Externally Managed Issuers – ISS Policy Survey

Introduction

ISS received 421 responses to this year’s policy survey, from 415 organizations, 114 of the respondents were institutional investors, representing 109 organizations, including 65 investment managers or asset managers; 17 government- or state-sponsored pension funds; 13 mutual funds; seven labor union-sponsored pension funds; six foundations and endowments; and one alternative asset management firm. A further seven responses were received from investor coalitions or consultants or NGOs with an investor perspective; these were aggregated with the institutional investor responses. Responses were also received from 257 corporate issuers (generally referred to as companies in this document), while 11 respondents identified themselves as commercial or investment banks or insurance companies, and two respondents selected the private bank/wealth management/brokerage category. Twenty respondents were consultants or advisors to companies, including law firms, compensation consultants and other advisors. Other respondents included academic researchers, issuer organizations and non-profit groups. The breakdown of investors by the size of their assets owned or assets under management was as follows:

Externally Managed Issuers

The largest number of respondents (322 in all) are from organizations based in the United States. Thirty-eight are based in Canada, and 51 in Europe (including 16 in the UK). Responses were also received from organizations based in Australia, Singapore, Taiwan, Japan, South Africa, Bermuda and Mexico. However, many respondents have a focus that goes beyond their country of domicile:

Externally Managed Issuers

Not every respondent answered every survey question. Throughout this report, response rates are calculated as percentages of the valid responses received on each particular question from investors and from non-investors, excluding blank responses. Survey participants who filled out the “Respondent Information” but did not answer any of the policy questions were excluded from the analysis.

Key Findings

Externally Managed Issuers (“EMIs”) (U.S. & Canada)

Survey questions on this topic focused on say-on-pay resolutions (or, in the absence of a say-on-pay vote, on director elections) at EMIs, such as externally-managed REITs, where most or all compensation is paid by the external manager and where disclosure is minimal or non-existent.

Where Externally Managed Issuers put forward a say-on-pay resolution with minimal or no disclosure about compensation payments or practices on the part of the external manager, 71 percent of investor respondents answered that ISS should recommend an AGAINST vote on the proposal, given that the level of disclosure does not meet shareholders’ informational needs. 13 percent of investors said that an ABSTAIN recommendation is appropriate in that situation, while 9 percent of investors responded that a FOR recommendation would be appropriate in the absence of significant pay-related concerns. (The remaining 8 percent of investors stated that the appropriate recommendation would depend on the specifics of each EMI.) Among non-investor respondents (companies and advisors), 32 percent stated that an ABSTAIN recommendation would be appropriate, while 24 percent supported an AGAINST recommendation, and 29 percent favored a FOR recommendation in the absence of other concerns. 14 percent of issuers stated that the appropriate recommendation should depend on the circumstances.

Where an Externally Managed Issuers does not have a say-on-pay resolution on the ballot (for example, a US company that has adopted a biennial or triennial frequency for such votes, or a Canadian company that has not voluntarily adopted the practice of say-on-pay votes), and does not disclose compensation details, investor respondents suggested that in making recommendations on director elections, ISS should look at factors such as the amount paid under the management contract, and how this compares with general and administrative expenses at internally-managed peers; the independence of the board and compensation committee (including interlocks and conflicts of interest); stock price performance relative to peers; and any history of pay-related controversies or activism. A number of investors indicated that they would consider voting against compensation committee members in the absence of robust disclosure, and one investor pointed out that the external management structure itself tends to create conflicts of interest between the managers, whose pay often depends on top-line growth regardless of profitability, and shareholders. Non-investor respondents cited many of the same considerations, including the overall size of the management fee and the EMI’s performance and disclosure levels relative to peers, and also suggested consideration of whether the executives employed by the manager are engaged full-time in managing the EMI or if they have other responsibilities.

Use of Adjusted Metrics in Incentive Programs (U.S.)

Questions on this topic focused on the use of adjusted (non-GAAP) metrics to measure performance for purposes of incentive compensation plans. Sixty-one percent of company respondents, and 81 percent of investors, believe that adjusted metrics are sometimes acceptable, depending on the nature and extent of the adjustments. Only 8 percent of investors, and 37 percent of companies, stated that board-determined adjustments are always acceptable. And 11 percent of investors (and one company) responded that incentive plan metric results should never be adjusted from reported or GAAP metrics.

Among those respondents who replied that adjusted metrics are sometimes acceptable, 66 percent of investors considered that non-GAAP metrics are acceptable as long as performance goals and results are clearly disclosed and reconciled with comparable GAAP metrics in the proxy statement, and the reasons for the adjustments are adequately explained. 23 percent of investors replied that adjustments to GAAP metrics should be described and explained, but that the non-GAAP metrics do not necessarily need to be fully reconciled to GAAP metrics. Eleven percent of investors responded that the use of non-GAAP metrics should be restricted to commonly-used metrics such as EBITDA or funds from operations. Among the non-investor respondents who stated that adjusted metrics are sometimes acceptable, 49 percent felt that the non-GAAP metrics should be reconciled with GAAP metrics, while 42 percent responded that disclosure and explanation of the adjustments to GAAP metrics are sufficient. Ten percent of companies stated that only commonly-used non-GAAP metrics should be used for compensation purposes.

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