Just a quick note that late last week ISS made available for public comment nine discreet voting policies for potential application in 2019. Only one of the draft voting policies addresses compensation, and it addresses the Financial Performance Assessment Methodology under the Pay-for-Performance Model.
Background
Beginning in 2018, ISS introduced the Financial Performance Assessment ("FPA") as part of its secondary pay-for-performance screen. The purpose of FPA was to provide a broader picture of an issuer's performance in instances where the issuer didn't fare well on the primary screen (i.e., the primary pay-for-performance screen relies upon total shareholder return). Currently, this secondary screen is based on unadjusted GAAP accounting data (e.g., return on equity, return on assets, return on invested capital, revenue growth, etc.).
ISS Draft Proposal
On February 12, 2018, ISS announced its acquisition of EVA Dimensions LLC, a business intelligence firm that measures and values corporate performance based on the Economic Value Added ("EVA") framework. EVA looks at an issuer's economic profit as opposed to its bookkeeping profit, and as a result, ISS contends that EVA would provide a standardized view of an issuer's economic performance (compared to the current version of the secondary screen which provides a view of an issuer's accounting results). ISS intends to replace the GAAP metrics currently in the secondary screen with "EVA Spread" and "EVA Margin," measured over a 3-year period. And an issuer's economic growth trajectory would no longer be based on EBITDA growth and cash flow growth; instead, an issuer's economic growth trajectory would be based on "EVA Momentum."
Request Comments
ISS is seeking feedback on whether total shareholder return should continue to be used as the main performance metric. Additionally, assuming that GAAP performance measures are replaced with EVA-based measures, ISS is seeking feedback on whether it should continue to display GAAP performance data for informational purposes.
Comments can be provided by e-mail at policy@issgovernance.com. The comment period closes on November 1, 2018.
PartnerTony’s multi-disciplinary legal practice focuses on executive compensation, ESOPs and employee benefit arrangements (including their related tax, accounting, securities and corporate governance issues) in the United ...
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