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ISS Expands List of Egregious Equity Plan Factors

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As reported in prior blogs, Institutional Shareholder Services Inc. (“ISS”), a leading proxy advisory firm, uses a proprietary “Equity Plan Scorecard” approach to evaluate public company equity compensation plans and will recommend a “for” or “against” vote depending on a combination of plan features, plan cost, company grant practices, etc.  Last week ISS issued its Proxy Voting Guideline Updates for 2020, which are generally effective for meetings on or after February 1, 2020 (“2020 Update”).  The 2020 Update, among other things, makes changes to the current Equity Plan Scorecard.

Regardless of how a plan scores under the current Equity Plan Scorecard, ISS will generally recommend a vote against a plan proposal if any of the following egregious factors apply: (i) accelerated vesting pursuant to a liberal change in control definition; (ii) provisions that permit the repricing and/or cash out of underwater options or stock appreciation rights without shareholder approval, (iii) provisions that make a plan a vehicle for problematic pay practices or create a pay for performance disconnect, (iv) the plan is excessively dilutive to shareholder holdings, or (v) the plan contains other features that have a significant negative impact on shareholder interests.  The 2020 Update expands this list to include plans that contain evergreen or automatic share replenishment features.

ISS’ rationale for the change stems from the drop in the number of equity plans brought to a shareholder vote in 2018 and 2019 compared to prior years (from 2017 to 2018 alone ISS noted a 27% year over year drop) and ISS believes that the drop might perpetuate plans with features that are unfriendly to shareholders.  A link to the full 2020 Update can be found here.