Click to view this message in a browser | To ensure delivery, please add to your address book.

ISS | Governance Weekly
November 2, 2012

Feature Story

Analysis: Say-on-Golden-Parachute Voting

An ISS analysis explores say-on-golden-parachute votes in 2012, examining the components of certain payments deemed problematic by shareholders with a specific focus on failed votes.

europe, middle east, & africa

European Union rules on the transparency of net short positions took effect Nov. 1, while the Dutch senate mulls bill that would set additional transparency and disclosure requirements with regard to gross short positions.

ESG Monitor

Northern Trust announces enhanced range of solutions for institutional investors seeking socially responsible investing options through an agreement with MSCI; pension fund files suit over alleged use of "unlawful child and forced labor."


A new Conference Board survey finds limited use and understanding of social media among corporate directors and managers, suggesting the need for efforts to aid board leaders in closing the gap; Cook study points to less variability in director compensation in 2012.

iss news

ISS extends comment period on proposed 2013 voting policies.

meetings to watch

Oracle Corp., Nov. 7
Fortescue Metals Group, Nov. 14
Sims Metal Management, Nov. 15


Analysis: Say-on-Golden-Parachute Voting

The issue of golden parachute payments and advisory votes on such exit packages has come to the fore in recent weeks following the decision by Xstrata plc to decouple its Glencore merger vote from that of attendant payments to executives, and as new research from Harvard University Law School Professor Lucian Bebchuk and others questions the efficacy of such payments on long-term shareholder value. This article explores say-on-golden-parachute votes in 2012, examining the components of certain payments deemed problematic by shareholders based on failed votes.

Looking Back at 2012

Through Oct. 4, ISS tracked 94 say-on-golden-parachute proposals in 2012, of which 34 were Russell 3,000 (R3K) companies, two were S&P 500 constituents, and 58 were other firms, including large caps Aon plc and Sunoco. Of these, ISS is tracking just three that failed to garner majority support.

The first say-on-golden-parachute proposal to fail in 2012 was at Advance America, Cash Advance Centers, a Spartanburg, South Carolina, payday loan company, where ISS recommended shareholders oppose exit payments due to what it deemed "problematic" modifications to change-in-control agreements with the company's executives. Specifically, in connection with the merger agreement, on Feb. 15 the company amended agreements previously entered into with its president and CEO J. Patrick O'Shaughnessy and chief financial officer James A. Ovenden, to provide modified single-triggered retention payments to these executives in lieu of their prior double-triggered severance payments. In addition, the company also made special equity grants and adjustments to the executives' base salaries, without a disclosed rationale and subsequent to the announcement of the merger agreement, which raised significant concerns.

Concerns about the proposed payments resonated with shareholders, who opposed the resolution with 52.1 percent of the votes cast against. Notably and by comparison, the merger proposal received near unanimous support (99.6 percent), suggesting that many investors clearly viewed the say-on-golden-parachute resolution as discrete from the underlying change-in-control transaction.

In another example, Ariba shareholders voting at an Aug. 29 special meeting failed to back the advisory golden parachute proposal, though strongly endorsed the related merger agreement whereby German technology giant SAP would buy the cloud networking company for $45.00 per share in cash. Among shareholder voting, 99.9 percent supported the merger deal with SAP, while just 49.5 percent supported the related exit payments. As in other cases, a number of problematic provisions were added prior to the merger vote, including the possibility of paying Ariba's CEO's cash severance without a qualifying termination of employment and deeming performance share metrics achieved at the 200 percent level solely because the company entered into a merger agreement.

A third failed say-on-golden-parachute vote this year also occurred on Aug. 29 at Interline Brands, a marketer and distributor of broad-line maintenance, repair and operations products, where shareholders' opposition marked the highest level recorded, at nearly 62 percent, since implementation of the golden parachute vote in the spring of 2011. At Interline, the CEO's double triggered cash severance had been recently modified to single trigger, and the outstanding performance-based equity was being paid out at maximum attainment level without regard to the achievement of underlying goals.

A significant difference evidenced this year between support levels on the merger transaction and the related say-on-golden-parachute proposal suggests some investors are choosing to abstain on exit pay ballot items despite rendering a vote in favor of the transaction, while others may simply vote against parachute proposals as a matter of course, irrespective of voting decisions on the underlying mergers.

Specifically, during the period studied, the average support on parachute proposals across ISS' coverage universe was approximately 81 percent, while the underlying merger transactions averaged above 95 percent of votes cast. Given average shareholder support across the R3K on management say-on-pay proposals during the 2012 proxy season stood above 90 percent, the relatively lower level of support on parachute proposals warrants scrutiny.

Parachute Payments in Practice

Of the 94 companies studied, CEO cash severance was double-triggered at 57 companies ( 60.6 percent). By comparison, the cash severance for NEOs other than the CEO was double-triggered at 60 companies, representing 64 percent.

At 10 companies examined, there were no existing, legacy agreements in place, and executives were not entitled to traditional severance payments. For CEOs, a total of 20 companies maintained single- or modified single-trigger legacy arrangements, while seven had entered into new agreements with their CEOs containing what ISS deemed to be problematic features during the most recent year under review.

Meanwhile, 11 companies did not maintain or pay any severance to NEOs other than the CEO in transactions that came to a shareholder vote in 2012; however, 18 maintained single- and modified single-triggers in legacy arrangements and five of those had adopted them in 2012. Within this universe, 39.4 percent of companies maintained or newly enacted (cash) severance triggers of concern to investors.

In terms of triggers for the acceleration of unvested, outstanding equity awards held by NEOs, the prevalent practice appears to be the single-trigger, i.e., automatic vesting acceleration; however, the most prevalent arrangement is that boards maintain discretion to determine the outcome in cases of change-in-control merger transactions, and it appears that boards exercise this discretion to provide automatic accelerated vesting of equity awards a majority of the time, since that was the outcome at 80 out of 94 companies studied (85 percent).

Excise tax provisions in existing agreements were observed at 34 out of the 94 companies. However, just 16 actually paid excise taxes to NEOs, as the rest did not trigger 280G tax liabilities.

In addition to potential severance, retention payments to NEOs were seen at 21 out of the 94 companies. While single-triggered in most cases, these payments were generally reasonable in magnitude, and accompanied double-triggered severance payments. Retention bonuses replaced severance payments in at least two instances.

As noted above, the most prevalent practice of some concern to investors is the single-trigger acceleration of unvested equity awards held by NEOs, seen at 80 out of the total 94 companies. Companies which in practice disclosed two or more problematic features in their golden parachute proposals made up of 41.5 percent of the entire universe, while companies with at most one problematic feature represent a majority at 58.5 percent.

Shifting Investor Focus: Single-Trigger Equity Acceleration

Notably, ISS tracked a few cases this year where investors displayed opposition to golden parachute payments despite double-triggered cash severance payments and no excise tax gross-ups. At Delphi Financial Group, for example, the say-on-golden-parachute resolution passed with just 56 percent support even though no executive was entitled to a cash severance payment. They were, however, entitled to $34.8 million on a combined basis, $33.5 million of which was comprised of single-trigger equity acceleration and related excise tax gross-ups.

At Benihana, meanwhile, the golden parachute proposal squeaked through with 50.3 percent of votes cast, despite a double-triggered cash severance arrangement with the CEO. However, $5.6 million of the total potential golden parachute payments to all NEOs (in the amount of $9.3 million) was generated from single-triggered acceleration of unvested, outstanding equity awards held by Benihana NEOs.

While some argue that single-trigger equity acceleration provides executives an incentive to pursue transactions with potentially a higher premium to shareholders, there has been growing concern that such golden parachutes are not necessarily beneficial, and some investors, as evidenced by voting in 2012, appear to view these payments as windfalls without the loss employment.--Oguz (Oz) Tolon, U.S. Compensation Research

Europe, Middle East, & Africa

EU to Require Net Short Position Disclosures

Earlier this year the European Parliament and Council issued a regulation on the transparency of net short positions, which took effect in all member states Nov. 1.

European Regulation 236/2012 provides a definition of a short-position and a long-position under Article 3, and continues under Chapter II of the regulation with transparency requirements of net short positions. The net short position is the remaining position after deducting the gross long position from the gross short position.

Any investor who has a net short position of 0.2 percent in relation of the issued share capital of publicly listed company will be required to notify local market authorities. In cases where the net short position reaches 0.5 percent of the issued share capital, the net short position is required to be publicly disclosed.

Moreover, each 0.1 percent above the aforementioned thresholds also triggers these notification requirements. The notification should include the identity of the investor, size and relevant position, and date when the net position was created, changed, or ceased to be held. All this information should be provided to the relevant local authority by 3:30 p.m. on the following day the net short position was created.

In addition to this new regulation, it appears likely the Dutch senate will approve a bill that would set additional transparency and disclosure requirements with regard to gross short positions. Gross short positions that exceed the minimum threshold of 3 percent relative to the issued capital of Dutch listed companies will need to be disclosed to the Dutch Authority Financial Markets. The new transparency requirements on short positions would help identify the actual economic exposure of investors and could possibly help identify cases of (partial) "empty voting," advocates of the rules say.--Robbert Gerritsen, European Research

ESG Monitor

Northern Trust to Use MSCI for ESG Research, Indices

Northern Trust announced Nov. 1 it had enhanced its range of solutions for institutional investors seeking socially responsible investing options through an agreement with MSCI, the parent of Governance Weekly publisher, Institutional Shareholder Services.

Using MSCI's environmental, social, and governance (ESG) research, ratings, and screening tools, Northern Trust says it will be able to provide customizable ESG solutions to its clients.

"Northern Trust has a broad commitment to responsible investing and is dedicated to providing our clients with customizable index solutions that help them meet their ESG objectives," said Steve Potter, global head of asset management at Northern Trust. "We are increasingly seeing growth in ESG portfolios as investors become more aware of ESG factors and their possible influence on a corporation's financial profitability and brand reputation."

"Our clients are looking for thoughtful, customized ESG solutions which address their requirements not only for good governance and social intent, but in generating returns," he added.

Northern Trust clients looking to integrate ESG factors in their investment portfolios can, through the agreement with MSCI, now access 79 distinct indices ranging from global ESG best in class to regional responsible investing themes, such as clean technology, and further customize these according to their unique requirements, the company said in a Nov. 1 press release. Northern Trust is also working with MSCI to create custom ESG indices for passive institutional funds.

According to a study conducted by Northern Trust in 2011, Customized Beta - Changing Perspectives on Passive Investing, 44 percent of investors surveyed indicated that their responsible investing allocations had increased in the past two years.--Subodh Mishra, Governance Exchange

ISS Corporate Services, a unit of MSCI, recently announced it would make available MSCI's ESG Manager available to corporate issuers. Inquiries about product demonstrations and related services can be sent to, or contact ISS Corporate Services Customer Support at +1.301.556.0570.

Pension Fund Alleges Hershey Vendor Use of Child Labor

The Louisiana Municipal Police Employees' Retirement System filed suit Nov. 1 against The Hershey Company to inspect the company's books and records, alleging cocoa it sources from the West African countries of Ghana and the Ivory Coast come from "unlawful child and forced labor."

In seeking a court order compelling Hershey to make its corporate records open to shareholder inspection, the fund maintains that the company's board has long known about the use of "tainted cocoa," yet has persisted in using ingredients from suppliers in West Africa, according to a statement announcing the suit put out by the plaintiff's attorneys, Delaware-based Grant & Eisenhofer P.A.

The plaintiffs contend that illegal child labor practices, including the use of children under 10 to harvest cocoa in the field, are rampant in West Africa and that the board has "consistently permitted Hershey to engage in unlawful acts in violation of its certificate of incorporation under Delaware law, and consequently has breached its fiduciary duties."

The complaint alleges that Hershey has failed to disclose the names of its cocoa suppliers, although its 2011 Corporate Social Responsibility (CSR) report includes Ghana and the Ivory Coast as "Major Sourcing Countries."

"Working with many public and private partners, The Hershey Company is committed to eliminating the worst forms of child labor in cocoa-producing regions," the Pennsylvania-based confectioner said in its 2011 CSR report. The report also noted that the group CocoaLink, which is funded entirely by The Hershey Company and developed and implemented in partnership with the World Cocoa Foundation and the Ghana Cocoa Board, is the "first corporate program endorsed by the U.S. Department of Labor as part of its $17 million Framework of Action to combat the worst forms of child labor in West Africa."--Subodh Mishra, Governance Exchange


Survey: Corporate Leadership Lacking on Social Media

A new Conference Board survey finds limited use and understanding of social media among corporate directors and managers, suggesting the need for efforts to aid board leaders in closing the gap.

Survey findings, released in a report titled "What Do Corporate Directors and Senior Managers Know about Social Media?" finds that while 90 percent of respondents claim to understand the impact that social media can have on their organization, just 32 percent of their companies monitor social media to detect risks to their business activities and 14 percent use metrics from social media to measure corporate performance.

Moreover, only 24 percent of senior managers and 8 percent of directors surveyed receive reports containing summary information and metrics from social media, according to a Conference Board blog highlighting key findings. Notably, half of the companies do not collect this information at all, the survey finds.

The survey findings also suggest personal familiarity with social media that fails to permeate at the organizational level.

Nearly two-thirds of respondents use social media for personal purposes, and 63 percent for business purposes. Of those who use social media, 80 percent have a LinkedIn account and 68 percent have a Facebook account, demonstrating that executives and board members are familiar with this medium.

Still, only 59 percent of companies in the survey use social media to interact with customers, 49 percent to advertise, and 35 percent to research customers, the Conference Board noted. Approximately 30 percent use social media to research competitors, research new products and services, or communicate with employees and other stakeholders.--Subodh Mishra, Governance Exchange

Large Cap Director Pay Shows Modest Increase, Study Finds

A new study of director compensation in 2012 finds pay for large capital company board members increased just 2 percent to a median total value of $229,000. By comparison, mid cap directors saw a 5 percent jump to $178,000, while small cap directors saw gains of just 1 percent to $118,000, according to compensation consultant's F.W. Cook's 2012 Director Compensation Report.

The report, which looks at 240 companies ranging in size from less than $1 billion in market capitalization, to between $1 and $5 billion, and greater than $5 billion, finds large capital firms tend to have "simpler" compensation structures than smaller peers that are typically made of retainers for board and committee chair service, as well as equity awards delivered in full-value stock of stock units.

The study also looked at companies across four sectors, including financial services, industrial, retail, and technology, to identify trends by industry. Notably, the financial services sector pays the highest portion of total director pay for board service in cash at 56 percent, compared with technology firms at the other end at just 34 percent of compensation. Not surprisingly, financial services had the lowest median total pay for directors, while technology was the highest.

On the issue of stock-based pay, the study finds that equity compensation continues to shift toward full-value stock awards determined under annual fixed-dollar formulas, and away from options and fixed-share grants. There was approximately a 25 percent year-over-year decline in the number of companies that utilize stock options as a means of compensation from our prior year study. Still, 34 percent of technology companies utilize options for director pay, while the figure stands at less than 15 percent for all other sectors studied.--Subodh Mishra, Governance Exchange

Access the F.W. Cook report via Governance Exchange.

ISS News

ISS Extends 2013 Voting Policy Comment Period

The ISS Global Policy Board invites all financial market participants to provide feedback through Nov. 9 on proposed updates to ISS' benchmark proxy voting guidelines.

To submit a comment, please send via e-mail to Please indicate your name and organization for attribution. While ISS will consider all feedback that it receives, comments will not be published without attribution. All comments received will be published as received, unless otherwise requested in the body of the e-mail submission.

Meetings to Watch

This section alerts readers to forthcoming shareholder meetings that have particularly interesting or controversial issues on the agenda.

Oracle Corp.


Nov. 7, 2012


Long-term shareholders investing in Oracle have done well, but CEO Lawrence J. Ellison, the third-wealthiest man in America (according to Forbes), continues to be overly rewarded through successive mega option grants. The computer software company's long-term incentive approach has been to award multi-million stock options to the CEO and other NEOs for the past several years. While the executive may only benefit from increases in the company's stock price for stock option grants, the upside potential is unlimited and especially generous with mega-sized options, and there is little downside risk to the executive over a 10-year grant term. CEO Ellison has reaped over $1 billion in realized option gains for the past 10 years and will continue to earn sizable gains through his multiple mega option grants as long as the company's stock price is higher than the option exercise price. Additionally, Ellison has pledged 139 million shares (valued at approximately $3.7 billion), up from 40 million last year, as collateral to secure certain personal interests, raising some potential risk for shareholders. At the company's 2011 annual meeting, shareholders expressed opposition to the company's pay practices with only 52.4 percent of external shareholders (66.6 percent including Ellison's beneficial ownership at 22 percent and other NEOs) supporting the company's say-on-pay proposal. The lack of specific actions taken to address the 2011 say-on-pay vote could be of concern at this year's annual meeting. Four shareholder proposals on the agenda would require an independent board chairman, adopt retention ratio for executives/directors, adopt a policy of pro-rata vesting of equity awards, and increase disclosure of executive compensation.--Nathan Thompson, U.S. Research

Fortescue Metals Group


Nov. 14, 2012


Although the current remuneration levels at the Australian iron ore producer are considered appropriate in respect of the peer group, some of the practices have a number of shortcomings, including no disclosure of short-term incentive outcomes for fiscal year 2012, weak performance hurdles of the long-term incentive plan, and an excessive increase in maximum remuneration opportunities as a result of the new LTI plan. As a result, some shareholders may choose to vote against the remuneration report at this annual meeting. The vote, which is required by the Australian Corporations Act, is advisory only and not binding on the board. --Daniel J. Smith and Michael Chandler, Australian Research

Sims Metal Management


Nov. 15, 2012


Serious concerns are being raised regarding the Australian metal recycling company's remuneration practices. During the year, bonus payments were made despite the company's recording a substantial statutory loss and the company's share price declining significantly over the period. Also, the CEO was awarded a retention payment of $500,000 in order to extend his contract for another year. All of this will be part of the remuneration report that will be put to an advisory vote by shareholders at this year's annual meeting. Also on the agenda, shareholders are asked to approve the grant of performance rights and options to the CEO, a substantial portion of which comprises options with no performance hurdles other than continued service and a market based exercise price.--Daniel J. Smith and David Sneyd, Australian Research

Comments Welcome: For comments on the content of the newsletter, please contact Subodh Mishra. To ask questions, comment, or participate in discussions on these articles, please go to Governance Exchange. You can also find a searchable database of Governance Weekly articles on Governance Exchange.

Governance WeeklyTM is published by ISS, an MSCI brand.

Mission Statement: ISS' flagship publication on corporate governance, Governance Weekly, provides news and analysis of corporate governance developments, including insights and reporting found in no other media. While we exercise due care in compiling this newsletter, we assume no liability with respect to the consequences of relying on this information for investment or other purposes.

Head of Governance Exchange - Subodh Mishra | Editor - Mason McAllister | Production Editor - Rob Yates
ISS, 702 King Farm Road, Suite 400, Rockville, Maryland 20850| |Governance Exchange |ISS on Twitter

© 2012 ISS. All Rights Reserved. ISS and the ISS logo, Governance Weekly, and other company service names and logos are protected under trademark and may not be used without permission.

Click to view this email in a browser

If you no longer wish to receive these emails, please reply to this message with "Unsubscribe" in the subject line or simply click on the following link: Unsubscribe

ISS | An MSCI Brand
702 King Farm Blvd
Suite 400
Rockville, Maryland 20850

Read the VerticalResponse marketing policy.

Try Email Marketing with VerticalResponse!