Risk Metrics Updates Voting Policies

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					DLA Piper | Publications | RiskMetrics Updates Voting Policies

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16 DEC 2008

RiskMetrics Updates Voting Policies

by Barbara Nepf and Mark Hoffman

RiskMetrics Group recently released the 2009 updates to its U.S. Corporate Governance Policy. These updates highlight changes to the voting guidelines that RiskMetrics will follow when advising institutional shareholders how to vote on certain corporate ballot measures for shareholder meetings held after January 31, 2009. Since RiskMetrics advises so many large shareholders, its policy positions may determine whether a proposal will fail or whether a nominee will be elected. Below is a brief overview of some of the new voting policies: Performance/Governance Evaluation for Directors. For 2009, RiskMetrics will recommend a withhold or against vote on all director nominees of Russell 3000 companies if (a) the company’s one- and threeyear total shareholder returns put it in the bottom half of its four-digit global industry classification (GICS) group; and (b) the board “lacks accountability and oversight.” Review of oversight would include consideration of (among other things): structures that could lead to board and management entrenchment, such as: a classified board; supermajority voting requirements; majority voting with no carve-out for contested elections; shareholders lacking authority to call special meetings or act by written consent; dual-class structure; and


DLA Piper | Publications | RiskMetrics Updates Voting Policies

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non-shareholder-approved poison pill; recent board and management changes; and board independence. RiskMetrics may also consider the company’s five-year total shareholder return and operational metrics. Previously, RiskMetrics used a combination of four five-year measures, including total shareholder return and sales growth, to assess corporate performance in determining whether to withhold director votes. Poor Pay Practices. If RiskMetrics believes a company has “poor pay practices,” it will recommend a withhold or against vote for compensation committee members, the CEO and possibly the entire board of directors. RiskMetrics will also recommend a vote against proposed equity plans that reflect poor pay practices. RiskMetrics has updated its list of potential poor pay practices to include the following: any tax gross-ups on perks; dividends or dividend equivalents paid on unvested performance shares or units; and new or materially amended change-in-control or severance arrangements (automatic renewals and amendments to comply with Section 409A are not considered under this policy) that: pay out upon voluntary resignation; provide for payment of excise tax gross-ups; or could result in payments absent an actual change of control.

The 2009 Policy also includes an updated list of “best pay practices,” such as tying compensation to long-term strategic goals and limiting employment contracts. Resetting and Repricing. RiskMetrics has emphasized that general market declines alone will not be an acceptable justification for repricing stock options or resetting performance targets. RiskMetrics may consider an against/withhold vote regarding all compensation committee members if performance metrics are modified without adequate explanation. RiskMetrics will continue to evaluate option-repricing or -exchange proposals on a case-by-case basis. Below are some of the current considerations: historic trading patterns – options should not be likely to be back “in the money” over the near term; rationale for the repricing (repricings within a year of a stock-price decline will be subject to particular scrutiny); whether it will be a value-for-value exchange; whether surrendered options will be added back to the plan reserve; whether the new options will be subject to a blackout period or immediate vesting; the new options should be priced at or above fair market value and have the same term as the replaced options;


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surrendered options should be at least two or three years old and their exercise price should be above the 52-week high stock price; and executive officers and directors should be excluded. Shareholder Proposal Regarding Separation of Chair/CEO Roles. RiskMetrics will continue to recommend votes in favor of shareholder proposals requiring an independent chairman unless the company meets certain performance tests and maintains a counterbalancing governance structure including a lead director with specified duties and authority. For 2009, RiskMetrics is updating this policy to: specify that “egregious” compensation practices will support a vote in favor of such proposals; revise the performance test to correspond with the one- and three-year TSR tests described above; and remove the current requirement that to satisfy the “counterbalancing governance structure” test the company must publicly disclose certain facts about its lead director and chairman. Management Proposal to Adopt NOL Pill. RiskMetrics will differentiate the treatment of traditional poison pill plans from the treatment of poison pills adopted by management in order to preserve beneficial tax treatment of net operating losses (NOL Pills). RiskMetrics is generally more favorably disposed to NOL Pills than traditional pills and will consider the following factors, among others, regarding a management proposal to adopt an NOL Pill: the trigger; the value of the NOLs; the term; and shareholder protection mechanisms. In light of these new policy updates, companies would be well advised to evaluate their TSR and pay practices, as well as any special ballot measures for which they intend to seek shareholder support, in advance of the upcoming proxy season.


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