Friday, March 11, 2011

Disney and Tyco take on ISS on compensation

From my perspective - as chair of one compensation committee and a member of another...

As Say on Pay and executive compensation is becoming a bigger part of shareholders review of companies practices a new area of contention is developing between companies and ISS -- whether companies will bypass ISS and communicate directly with their shareholders about ISS recommendations.

The relationship between ISS and companies is contentious at the outset. ISS reviews each public company's reports (like the MD&A and the CD&A) and then makes recommendations to shareholders on whether to vote for or against management recommendations in the annual proxy. Many larger institutions have a policy of voting with ISS recommendations - and the decision is often made by the governance group of the institution, not by the portfolio manager holding the stock, so the ISS recommendation holds a great deal of sway.

At the same time ISS charges companies for their software package to predict what score ISS's methodology will give the company - and hence whether ISS will recommend a for or against. It's a conflicted business model, to say the least.

Now we have increasing regulations and scrutiny on executive compensation and ISS is weighing in - and until recently when ISS made a mistake or a questionable judgment all companies did was go to them, point out the mistake, negotiate changes and hope ISS would change their recommendation. Companies were handcuffed. Until Disney.

As you can see below Disney is taking ISS on publicly and communicating directly with their shareholders. Tyco are also taking them on directly. Tyco's 2/22 filing starts out "ISS’s premise is that Tyco’s executive compensation program does not align the pay of its CEO with company performance. This is clearly not the case." Frontal attack.

It's going to be very interesting to watch what happens to ISS's credibility in the next 12 months. Their whole business model will break down if companies decide to aggressively bypass them - based on their competency on compensation - and work directly with their major shareholders on the new compensation rules.

The Disney letter to shareholders is as follows: Commencing March 2, 2011, The Walt Disney Company sent the following communication to certain shareholders. We write with respect to the ISS Proxy Report you may have seen regarding the proposals to be voted on at The Walt Disney Company annual shareholder meeting. We take serious issue with ISS's recommendations against the Company's position on the advisory vote on executive compensation and the shareholder proposal regarding performance tests for restricted stock units. We set forth below why we believe the two negative ISS recommendations are unwarranted.

1. ISS's recommendation to vote "against" the advisory vote on executive compensation relates to a practice that no longer exists. The recommendation appears to be grounded on a concern that the Company "recently extended excise tax gross ups." Bu
t, in point of fact, the Company's Compensation Committee has adopted a policy, fully disclosed in the proxy statement, that prohibits excise tax gross ups in any future agreements with executive officers, or in any material amendments or extensions of existing agreements, unless the provision is submitted to approval by shareholders. The "recent" extension of a gross up that ISS refers to (which would not be permitted under the new policy) occurred over a year ago, was fully disclosed in a Company filing on January 8, 2010, well prior to last year's annual meeting and prior to last year's ISS proxy report, which made no mention of it. Subsequent to that time, the Compensation Committee, in response to feedback from shareholders, adopted a policy that would prohibit tax gross ups as outlined above. For that reason, we urge that you vote in favor of the advisory vote on executive compensation.

2. In its original recommendation to support the shareholder proposal regarding performance tests for restricted stock unit awards, ISS made frequent reference to what it argued was the short-term nature of a one-year earnings per share component of the Company's current performance test. In point of fact, however, the EPS test is a three-year test. ISS acknowledged this mistake in the introduction to its update, but the body of the report (which relied on that error) and the rationale supporting the recommendation remained unchan
ged. Again, we believe that, on the basis of a corrected record, ISS's rationale does not hold. The three year EPS measure is an integral component of a long-term performance test that was designed to tie vesting of RSU's to the attainment of long-term performance metrics.

For the foregoing reasons, we believe ISS's recommendations are unwarranted and urge you to vote "for" the advisory vote on executive compensation and "against" the shareholder proposal relating to performance tests for restricted stock units.


If you have any questions, you may direct them to Lowell Singer, Senior Vice President - Investor Relations, at 818-560-6601.

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