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Summary of ISS’ New Policies for 2016

For companies subject to ISS’ United States policy, there are several changes to be aware of:

Management Proposals

• Director overboarding:
o Subject to the one-year transition period described below, ISS will issue a negative vote recommendation on directors who are not public company CEOs and who sit on more than five public company boards. ISS will issue negative vote recommendations on all elections for that director until they sit on five or fewer public company boards.
o ISS will allow a one-year transition period in which ISS will issue cautionary language in proxy advisory research reports, but not issue negative vote recommendations, for directors that are overboarded under the new policy (but not under the former policy).
o Departing from the policy draft, ISS will not impose tighter restrictions on the number of boards on which sitting public company CEOs may reasonably sit. ISS will continue to issue a negative vote recommendation for overboarding only for public company CEOs that sit on more than their own board and two others. ISS’ negative recommendations would continue to apply only to directorships other than the CEO’s own company.

• Negative director election vote recommendations for directors that have taken unilateral board actions:
o ISS is clarifying its director election policy to state that upon a unilateral reduction of shareholder rights, ISS will generally issue negative vote recommendations on director elections until a majority of shareholders approve the rights reduction, or until the rights are fully restored.
o In addition, ISS will issue a negative vote recommendation on directors of newly-public companies when the directors have taken adverse actions immediately prior to the IPO, including classifying the board and introducing supermajority voting requirements.

• Voting policy for directors nominated using proxy access:
o ISS is clarifying its voting policy to establish that vote recommendations for directors nominated using proxy access will be evaluated case-by-case using criteria that are similar to those used in proxy contests.
o In addition, certain criteria may be applied specifically to proxy access nominees, including “those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether or not there are more candidates than board seats).”

• Compensation-related votes at externally-managed issuers:
o ISS will generally recommend against say-on-pay proposals where there is an external management structure in place, and there is insufficient detail in the company’s disclosures for ISS to perform a comprehensive pay-for-performance analysis.

Shareholder Proposals

• Compensation: Adopt holding periods:
o ISS is streamlining its holding period shareholder proposal policy, not proposing a new policy.
o ISS is broadening its holding period shareholder proposal policy to “encompass executive equity retention proposals more generally, eliminating the need for a separate policy covering proposals seeking retention of 75% of net shares.”
o ISS will still strongly consider retention ratio and holding period duration among several other factors.

• ESG: Animal welfare:
o ISS is extending the examination of animal welfare issues to suppliers of the target company.
o ISS is somewhat broadening its policy to cover animal welfare-related risks, not just animal welfare standards.
o ISS is adding animal treatment controversies to its list of evaluated criteria.

• ESG: Pharmaceutical pricing, access to medicines, and prescription drug reimportation:
o ISS is adding a component examining “recent significant controversies, litigation, or fines at the company.”
o ISS is adding a regulatory risk component to its analysis.

• ESG: Climate change / greenhouse gas (GHG) emissions:
o ISS is adding specificity to the types of climate change risks of which it will support disclosure, including financial, physical, and regulatory risks.

These summarized changes for your easy reference. Please refer to the ISS published policy for full information and before making final decisions for your company.

Also, if your company will propose an equity compensation plan in 2016, please note that ISS also released an updated Equity Plan Scorecard FAQ document – which outlines a few modifications to the Equity Plan Scorecard evaluation framework, including the addition of a new model index for large companies that are newly public or emerging from bankruptcy. In addition, the document describes several minor adjustments to scorecard factors.

Please feel free to contact us if you have any questions regarding these updates.

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