The NASPP Blog

January 6, 2009

ISS/RiskMetrics Policy Updates

As we head into proxy season and many of you begin preparing to submit stock plans to shareholder votes, it might be helpful for you to know that RiskMetrics (formerly ISS) has issued updates to its corporate governance policy for 2009.  For the most part, the updates seem fairly light with respect to stock compensation (unlike in past years–see our practice alerts on ISS’s 2005, 2007 and 2008 updates).

Burn Rates

As usual, RiskMetrics updated the burn rates they consider acceptable for stock plans.  RiskMetrics will recommend voting against stock plans if a company’s burn rate exceeds their published guidelines.  For the most part, the acceptable burn rates seem to have increased. For Russell 3000 companies, the only industries where acceptable burn rates decreased were Commercial Services & Supplies, Consumer Services, Health Care Equipment & Services, and Real Estate.  Non-Russell 3000 companies saw decreases in acceptable burn rates in the Materials, Automobiles & Components, and Retailing industries.

In addition, RiskMetrics indicates that they are now using a 400-day volatility to determine the acceptable burn rates (rather than a 200-day volatility they’ve used in the past).  Wondering how volatility figures into a burn rate calculation?  When calculating burn rates, Riskmetrics applies a premium to full value awards based on the company’s volatility (e.g., for companies with a volatility of 54.6% or higher, each share granted under a full value award counts as 1.5 shares in RiskMetrics burn rate calculation). 

Paying Dividends on Performance Awards

The policy takes a position against paying dividends (or equivalents) on unvested performance-based stock awards.  Where companies have stock plans that provide for this, RiskMetrics may recommend withholding votes or voting against the company’s directors or may recommend voting against the company’s stock plans.

It seems like this could be significant for NASPP member companies that pay dividends.  According to our 2007 Stock Plan Design and Administration Survey (co-sponsored by Deloitte), 45% of respondents pay dividends on their performance share plans and 42% pay dividends on performance unit plans.

Change-In-Control Provisions

The policy introduces the concept of “liberal change-in-control provisions.” For stock compensation, this means a change-in-control provision that could result in acceleration of vesting even if the change-in-control never occurs.  Many of you will remember that this was a problem in the proposed US Airways/UAL and Sprint/Worldcom mergers that were not completed.  

Now might be a good time to review how your stock plans define a change-in-control because if your plan includes what RiskMetrics considers to be a liberal provision, in addition to recommending voting against your plan, RiskMetrics may recommend voting against (or withholding votes for) your directors–making this an issue even if you aren’t submitting a stock plan to shareholder vote this season.

See the articles “How to Handle Equity Compensation Awards in Corporate Transactions” and “Designing Stock Plans That Work in Corporate Transactions” for more information on drafting change-in-control provisions in your stock plans.

Repricing

RiskMetrics already has a well-articulated policy on repricing stock options; the only update to that policy this year was to specify that they do not consider market deterioration, in and of itself, to be a reason to reprice options.  For more on what RiskMetrics requires before it will recommend that shareholders vote for a repricing (or other option exchange program), don’t miss our January 29 webcast, “The Dark Side of Option Exchange Programs.”

For more information on Riskmetrics 2009 policy update, see the NASPP alert “ISS/Riskmetrics 2009 Corporate Governance Policy Updates.” 

Reason #7 to Renew Your NASPP Membership: Discounted Registration for the NASPP’s Newest Online Course on M&A

We’ve just announced the newest addition to the NASPP’s online curriculum: “Tackling Equity Compensation Issues Related to Mergers & Acquisitions.” This program will address the real-world, practical challenges that arise for stock plan administration in mergers and acquisitions. The program includes two webcasts, interactive quizzes, and a dedicated online discussion forum allowing you to interact with the instructors. Don’t wait to register–the early bird discount is only available until February 6 and the first webcast is on March 24. And don’t forget to renew your membership–NASPP members can save up to $700 on registration.

NASPP “To Do” List

We have so much going on here at the NASPP that it can be hard to keep track of it all, so I’m keeping an ongoing “to do” list for you here in my blogs.