Editor’s Note: This post is by Carol Bowie of Institutional Shareholder Services Inc.
RiskMetrics Group recently released updates to its 2009 proxy voting policies, after an extensive process that included outreach to and input from hundreds of institutional investors and corporate issuers. RiskMetrics’ policies will be applied to all companies with shareholder meeting dates on or after February 1, 2009.
This year’s policy revisions reflect the unprecedented market turmoil that has sparked investor and regulatory focus on executive compensation practices, board accountability and oversight, and the quality of financial reporting. Accordingly, the three main areas of focus for the 2009 policy updates are executive pay, board structure, and audit practices.
Both issuer and investor respondents to RiskMetrics’s annual policy survey demonstrated little tolerance for outsized pay packages, with 70 percent of investors and 85 percent of issuers specifying pay relative to performance as “very important” in evaluating executive compensation practices. Thus, RiskMetrics’ policy guidelines on executive compensation have been expanded to examine practices that divorce pay from performance, such as tax gross-ups on severance payments and executive perks, and provisions that pay severance for voluntary departures following a takeover.
RiskMetrics has also harmonized assessment of company performance across several North American policies. As of 2009, corporate performance will initially be assessed using a relative, rather than absolute, measure of total shareholder return over 1- and 3-year periods. This assessment will result in greater scrutiny under several policies, including pay-for-performance evaluations, independent chair shareholder proposals, and director elections. Regarding the latter, the policy update addresses cases where lagging company performance is coupled with a governance structure that discourages director accountability and may lead to board and management entrenchment.
Additionally, RiskMetrics has updated its accounting policy guidelines to specify ongoing material weaknesses in Section 404 disclosures and misapplication of GAAP as triggers for in-depth analysis of a company’s accounting practices, and to recommend against audit committee members in the case of an adverse opinion from auditors.
Internationally, RiskMetrics revised its share buyback policy to reflect client feedback and regulatory developments in Europe. RiskMetrics’ policy on discharge of directors resolutions, common in several markets, will now accommodate recommendations designed to provide a “yellow card” warning to directors who may not be fulfilling their fiduciary duties. Director independence best practices in several European markets have also been incorporated into the 2009 policies. In Canada, RiskMetrics is introducing a Poor Pay Practices Policy to reflect the additional disclosure that is now available in that market.
The 2009 policy updates are accessible through RiskMetrics’ online Policy Gateway, which also contains FAQs and other informational resources to provide all market participants with a good understanding of how RiskMetrics formulates and applies its corporate governance policies. In addition to its own policies, the corporate governance policies and philosophies of leading market participants are also available via RiskMetrics’ Policy Exchange platform.