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A new ISS policy that will trigger negative vote recommendations for boards that pay directors excessively is a signal to boards that director compensation packages, which have long flown under investors’ radar, have become an indicator as to whether a board has strong corporate governance. The policy takes effect in 2019, and will apply to boards that have paid directors excessively over a period of two or more consecutive years.
Based on the information currently available from ISS, Jan Koors, managing director at Pearl Meyer, says the new proxy voting policy is “pretty mild.” Plus, the way the policy is written gives ISS a “fair amount of wiggle room” because it isn’t prescriptive, Koors adds.
“[ISS] hasn’t drawn bright lines; they haven’t put any quantitative numbers around how they’re going to define ‘excessive’ director compensation,” Koors says.
The policy also gives ISS analysts a different lens through which to analyze director independence, possible entrenchment and overall board governance.
“The way I interpret ISS’s focus on director comp is they are viewing this as a signal of good versus bad corporate governance,” Koors explains. “That somehow if directors are paid too much—and ‘too much’ is still, in ISS’s world, in the eye of the beholder—if directors are being paid too much then it calls into question how independent [directors] really are, even if they check all the boxes.”