Sneak Preview: How ISS Dictates Equity Plan Design
8 Pages Posted: 28 Oct 2013
Date Written: October 23, 2013
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
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