US Audit/Board Policy

Frequently Asked Questions

Display allUpdated: April 17, 2012

Audit

1. Why did ISS put the "Tax Fees" under "Other Fees"?

   ISS recognizes that certain tax-related services, e.g. tax compliance and preparation, are most economically provided by the audit firm. Tax compliance and preparation include the preparation of original and amended tax returns, refund claims, and tax payment planning. However, other services in the tax category, e.g.  tax advice, planning, or consulting fall more into a consulting category. Therefore, these fees are separated from the tax compliance/preparation category and are added to the Non-audit fees. If the breakout of tax compliance/preparation fees cannot be determined, all tax fees are added to “Other” fees.

2. What disclosure is needed so that ISS will not add Tax Fees to Other Fees?

   Provide as a footnote to the audit fees table a breakout of the tax fees: those related to tax compliance and preparation fees, i.e. the preparation of original and amended tax returns, refund claims, and tax payment planning, vs. those related to all other services in the tax category, such as tax advice, planning, or consulting.

Board - Voting on Director Nominees in Uncontested Elections

Board Accountability

1. When does ISS apply the classified board structure policy: if a director responsible for a governance problem is not up for election due to a classified board, ISS recommends withhold on all nominees?

   This policy is generally not applied if the director in question has a governance issue related only to him or herself, (e.g., poor attendance, overboarded, or is an Affiliated Outside Director serving on a key committee), unless the issue is considered egregious.  It is applied when ISS would normally recommend withhold on all the members of a committee - e.g., the compensation committee for problematic pay practices or a pay for performance disconnect, or  the audit committee for continued material weaknesses in internal controls - and no one on the committee is a nominee on the ballot. The reason for this is that a classified board further entrenches management and prevents shareholders from holding the responsible individuals accountable.

2. What modification must be made to a pill that has a dead hand provision to address an ISS withhold recommendation against all nominees for this issue?

   The amendment would need to eliminate all requirements in the Rights Agreement that actions, approvals and determinations taken or made by the Company’s Board of Directors be taken or made by a majority of the “Continuing Directors” (sometimes also referred to as the disinterested directors).

3. What modification must be made to a pill that has a slow hand (modified dead hand) provision?

   Sample language:

   "The Agreement is hereby amended to remove the following sentence from the [ # of paragraph]: The Rights generally may not be redeemed for one hundred eighty (180) days following a change in a majority of the Board as a result of a proxy contest."

4. What if a company adopts a poison pill before it is public?

   In the case of an newly public company, ISS will recommend withhold on the entire board if the pill is not put to a vote at the first annual meeting of public shareholders or if the company does not commit to putting the pill to a shareholder vote within 12 months following the IPO.

5. What commitment language is ISS looking for concerning putting the poison pill to a binding shareholder vote?

   Sample language:

   "On [date] the Board of Directors determined that it will either (i) include in its proxy statement for the Company’s [next year's] Annual Meeting of Stockholders  a proposal (the “Rights Plan Proposal”) soliciting stockholder approval of the Company’s existing stockholder rights plan, or (ii) repeal the stockholder rights plan prior to the [next year's] Annual Meeting. In the event that the Company elects to include the Rights Plan Proposal in the proxy statement, and the Company does not receive the affirmative vote of the holders of [voting requirement], then the Company will promptly take action to repeal the stockholder rights plan."

Board Responsiveness

1. When ISS is looking for board responsiveness to shareholder proposals and management say-on-pay proposals, how does ISS calculate "majority of votes cast"?

   We use: For/ (For + Against).  Abstentions are not counted. We do not use the base the issuer considers to determine if a proposal passed or not.

2. ISS looks for a board response if the shareholder proposal got a majority of votes cast in the last year and in one of the 2 years before that. What if the proposal was on the ballot all 3 years and received majority support in years 1 and 3, but did not receive a majority of cast in the middle year?

   In that case, it would not trigger ISS’ policy. We are looking to see if a proposal received a majority of votes cast in 2 consecutive voting opportunities. If the proposal were on the ballot all 3 years, but did not receive a majority of cast in the middle year, then it would not have received the majority of shares cast in 2 consecutive voting opportunities.

3. What does ISS consider as "responsive" to majority-supported shareholder proposals?

   Responding to the shareholder proposal means either implementation of the proposal; or, if the matter requires a vote by shareholders, a management proposal on the next annual ballot to implement the proposal. In general, the proposal should have a management recommendation of FOR. A recommendation other than a FOR, (e.g.” None” or “Against”) will generally not be considered as sufficient action taken. Furthermore, if the test has not yet been met (e.g. the proposal received only one year of majority of votes cast), then ISS will consider a management proposal with a management recommendation other than "FOR" the equivalent of a shareholder proposal when applying the test the following year.

4. How does ISS treat its withhold policy for ignoring majority support in the case where the proponent of a shareholder proposal is satisfied?

   ISS looks to the actions of the company in relation to the proposal that has been submitted.  Shareholders are voting on the demands placed on the company pursuant to the language of the proposal.  Therefore, if a proposal receives majority support from shareholders, then, in the absence of action taken on the proposal, the company would receive withhold recommendations from ISS regardless of whether or not the proponent is satisfied.

5. If a shareholder proposal on annual elections calls for declassification in one year, but the company phases in the declassification over the next 3 years (allowing current directors to serve their full elected terms), is that sufficient implementation?

   Although it is preferable to declassify as quickly as possible, in our 2010 policy survey, 64 percent of our institutional clients said that declassification over a phased-in term should be considered a sufficient response to the shareholder proposal, so ISS considers this a sufficient response. However, please note that in GRId, question 77, fewer points are awarded for a company transitioning to annual elections than one that has annual elections.

6. If a shareholder proposal for shareholders to call special meetings calls for a threshold of 10%, but the company implements a higher threshold, or requires that only one shareholder must hold that amount, is that sufficient?

   No. According to our 2010 policy survey, 56 percent of our institutional clients did not accept this as sufficient.  A threshold above 10%, or one that says that shareholders cannot group together to achieve that threshold, is not a sufficient response.

7. If the company gives shareholders the ability to call special meetings, but restricts the potential agenda items in such a meeting, (e.g. it excludes any agenda items that were on the previous annual meeting agenda, or will be on the upcoming annual meeting agenda), is that sufficient?

   No. Implementing the right to call special meetings but restricting the agenda is not considered a sufficient response to the proposal, according to 71 percent of our institutional clients in our 2010 policy survey. For example, it would prohibit shareholders from calling a special meeting to elect a dissident slate, as the annual meeting agendas would include election of directors on the ballot.

8. If a shareholder proposal calls for reducing the vote requirement on charter/bylaw amendments to a majority of shares cast, and the company reduces it for most provisions, but not all, is that considered sufficient?

   No. Generally it would require that all provisions be reduced to the majority of shares cast. However, exceptions may be made in a case where the supermajority applies only to a provision that would be antithetical to shareholders' rights, such as the ability to reclassify the board.

9. If a shareholder proposal calls for reducing the vote requirement on charter/bylaw amendments to a majority of shares cast, and the company reduces the level to majority of shares outstanding rather than shares cast, is that considered sufficient?

   In general, no. According to our 2010 policy survey, 55 percent of our institutional clients considered that a majority of shares outstanding in lieu of majority of shares cast would not be considered a sufficient response. However, ISS will take a case-by-case approach to this response; for example, if the company consistently uses a majority of outstanding standard for all voting items, including the implementation of both management and shareholder proposals, ISS will consider this a sufficient response.

   Reducing the supermajority to a lower supermajority (e.g. 75% to 66.7%), would not be considered a sufficient response according to 71 percent our institutional clients surveyed.

10. What happens if a director received less than a majority (50%) of votes cast in the previous year?

    If any director receives a majority of votes withhold/against him or her, ISS will recommend withhold/against the entire board the following year if the underlying issue(s) causing the high level of opposition is not fixed.

Director Independence

1. In the proxy analysis, why did ISS classify a director as an "affiliated outsider"?

   Please look at the "Affiliation Notes" under the Board Profile section of the proxy analysis. This will tell you the nature of the affiliation, and whether it is material under ISS' definitions. The definitions are available on page 15 of our 2012 U.S. Proxy Voting Summary Guidelines.

2. When ISS looks at whether a board is “majority independent”, whose definition of independence are you using?

   ISS is using our definition of “independent outside director” to determine if the board is majority independent.

3. What if the board is 50% independent outsiders and 50% insiders/affiliated outsiders?

   50% is not a majority. ISS would not consider this board majority independent.

4. What public commitment can a company make concerning adding an independent director (and thus making the board majority independent)?

   Sample language:

   “We are conducting a director search in the exercise of due care for a candidate as soon as practicable following our Annual Meeting of Stockholders.  Our new director will not only satisfy the independence requirements under the listing requirements, but will have no material connection to our Company (that is, no material financial, personal, business, or other relationship that a reasonable person could conclude could potentially influence boardroom objectivity) prior to being appointed to the Board. We commit to having this new director in place within no more than six months after the upcoming shareholder meeting.”

5. What steps can a company take to change a vote recommendation on an affiliated outside director serving on a key committee?

   For ISS to change its vote recommendation, either the director needs to step off the committee, or the material relationship causing the affiliation (e.g. professional relations with a firm associated with the director) would need to be terminated.

6. What disclosure can a company make concerning a non-independent director stepping off a committee?

   Sample language:

   “As of [date no later than the upcoming annual meeting date], [Director Name] will resign as a member of the [Committee].”

7. What disclosure can a company make concerning the discontinuation of the purchase of services from an affiliated director’s firm, thus making the director independent?

   Sample language:

   “Effective [today], the Company will no longer purchase services from the [service provider] as long as [affiliated Director] serves on the Company's Board of Directors.”

   Please note this disclosure will not change the classification of the director if the fees are sufficient to trigger the look-back period under the company’s listing standards. (ISS is not going to classify a director as independent when the board is unable to do so.)

8. How does the definition of affiliation differ in ISS’ standards for professional vs. transactional relationships?

    Both are derived from the definition of affiliation in NASDAQ Rule 5605—but the affiliation under professional services is more strict: a director (or immediate family member) only has to be an employee of the organization providing the professional service, as opposed to an executive officer in the case of a transactional relationship for him to be considered affiliated.

9. Are insurance services considered professional or transactional?

   Insurance services are considered professional services unless the company explains why such services are not advisory. These services are frequently advisory in nature, involve access to sensitive company information, and have a payment structure that could create a conflict of interest. Commissions or fees paid to a director (or to an immediate family member or an entity affiliated with either the director or the immediate family member) are an indication that the relationship is a professional service. The case where a company has an insurance policy with and pays premiums to an entity with which one of the company’s directors is affiliated will be considered a transactional relationship. However, the burden will be on the company to explain why the service is not advisory.

10. Are information technology services considered professional or transactional?

    Information technology (IT) services are considered professional services unless such services are tech support. Although tech support could be considered advisory in nature, generally the provision of such services is tied to a previous transactional relationship, typically a purchase of hardware or software. The provision of tech support does not involve strategic decision-making or a payment structure which could create a conflict of interest.

11. Are marketing services considered professional or transactional?

    Marketing services are considered professional services unless the company explains why such services are not advisory. Certain types of marketing services could reasonably be considered advisory in nature, involving access to sensitive company information or to strategic decision-making, such as: market research, market strategy, branding strategy, and advertising strategy. Other marketing services, such as the sale of promotional materials, sponsorships, or the purchase of advertising, are transactional in nature. However, the burden will be on the company to make the distinction.

12. Are educational services considered professional or transactional?

    Educational services are generally considered to be transactional in nature. Educational services are typically not advisory and do not generally involve access to sensitive company information or to strategic decision-making.

13. Are lobbying services considered professional or transactional?

    Lobbying services are considered professional services. These services are advisory in nature and have a payment structure that could create a conflict of interest.

14. Are executive search services considered professional or transactional?

    Executive search services are considered professional services. These services are advisory in nature and have a payment structure that could create a conflict of interest.

15. Are property management and realtor services considered professional or transactional?

    Property management and realtor services will be considered professional services. These services are advisory in nature and have a payment structure that could create a conflict of interest.

16. What happens when the company provides professional services to the director or an entity associated with the director?

    In the case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, the relationship is considered transactional rather than professional. Since neither the director nor the entity with which the director is affiliated is receiving fees for the service, there is no direct financial tie which could compromise that director’s independence.

17. How does ISS assess the terms of voting agreements or "standstill" agreements that arise from issuers' settlements with dissenting shareholders?

    In addition to the classification of any directors that the dissident shareholder may have placed on the board pursuant to our Director Independence policy and section 2.15 of our Categorization of Directors table, ISS will examine the terms of the standstill agreement and any other conflicting relationships or related party transactions and, pursuant to our Board Accountability policy, may issue negative recommendations affecting the re-election of Nominating Committee members if we deem any terms of or circumstances surrounding the agreement to be egregious.

Director Competence

1. What is the SEC’s disclosure requirement on director attendance?

   The SEC requires the following proxy disclosure for exchange-listed companies:

   “Name each incumbent director who during the last full fiscal year attended fewer than 75 percent of the aggregate of:

   (i) The total number of meetings of the board of directors (held during the period for which he has been a director); and

   (ii) The total number of meetings held by all committees of the board on which he served (during the periods that he served).”

   http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=dff06bb8466f3e795de4ae8e3255ceb6&rgn=div8&view=text&node=17:2.0.1.1.11.5.31.7&idno=17

2. What if the company is not listed on an exchange? What attendance disclosure is needed?

   ISS is looking for similar attendance disclosure for non-listed companies as for listed companies.

3. What boards are you counting when you look to see if a director is overboarded?

   We include: publicly-traded companies (including non-US companies) and mutual fund families. Disclosure permitting, we do not include: subsidiaries or the parent of the company (where ownership by the parent is 20% or more), non-profit organizations, universities, advisory boards, and private companies. Mutual funds are rolled up to mutual fund families, with one family counting as one board. Also, if service on another board is a required duty of the officer (e.g., as part of a joint marketing agreement), that board will not be counted.

4. Would service on the board of a liquidating trust count as a board?

   We would look at the situation, and consider if it is publicly traded, when it is expected to terminate, etc. In general, we will not include these in the count if the disclosure is sufficient.

5. Is the CEO of a private company subject to the policy on overboarded CEOs?

   No. This policy is only applied to public-company CEOs.

6. Does the overboarded CEO policy apply to an interim CEO?

   No. There is no expectation that a director who steps in as interim CEO to fill the gap should drop his or her other boards for this short-term obligation.

7. Does ISS take into account if a director is transitioning off one board soon?

   Yes. If the information is publicly disclosed that a director will be stepping off another board at the next annual meeting of that company to accommodate taking a place on a new board, ISS will not consider that board in determining if the director is overboarded.