This question asks for views on the use of adjusted—or non-GAAP—metrics for compensation purposes and the types of adjustments that should be viewed as appropriate.  

 

Business Roundtable believes that decisions by compensation committees or boards with respect to adjustments to metrics for compensation plans should not be second guessed by ISS, particularly where the company has disclosed the reasons for the adjustments.  Incentive compensation programs are designed to drive long-term corporate performance and shareholder value by motivating employees to increase company financial performance and contribute to the company’s operational successes.  To achieve these goals, adjustments to performance metrics are often necessary and are in accordance with a company’s long-term strategy.  For these reasons, boards must maintain the flexibility and discretion to customize incentive compensation measures to best incent employees and ultimately drive shareholder value.  This includes making appropriate adjustments to GAAP-based financial information, taking into account a company’s specific facts and circumstances.

 

For example, adjustments may be necessary so that compensation plans neither reward nor penalize an individual for results that have been materially affected by factors entirely outside the control of the compensation plan’s participants.  Further, a compensation committee may determine that excluding the effect of acquisition-related benefits or expenses is appropriate to avoid rewarding or penalizing plan participants for benefits or costs associated with acquisitions.  Similarly, a compensation committee may determine that is appropriate to exclude the impact of unusual litigation expenses, settlement amounts or accounting benefits or charges because, while these benefits or expenses may impact corporate earnings, they often vary significantly from year-to-year and are not typically reflective of ongoing business activities or operations.  Finally, some compensation committees determine that it is appropriate to exclude benefits or charges for large one-time events incurred in cashing out terminated vested pension plan participants, because these expenses are incurred to reduce potential future volatility, are non-recurring and do not reflect current or future company operations or performance.

 

 

This question asks about which board-adopted proxy access restrictions not contained in a majority-supported shareholder proposal should be viewed as “problematic” under ISS’s board responsiveness policy.

 

Rather than penalize boards that do not follow a one-size-fits-all approach, ISS policy should accommodate adoption of corporate governance—including proxy access—provisions that are the product of shareholder engagement, are disclosed and described by the company and that reflect a company’s specific circumstances.  Business Roundtable’s Principles of Corporate Governance (2012) reflect our belief that “it is the responsibility of the corporation to engage with long‐term shareholders in a meaningful way on issues and concerns that are of widespread interest to long‐term shareholders, with appropriate involvement from the board of directors and management.”  In the Principles, we also encourage boards to “seriously consider issues raised by shareholder proposals that receive substantial support and . . . communicate [their] response[s] to proposals to the shareholder-proponents and to all shareholders.”

 

Moreover, under state corporate law, directors are expected—and indeed, have a legal obligation—to exercise informed, independent judgment to make decisions that are in the best interests of the corporation and its shareholders.  As a result, when deciding the appropriate response to a shareholder proposal, a board must take into account all factors that the board deems relevant—including, but not limited to, the views of shareholders—in order to reach a decision that is in the best interests of the corporation and its shareholders.  Thus, ISS should not recommend votes “against” directors under the board responsiveness policy where a company’s disclosures demonstrate that the board-adopted proxy access policies were informed by engagement with its shareholders and the company’s specific circumstances.

 

 

The survey asks other questions, including regarding board-adopted amendments to bylaws and charters that “materially diminish shareholders’ rights,” whether to further limit directors’ service on public company boards and tightening ISS’s definition of independence as it applies to former executives and former employees of firms providing significant professional services to the company.

 

Consistent with our comments above, Business Roundtable believes that ISS should not adopt one-size-fits-all corporate governance policies, thereby ignoring the unique and dynamic character and culture of the companies that have built and are the future of the U.S.’s innovation-based economy.  Some of these unique characteristics that must be balanced are industry segment, market capitalization, governance profile, company life-cycle, competitive dynamics, shareholder base and other factors.

 

Companies already have policies and procedures that address many of the issues mentioned above.  For example, nominating committees assess directors’ past performance and ability to contribute to the board, including the ability to devote sufficient time to the board as well as past meeting attendance, in determining whether to recommend them for election.  Business Roundtable believes it is the primary responsibility of the nominating committee, and ultimately the board, to determine whether a director is able to commit the time required to serve as an effective board member, consistent with each director’s fiduciary duties to the company and its shareholders.