The Key to a Successful Share Request Proposal

Guest blog by Laura Wanlass, Partner & Head of Corporate Governance at Aon.

One of the first thoughts a Compensation Committee member or Director of Executive Compensation has when faced with the necessity of going for a new equity compensation pool is whether or not they will be able to pass the Institutional Shareholder Services, Inc. (“ISS”) tests. Additionally, there is often heartburn across various internal teams, such as Finance, Human Resources and Legal, in trying to understand and then communicate the implications of the ISS analysis to the Compensation Committee to determine the best course of action going forward.

At Aon, it is our perspective that companies should approach the share request process from a different angle than attempting to merely comply with ISS or Glass Lewis guidelines. The reality is that less than a handful of the over 1,000 companies going back for shares each year actually fail to obtain majority shareholder approval. While these statistics indicate that companies with bad fact patterns probably aren’t going back for shares thus avoiding potentially bad outcomes, the statistics also indicate that investors are often willing to support share requests that don’t necessarily receive ISS and Glass Lewis support.

The key to a successful share request proposal is being organized. You need to truly know who owns your shares and the extent to which your investors use or follow ISS and Glass Lewis – or instead use their own internal proxy voting guidelines to determine how to vote. Once you know this information, you should start thinking about your prospective equity needs for the next few years and go from there in terms of deciding whether or not you need to follow the ISS and/or Glass Lewis guidelines to obtain majority support or not for a reasonable share pool duration. Companies should attempt to maximize the size and design of their share pools in a manner that preserves Committee and Company flexibility to make market competitive grants to employees while balancing investor perspectives.

If preliminary share modeling indicates that you can easily pass the ISS and Glass Lewis tests while still preserving a good amount of flexibility in your programs, then the path is usually a clear one. However, if the path is less clear and the modeling is indicating that it may be difficult to obtain ISS and Glass Lewis support without adopting numerous restrictive, proxy advisory firm deemed best practices, it may be worthwhile to go to your shareholders directly with a non-ISS/non-Glass Lewis compliant share pool. At the end of the day, a big reason investors will often support a non-ISS and/or non-Glass Lewis compliant share request, is because they understand that equity compensation is one of the easiest ways to align management interests with those of shareholders.

If you are interested in learning more about the black box approaches employed by ISS and Glass Lewis in evaluating share requests, as well as the implications and our recommended strategies for dealing with this process you can listen to our recent webcast, Navigating the Share Request Approval Process.