion $100 million - $500 million Under $100 million Not applicable *For institutions, size is measured by equity assets under management or assets owned (in U.S. dollars); For issuers, size is measured by market capitalization (in U.S. Dollars) Institutions 32% 22% 30% 4% 6% 5% 2% Issuers 5% 29% 31% 7% 7% 2% 19% 2012-2013 Policy Survey Summary of Results - 2 - © 2012 Institutional Shareholder Services Inc. Key Findings ISS Research ISS’ outreach activities with respect to policy formulation and engagement are useful to both investors and issuers. A significant majority (over 72 percent) of both investor and issuer respondents indicated that all elements of ISS’ outreach process (policy survey, policy roundtables, and comment period) for policy formulation were either “very useful” or “somewhat useful” to their organization when developing voting policies or assessing governance practices. Likewise, a significant majority (over 72 percent) of both investors and issuers indicated that all elements of ISS’ engagement process with issuers were either “very useful” or “somewhat useful” to their organization, considering the benefits of enhancing dialogue and providing additional information on ISS reports. Top Governance Issues Executive compensation is the top area of focus across the globe. Investor respondents cite the issue of executive compensation as the perennial top governance topic for the coming year. Issuer respondents also cited executive compensation as their top concern in North America and Europe and as their second most commonly cited topic in both the Asia-Pacific and the Developing Markets. On a global basis, investors focused on board competence/director qualifications and board independence. Across every region, board competence and board independence were identified among the three most important governance topics by investor respondents. For issuer respondents, board competence was the third most commonly cited topic across every region. Issuers focus on risk oversight. For issuer respondents, the most commonly cited topic in Asia-Pacific and Developing Markets was risk oversight; this was the second most commonly cited topic in North America and Europe. Nominating Process When voting on new nominees in director elections, issuers value diversity in skill set and track records at other boards. Investors are more likely to vote against or withhold votes from new nominees where their qualifications/experiences/skills raise concerns, as opposed to targeting nominating committees. When evaluating a new or prospective director nominee’s experience, qualifications, and skills, a nominee’s track record at other boards was cited as "very important" by most investor respondents (61 percent). For issuer respondents, a nominee`s diverse skill set relative to other directors received the highest percentage (84 percent) for "very important." Recent (past five years) direct experience in the respective industry was cited as “very important” by 62 percent of issuers and 51 percent of investors. A majority of both investors and issuers would consider nominee diversity with respect to skill sets to be “very important” when evaluating a new nominee’s qualifications while gender/race diversity was most commonly cited as “somewhat important” by both issuers and investors. 2012-2013 Policy Survey Summary of Results - 3 - © 2012 Institutional Shareholder Services Inc. For investors, if a new board nominee’s experience, qualifications or skills raise concerns, a significant majority (82 percent) indicated that they would vote against the new nominee. They were less inclined to vote against the nominating committee or its chair. Sixty-three percent indicated that they would not vote against the nominating committee and 52 percent of investors indicated that they would not vote against the chair of the nominating committee solely due to concerns about a new nominee`s qualifications. U.S. Compensation Practices While ISS’ selection of peer groups for analysis of executive compensation invokes divergent views from investors and issuers, both agree that size matters when selecting peers. Eighty-four percent of investors and 74 percent of issuers indicated that an ISS-selected peer being within a specified size range of the target company (e.g. between 0.5 and 2 times the company’s revenue) is a very or somewhat relevant factor in selecting peers for a pay-for-performance comparison group. Both the majority of investors and issuers also agreed that the target company’s size should be near the median of the selected peers (75 percent and 64 percent, respectively); the ISS-selected peer within the same GICS group as one or more of the target company`s published peers (79 percent and 51 percent, respectively); and the ISS-selected peer has chosen the target company as a peer (67 percent and 56 percent, respectively) as somewhat relevant or neutral factors. It appears, however, that the ISS-selected peer being included in the target company’s published peer group(s) is only somewhat relevant or neutral in selecting peers for a pay-for-performance comparison group for 64 percent of investors while it is the most relevant factor for the majority of issuers (65 percent). Moreover, 74 percent of investors indicated the ISS-selected peer being in the same GICS group as the target company as a very or somewhat relevant factor, while 55 percent of issuers indicated that factor to be somewhat relevant or neutral. A two-thirds majority of investor respondents cited that ISS should continue to create its own peer group and provide the company’s peer group as an alternative view. For issuers, the responses varied with the most common response citing that ISS should use the company’s peer group without exception. Investors are very likely to consider performance metrics other than total shareholder return when evaluating say-on-pay proposals. With respect to ISS’ pay-for-performance methodology, a slight majority (52 percent) of investor respondents indicated that they would be “very likely” to consider metrics other than total shareholder return as a factor when evaluating say-on-pay proposals. Common suggestions for such metrics included EPS and revenues as the alternative metrics. Standardized calculations of realized/realizable pay or measures of such pay provided by the company are favored by both issuers and investors. One-half of investor respondents indicated that they would consider both granted and realized/realizable pay as an appropriate way to measure and analyze executive pay. The other half of investor responses varied among other perspectives with 25 percent indicating that ISS should use granted pay in a quantitative evaluation but consider realized/realizable pay in a qualitative evaluation to determine overall pay-for-performance. For issuers, responses varied, with the least popular perspective to focus on “granted pay” (primarily cash and the grant-date value of equity awards). 2012-2013 Policy Survey Summary of Results - 4 - © 2012 Institutional Shareholder Services Inc. A majority of investors indicated that both a standardized calculation of realized/realizable pay and measures of realized or realizable pay as provided by the company are appropriate ways to consider such pay in a pay-for-performance evaluation. Issuer responses varied, with 36 percent citing a standardized calculation of realized/realizable pay and 29 percent citing measures of realized or realizable pay as provided by the company as the appropriate way to consider such pay. Regarding pay-for-failure scenarios, cash severance exceeding 3x base salary and target bonus and new severance agreements entered immediately prior to a CEO’s departure are considered problematic: both issuers and investors agree. Over 80 percent of investor respondents consider all of the following actions as problematic in a scenario where a CEO receives sizable termination package at a time of significantly lagging shareholder returns: a severance settlement when the executive is stated to be retiring or resigning, immediate acceleration of all unvested equity upon termination without cause, cash severance exceeding 3 times base salary and target bonus, a new severance agreement entered into immediately prior to departure, and large pension/SERP payouts. A majority of issuer respondents, on the other hand, do not consider any of these actions to be problematic with the exception of cash severance exceeding 3x base salary and target bonus and a new severance agreement entered immediately prior to departure. The practice of pledging stock is concerning to both investors and issuers. Almost 50 percent of investor respondents and 45 percent of issuer respondents view any pledging of shares by executives or directors as significantly problematic, with 38 percent and 35 percent, respectively, viewing it as concerning if it involves a significant amount of shares (e.g., > 500,000 or a value exceeding 10 percent of the company`s market value). Investors are inclined to target management say-on-pay proposals in the event a company has significant ES&G-related risks and no ES&G performance metrics tied to executive pay packages. At a company where risks stemming from severe ES&G controversies have been identified and the company does not incorporate ESG performance metrics (such as environmental goals or regulatory compliance) in executive pay packages, the majority of investor respondents indicated that they would vote against the management say-on-pay proposal but would not vote against the compensation committee or the full board. U.S. Board Issues The presence of a lead/presiding director and a company’s governance structure are key considerations for investors when voting on shareholder proposals seeking an independent board chair. When determining whether or not to support shareholder proposals seeking an independent board chair, 65 percent and 58 percent of investor respondents, respectively, indicated (1) the presence or absence of an independent lead or presiding director and (2) the company governance structure are “very relevant” attributes. However, a significant majority (over 69 percent) of investors indicated that all attributes (the presence or absence of an independent lead or presiding director, the company`s governance structure, the company`s total shareholder return relative to peers, and the company`s reasons for maintaining a combined chair/ CEO board leadership structure) are all either “very relevant” or “somewhat relevant” factors. 2012-2013 Policy Survey Summary of Results - 5 - © 2012 Institutional Shareholder Services Inc. ... - --nqh--