When it comes to say-on-pay votes, ISS may be developing an outsized influence, according to new analysis from the Manhattan Institute for Policy Research.
And a new rule that ISS instituted this year could act as a self-reinforcing mechanism, further extending the effect it can have on executive pay.
That could present ‘more systemic risk’ for the market and governance, according to study author James Copland, director of the Manhattan Institute’s Center for Legal Policy, if too many companies feel pressured into ISS-approved compensation models, which would reduce variation in approach.
According to Copland, early 2012 proxy results indicate that ISS has significant sway when it comes to executive compensation – not enough to decide the vote, but plenty to tip results in one direction or another.
Each of the 11 Fortune 500 companies that have held advisory pay votes so far this year have passed their board’s recommendations. But Copland compared the final point spreads in the votes with the associated recommendation from ISS.
Of the 11 companies, ISS recommended ‘no’ votes on executive pay measures at four: Johnson Controls, Navistar, Qualcomm and Walt Disney. These companies averaged 64 percent in their advisory votes. The other seven companies, which had ISS support, averaged 94 percent.
As Copland tells IR Magazine, the sample size is ‘small’ and doesn’t conclusively show that ISS recommendations caused the less favorable votes. Even with a larger sample size, a strong correlation could show some other factor that influenced both ISS and shareholders, rather than indicating that ISS caused the votes.
There are also data, such as studies by Stephen Choi and Marcel Kahan of New York University and the University of Pennsylvania Law School’s Jill Fisch, suggesting that ISS influence may be overstated in some cases.
For example, these authors argue that ISS recommendations move only 6 percent to 10 percent of the vote in uncontested director elections, rather than 20 percent to 30 percent.
But uncontested director elections, where there is no real alternative, are arguably different from executive pay. Even a moderate sway could put a vote into territory where institutional investors might put more scrutiny onto board recommendations. ‘Six percent to 10 percent is not insignificant,’ says Copland.
Potentially compounding the issue is the proposed ISS policy to demand explanations from management when a vote receives less than 70 percent of shareholder votes.
‘ISS is saying that if it disagrees with you, you have to engage, even if a majority of shareholders agree with you and not ISS,’ Copland says.
‘It’s a self-reinforcing prescription. If you have more than two thirds of the shareholders backing executive compensation, what is it that ISS is identifying? It’s identifying that it thinks there’s something wrong. There’s circularity in its position.’
Copland’s greater concern comes when speculating what action ISS might take with a company it deems to have too few supporting the compensation plan.
‘If it goes after directors on issues that are to a significant degree severable from the executive pay vote, that’s disconcerting,’ he says. ‘Directors don’t want to fight a withhold vote.’
Executive compensation makes up only 14 percent of 2012 shareholder proposals, by the Manhattan Institute’s count, but that figure is deceiving. Under the Dodd-Frank Act, a majority of companies voted last year to adopt an annual executive pay review.
