RiskMetrics Issues Policy Updates for 2010 Proxy Season - 15 Dec 2009

RiskMetrics Issues Policy Updates for 2010 Proxy Season

On November 19, 2009, RiskMetrics Group issued updates to its proxy
voting policy that will be applicable to shareholder meetings held on
or after February 1, 2010. The policy updates that are applicable to US
companies are available at here. This
briefing summarizes those policy updates that affect US companies and
discusses implications for voting recommendations and results in
uncontested elections of directors. [1]
Notably, RiskMetrics’ updated policy expands the circumstances that
will lead it to recommend that its clients vote against or withhold
votes for directors who are up for re-election in 2010. As outlined in
Appendix A, there will now be more than 40 categories of practices that
could lead to a negative vote recommendation.

RiskMetrics voting recommendations are influential: The voting
results at Russell 3000 companies for the 2009 proxy season indicate
that the vast majority of directors who received a majority “against”
or “withhold” vote also received an adverse RiskMetrics vote
recommendation. The impact of negative vote recommendations is likely
to be even greater for the 2010 proxy season because of the increase in
companies adopting majority voting for the election of directors and/or
director resignation policies, coupled with the elimination of brokers’
ability to vote in director elections in the absence of customer
instructions.

In preparing for their companies’ 2010 annual meetings, corporate
counsel, corporate secretaries and directors (particularly those
serving on compensation or nominating and governance committees) should
review the updated policy and consider areas of potential vulnerability.

Summary of Key Changes for the 2010 Proxy Season

1. Executive Compensation Evaluation and Equity Plan Proposals

RiskMetrics has updated its policy on evaluation of executive
compensation so that management proposals to approve executive
compensation that have been included on the ballot at companies that
have implemented a “say-on-pay” will become the primary communications
vehicle for shareholders to initially address problematic pay
practices. In determining its recommendation with respect to a
management proposal to approve executive compensation, RiskMetrics
will:

• Consider whether the company has “problematic pay practices,”
  including policies and practices that could incentivize excessive
  risk-taking and


• Assess pay-for-performance, which will now include an assessment of
  CEO pay relative to a company’s total shareholder return over five
  years in addition to its current tests.

RiskMetrics will generally recommend a negative vote on the
re-election of compensation committee members (or, in rare cases where
it deems the full board to be responsible, all directors) if, in its
view:

• There is a misalignment between CEO pay and performance with regard
  to shareholder value, in accordance with the broader tests discussed
  above or


• The company maintains problematic pay practices (including policies
  and practices that could incentivize excessive risk taking) and one of
  the following three factors is present:
  
  
  
  • RiskMetrics considers the situation to be “egregious”
  
  
  • No management proposal to approve executive compensation is on the ballot or
  
  
  • The board has failed to respond to concerns raised in prior management proposals to approve executive compensation.
  
  
  
  

In emphasizing its new focus on potential incentives for
inappropriate risk-taking, RiskMetrics spotlighted guaranteed bonuses,
the use of a single performance metric for short- and long-term plans,
“lucrative” severance packages, “high pay opportunities” relative to
industry peers, “disproportionate” supplemental pensions and “mega”
annual equity grants that provide “unlimited upside with no downside
risk.”

RiskMetrics will also assess pay-for-performance when determining
its recommendation with respect to proposals to approve equity-based
incentive plans and will recommend a negative vote if in its view,
excessive non-performance-based equity awards are the major contributor
to a payfor- performance misalignment. RiskMetrics has also updated its
volatility and stock price assumptions and burn rate tables for 2010,
which it uses to determine recommendations with respect to equity
compensation plans that are up for shareholder approval.

Note that on November 19, 2009, RiskMetrics released a set of
frequently asked questions in relation to its evaluation of
compensation practices for US companies, which is available here.

2. Adoption or Renewal of Non-Shareholder Approved Poison Pills

RiskMetrics has amended its policy with respect to voting on
directors at companies where a shareholder rights plan (poison pill)
has been instituted by the board but not approved by shareholders.
RiskMetrics will now recommend on a “case-by-case” basis where a board
has adopted a pill with a term of 12 months or less without shareholder
approval. However, RiskMetrics will recommend a negative vote with
respect to all continuing directors where a board has, without
shareholder approval:

• Adopted a pill with a term of more than 12 months


• Renewed any pill


• Made any “material, adverse change” to an existing pill or


• Maintained an existing pill that has not been previously approved
  by shareholders. RiskMetrics will review companies that have a pill in
  place every year if the company has a classified board or at least once
  every three years if the company does not have a classified board.

Note that RiskMetrics has a separate updated policy regarding pills adopted to protect a company’s net operating losses.

3. Shareholder Ability to Call a Special Meeting and Action by Written Consent

RiskMetrics has amended its policies relating to recommendations on
proposals that either restrict or permit shareholders to call special
meetings or act by written consent. RiskMetrics will now consider the
following factors:

• Whether shareholders currently have the right to call special meetings or act by written consent


• The ownership threshold necessary to call special meetings (10% is
  preferred) or the threshold at which shareholders can act by written
  consent, as applicable


• The inclusion of exclusionary or prohibitive language


• The ownership structure of investors and


• The level of shareholder support of and management’s response to previous shareholder proposals.

4. Egregious Actions

For 2010, RiskMetrics will define more broadly the “egregious
actions” for which it will recommend negative votes for individual
directors, for a specific committee or for the entire board. In
addition to its existing criteria, which relate to failure to replace
management as appropriate, RiskMetrics will consider:

• “Material failures of governance, stewardship or fiduciary responsibilities at the company” and


• Actions related to the directors’ service on other boards that
  “raise substantial doubt about his or her ability to effectively
  oversee management and serve the best interests of shareholders” at any
  company.

5. Director Independence Classification

RiskMetrics has amended its classification of directors to, among
other things, broaden the transactional relationships and professional
services that may impair independence under its bright-line rules. In
relation to transactional relationships, RiskMetrics will employ a
NYSEbased test for companies listed on the NYSE or Amex and a
Nasdaq-based test for all other companies. While RiskMetrics removed
related party transactional relationships from the bright-line
impediments to a finding of independence, such relationships will
continue to be examined under the general tests of “material
relationship.”

For a detailed comparison of the classification for 2010 against the 2009 classification, see Appendix B.

6. Other Amendments

Appendix C summarizes the other changes and clarifications made by
RiskMetrics that are applicable to the 2010 proxy season, including
amendment of the policy relating to greenhouse gas emissions.

Expected Impact of these Changes in 2010

Looking back at uncontested elections during the first nine months
of 2009, RiskMetrics recommended a negative vote with respect to 2,147
directors in the Russell 3000. Notably, the vast
majority of directors who received a majority “against” or “withhold”
vote received an adverse vote recommendation from RiskMetrics – out of
93 directors at 50 companies who received such a vote, RiskMetrics
recommended adversely with respect to 89 of those