Options Backdating Gains Focus in ISS 2007 Policies

ISS said in a news release it may recommend withholding votes from compensation committee members, depending upon the severity of the practices and the subsequent corrective actions on the part of the board. According to the news release, backdating of stock options gained particular focus this year and was ranked by institutional investors as the “most problematic” among pay practices in ISS’ Policy Survey.

“Options backdating has serious implications and has resulted in financial restatements, delisting of companies, and the termination of executives,” said Martha Carter, ISS’ managing director of corporate governance, in the news release. “A case-by- case approach is preferred in order to differentiate between companies who were careless in options administration and have since taken corrective action and those who committed outright fraud.”

Also along the lines of pay practices, due to the Securities and Exchange Commission approving new disclosure rules on executive compensation and ISS’ belief that pay for performance should be a central tenet in executive compensation philosophy, ISS said it has updated its poor pay practices policy and may recommend a vote to withhold from the compensation committee and/or the CEO in cases where it identifies poor pay practices. In addition, ISS may consider recommending a withhold vote from the entire board if the whole board was involved in and contributed to the egregious compensation problems.

Majority voting in board elections also gained more favor during the 2006 proxy season as more than 180 companies adopted new election policies and bylaws. At more than 85 companies, the average level of support for majority vote shareholder proposals increased to 49%, compared to 44% at more than 55 company meetings last year, according to ISS.

ISS said it is fine-tuning its policy on majority voting in director elections and will generally support precatory and binding resolutions requesting that the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats.

ISS analysts will begin applying the new policies for all companies with shareholder meeting dates on or after February 1, 2007. The 2007 ISS policy updates for US as well as Canada,  UK, and international corporate governance policies are here .