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Update on proxy agency voting guidelines and the Investment Association Principles of Remuneration


The last few days have seen three of the most influential proxy voting agencies release updated pay guidelines, reflecting updated investor guidance and new provisions under the UK Corporate Governance Code.  Of particular note is the specific IA guidance around post-termination share ownership requirements and the need to implement such guidelines by the next Remuneration Policy review, and the principle that dividends should no longer be accrued as cash on outstanding share awards. We summarise the updated guidelines below and provide our initial commentary.

Updated proxy voting guidelines - ISS On 19 November 2018 ISS issued its policy update effective for meetings after 1 February 2019. It is not surprising that the main updates in policy relate to the changes to the UK Corporate Governance Code 2018, namely the requirement to have a formal post-employment shareholding policy and for a minimum 5 year vesting/ holding period for  Long Term Incentives

Additional noteworthy changes are;

  • Actions by Directors on other Boards should be considered in assessing their fitness;

  • NED fees should not be excessive relative to similarly-sized companies in the same sector; and

  • An assumption that target bonus should not be more than 50% of the maximum bonus opportunity.

ISS policy updates – Summary Board of Directors An individual’s fitness to serve as a Director will also consider material failures at other firms. ISS will vote against the re-election of a director where there has been attendance at less than 75% of meetings unless suitably explained. Previously, such a failure over 2 or more consecutive years would cause a vote against re-election.  However, no material change in ISS’s position is intended by the removal, it merely highlights that lack of attendance at meetings over a period of time is the main cause for concern. Remuneration Policy Bonus – ISS now expects that target bonus outcomes should typically be no more than 50% of maximum bonus outcome, unless this is supported by robust explanation. LTIP – ISS will continue to encourage performance periods of 3 years or longer, but now recommends that total vesting and holding period should be at least 5 years, in line with the requirements in the CGC. Post-cessation shareholding – ISS will expect the Remuneration Committee to develop a formal policy for post-employment shareholding that includes both vested and unvested shares (but note that ISS does not add explicit guidance as to their expectations for the level or duration, unlike the IA – see below). Remuneration Report LTIP – ISS now highlights good market practice would suggest that where there has been a material reduction in share price, the Remuneration Committee should consider reducing the level of LTIP awards. NED fees – ISS now includes in its good market practice examples that NED fees should not be excessive when compared to similar sized companies. They highlight that previously it was not an option to vote against policy where NED fees were excessive, this wording introduces flexibility to do so. Smaller companies ISS has provided additional wording to ensure that companies report on which Corporate Governance Code they have applied, in compliance with the AIM listing rules. Social and Environmental factors Whilst still assessing on a case by case basis, when recommending policy votes ISS has added an additional consideration of whether there are “significant controversies, fines, penalties, or litigation associated with the company's environmental or social practices”. External auditor May recommend a vote against ratification of external auditors where the lead audit partner(s) have been linked to a significant audit controversy. Approval or amendment of LTIP ISS has adjusted its policy on shareholder dilution in line with the Investment Association guidelines.

Mercer | Kepler Commentary and next steps Most of these changes are small, reflect how most companies behave in any case (e.g. paying NED fees at an appropriate level), are clarifications, and/or reflect principles already included in the UK Corporate Governance Code. The requirement to limit target bonus to 50% of maximum reflects typical practice but is an unhelpful misunderstanding of how many companies think about bonus: i.e. the starting point is the target with the maximum set as a multiple (typically 1.5-2x) of that target level.  Where companies currently have a 1.5x multiple (i.e. target is 67% of maximum) they will need to explain the background and why the target level remains appropriate. The underlying theme to the changes seems to be to emphasise compliance with the spirit and not just the wording of the guidelines.

Updated proxy voting guidelines - Glass Lewis Glass Lewis has released a formal update on its UK Policy Guidelines for 2019. Glass Lewis – Summary Executive Remuneration: Realised Pay When assessing the link between pay and company performance, Glass Lewis has clarified that they assess the realised pay received by a company’s top executives over at least three years. Pay Ratios Glass Lewis has clarified that, currently, CEO pay ratios alone will not have a material impact on voting recommendations. Board Skills and Diversity Glass Lewis has clarified that it expects FTSE 100 companies to provide meaningful disclosure in line with developing best practice standards when electing directors. For larger companies, when assessing diversity on the board, Glass Lewis has clarified they will take into account disclosed gender pay gap data and executive pipeline composition. Board and Committee Responsiveness Where there has been failure to address shareholder dissent Glass Lewis may, in certain circumstances, hold committee chairs and members accountable. Environmental and Social Risk Oversight Glass Lewis will identify which directors or board-level committees have been charged with oversight of environmental and/or social issues and may recommend a vote against board members who have not properly managed or mitigated these risks. Mercer | Kepler Commentary and next steps There is little to note here about remuneration, however there are welcome clarifications about pay for performance and pay ratio reporting. Arguably the most significant elements are those pertaining to environmental and social risk oversight and to Board skills and diversity.  We believe that this wider emphasis makes a welcome change from a perception that corporate governance is 90% about remuneration.

Updated Investment Association Principles of Remuneration

On 22 November the Investment Association (“IA”) published a formal update on its Principles of Remuneration (the “Principles”) introducing a number of changes to how companies should deal with executive pay and how they report on their packages. The update comes with an open letter to the chairs of remuneration committees of FTSE 350 companies, expressing IA members’ frustration that many companies are not listening to their views. IA Principles – Summary Remuneration Committees When a significant vote against any remuneration resolution appears on the IA’s Public Register, the IA strongly encourages Remuneration Committees to seek to understand the reasons for the dissent and issue an update statement in response to it, expressing the views received from shareholders and what the company has done or proposes to do. Executive Shareholding Requirements The IA has clarified that when setting out the shareholding requirements and timeline executives are expected to meet, Remuneration Committees should express the consequences of an executive not satisfying the requirements. It has also provided further indications of when shares count towards the executive’s requirement and encouraged executives to purchase company shares using their own resources to provide evidence of their alignment with shareholders. Post-Employment Holding Periods The IA has welcomed the post-employment shareholding requirements introduced by the UK Corporate Governance Code and provided guidelines on how they should be implemented. The IA expects the requirements to apply for at least two years at a level equal to the lower of: the shareholding requirement immediately prior to departure; and the actual shareholding on departure. It, also expects the requirements to be established for all new executive directors and for existing executive directors at the earliest opportunity, and at a minimum by the company’s next policy vote.   Performance Adjustment / Malus and Clawback The IA has encouraged companies to add a more substantial list of specific circumstances in which Malus and Clawback provisions could be used (in addition to the current market standard triggers of gross misconduct or misstatement).  It has also provided guidelines on how to help the enforcement of Clawback, including a requirement for executive directors to sign forms of acceptance at the time of grant and ensuring consistency across all the documentation (remuneration policy, LTIP and bonus rules, employment contracts, etc.). Finally, it recommends Remuneration Committees develop clear processes for exercising Clawback or to provide information on how they will exercise discretionary Clawback. Discretion The IA has underlined the importance of Remuneration Committees having sufficient legal power when exercising discretion and that this should reflect the experience of shareholders in terms of value creation. If no discretion has been used, the IA encourages Remuneration Committee chairs to state clearly that this is the case. In addition, the IA has suggested consulting shareholders on implementation of the remuneration policy and on any proposed payment of variable remuneration if the business has suffered an exceptional negative event. Pay for Employees below Board Level The IA has added that when complying with relevant reporting obligations in relation to workforce pay, such as Gender Pay Gap Reporting or executive-to-employee pay ratios, Board and Remuneration Committees are expected to disclose any actions they intend to take to improve the position. Pensions The IA has said pension contribution rates for executive directors should be aligned with those available to the majority of the company’s workforce and expect this to be achieved as soon as possible, warning no other compensation should be awarded to offset this change. Dividends Where dividends have accrued on deferred bonus or LTIP vested shares, the IA now recommends these are paid solely in shares (i.e. not in cash). LTIPs The IA has clarified it would not support the payment of long-term incentives in cash or cash equivalents other than to settle tax. Restricted Share Awards In deciding whether to support the introduction of a restricted share scheme, the IA will factor in a company’s previous approach to remuneration and assess the strategic rationale of proposing such vehicle on a case-by-case basis.

Mercer | Kepler Commentary and next steps Much of the change is aimed at aligning the IA guidelines with the changes to the UKCGC and is helpful insofar as it is consistent with other commentators. There are some aspects that may give companies cause for concern:


  • The suggested consultation before exercising discretion in relation to variable pay after an exceptional negative event may also be unhelpful if shareholders take it upon themselves to comment on how the discretion should be exercised as opposed to whether it should be exercised.  Shareholders need to protect their interests but should not be setting executive pay.Aligning pension contribution rates with those of staff may sound logical but it is likely to be problematic to implement if it is in breach of contractual obligations but no compensation can be paid.

  • The requirement to pay accrued dividends in shares only sounds innocuous but we are aware of the IA already discussing that even the potential in the Policy to pay such dividends in cash would warrant a Red top – we will investigate this further in our forthcoming meeting with the IA.

  • The need to introduce a post-termination extension of the shareholding requirement, whilst in line with the UKCGC, will require careful consideration as to how the guideline will work in different leaver situations.

Useful links https://www.issgovernance.com/ http://www.glasslewis.com/guidelines/ https://www.ivis.co.uk/guidelines


This briefing is for general guidance and does not necessarily cover all areas of the topics included in this briefing. It is not designed to give legal or other professional advice.

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