Sneak Preview: How ISS Dictates Equity Plan Design

8 Pages Posted: 28 Oct 2013

See all articles by Ian D. Gow

Ian D. Gow

University of Melbourne; University of Melbourne - Department of Accounting and Business Information Systems

David F. Larcker

Stanford University - Graduate School of Business; European Corporate Governance Institute (ECGI); Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance

Allan L. McCall

Stanford University - Graduate School of Business

Brian Tayan

Stanford University - Graduate School of Business

Date Written: October 23, 2013

Abstract

Proxy advisory firms are highly influential in the design and approval of equity compensation plans.

The largest proxy advisory firm — Institutional Shareholder Services — uses a variety of tests to determine its recommendation on equity plan proposals. Among these is a proprietary metric called Shareholder Value Transfer (SVT). ISS automatically recommends a vote against a company’s equity plan if its SVT exceeds a certain allowable cap that is determined by ISS. At the same time, ISS provides little transparency into the computation of this cap and instead sells companies access to this information.

A growing body of evidence suggests that companies pay significant attention to their SVT caps and rely on this information to design their equity plans.

We examine this issue in detail. We ask: Should market participants be concerned with ISS’s influence over equity plan design? Without transparent disclosure, how can shareholders be sure that ISS’s SVT allowable caps are “correct”? Does profit motive affect ISS’s incentive to be transparent about the computation and disclosure of SVT caps?

Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

Keywords: proxy advisory firms. proxy advisors, institutional investors proxy votes, corporate governance

JEL Classification: G3, G30, G34, J33, M4, M14, M52

Suggested Citation

Gow, Ian D. and Larcker, David F. and McCall, Allan L. and Tayan, Brian, Sneak Preview: How ISS Dictates Equity Plan Design (October 23, 2013). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance and Leadership No. CGRP-37, Available at SSRN: https://ssrn.com/abstract=2346401

Ian D. Gow (Contact Author)

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

University of Melbourne - Department of Accounting and Business Information Systems ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia

David F. Larcker

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance ( email )

Crown Quadrangle 559 Nathan Ab
Stanford, CA 94305-8610
United States

Allan L. McCall

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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