Institutional Shareholder Services (ISS) has released its voting guideline changes for 2020, effective for meetings held on Feb. 1, 2020, or later. EQ’s Peggy O’Keefe, Managing Director, Corporate Governance, summarizes the updates, which may affect your 2020 annual shareholder meeting’s vote results.
Board Accountability
Are you a newly-formed public company? These ISS policy areas will be closely reviewed:
- ISS will vote against or withhold on the entire board (except for new nominees, who will be considered on a case-by-case basis) if a multi-class capital structure was established prior to, or in conjunction with the public offering that includes unequal voting rights. However, if there is a reasonable sunset provision, this will be considered a mitigating factor. ISS will review the rationale disclosed for the sunset period chosen, the lifespan of the company, and the post-IPO ownership structure. No sunset provision exceeding seven years will be considered reasonable.
- ISS will vote against or withhold on individual directors or committee members, or the entire board if there are problematic governance structures that ISS finds egregious, unless a sunset provision that ISS finds reasonable is disclosed. There is an exception for new nominees, who will be considered case-by-case. Problematic structures include supermajority vote requirements for bylaw or charter amendments, a classified board, or other egregious governance provisions.
ISS will continue to vote on a case-by-case basis on directors for both these policies, until the problematic provisions/structures are removed.
Restrictions on Shareholder Rights
Board Accountability
ISS will vote against/withhold on governance committee members if a company’s bylaws impose restrictions on their shareholders’ right to amend bylaws. Such restrictions include:
- A prohibition on binding shareholder proposals to amend the bylaws
- Share ownership requirements, and
- Subject matter restrictions, and
- Time-holding requirements, any of which exceed SEC 14a-8 requirements
Subject matter restrictions include a prohibition on shareholders’ ability to amend the specific bylaw that governs the shareholders’ ability to amend bylaws, so that being able to change the time or ownership requirements cannot be achieved.
ISS will continue to recommend voting against/withhold on governance committee members until shareholders are provided with an unfettered ability to amend the bylaws.
Shareholder Proposals
ISS has policy changes to two shareholder proposal types:
- Governance-type proposal requesting an independent board chair
ISS has broadened its rationale for supporting such proposals to include where companies do not have a strong lead independent director to assist in balancing the combined Chair/CEO role, or where the chair is not independent, or if there has been a recent recombination of the roles of CEO and chair, or where the board is a majority non-independent, or when there is evidence that the board has failed to oversee material risks the company is facing, or where the company has material governance failures, or where there is evidence that the board has failed to step in when shareholders’ interests conflict with those of management. - Social policy proposal for pay data disclosures
ISS has expanded its support for social policy proposals regarding pay data disclosures. Now, in addition to gender, ISS will expand its support for proposals requesting disclosure of such information in terms of race or ethnicity.
Board Composition
ISS’ gender diversity policy transition period reached its one-year mark. ISS will recommend voting against the nominating committee chair, or other directors as appropriate, for companies that do not have at least one woman on the board, unless the company has committed to reach that goal within a year. That will only apply for 2020, not after.
New Board Nominees
ISS policy update states that it will review new board nominees on a case-by-case basis only when the nominee has actually served on the board for less than a year, in order for the nominee to potentially be exempt from previous board actions that ISS may find problematic.
Executive Compensation
ISS has two changes to its U.S. policies.
- ISS added Economic Value Added (EVA) to its executive compensation pay-for-performance evaluation. This will now be a factor in the financial performance assessment (FPA) secondary screen as an additional metric in ISS’ quantitative analysis.
- The second change applies to ISS’ evaluation of a company’s equity compensation plan proposal. The result will be an against vote recommendation if there is an evergreen feature in the plan, i.e., meaning shares will be automatically added to the plan.
Share Repurchase Programs
ISS has updated its policy on share repurchase programs to review for potential misuse. Generally, ISS supports such management proposals for open-market repurchase programs, but will review on a case-by-case basis to:
- Determine if there are greenmail issues (repurchasing shares from insiders at a premium to market price).
- Ascertain if the repurchase is being conducted as a way to positively affect executive compensation metrics.
- Ensure the repurchase does not pose a threat to the long-term viability of the company.
How to prepare for problematic issues
Proper planning and evaluation are critical steps to any successful annual meeting, but especially if you’ve identified any of the ISS 2020 Voting Policy Updates to impact your meeting.
Here are a few tips to better ensure no surprises:
- Know your shareholders. Knowing who your institutional holders are and how they are likely to vote on these policy update issues, as well as other voting matters, will help project voting outcomes at your annual meeting, as well as determine your shareholder outreach strategy.
- Utilize your proxy statement as a marketing tool by including new or additional discussion and disclosure on various matters. This helps your shareholders understand: a- if your company has incorporated changes that will mitigate problematic issues; or b- that will help explain your company’s rationale for certain actions or practices that are in place, as well as the long-term strategy of your company.
- Set up the right shareholder engagement strategy. Do you have a large retail base? Add a call campaign to this audience to increase the voting response. Or, take votes over the phone, which helps increase favorable voting results. The right shareholder engagement approach can mean the difference between success and failure on all proxy proposals.
Learn more about EQ’s Corporate Governance offerings and our approach, which could include recommendations for additional discussion/disclosure in your proxy statement, as well as shareholder engagement strategy, and/or governance adjustments that may be advisable for your firm to adopt.
EQ Corporate Governance is prepared to review potential problems with you, and offer suggestions to help ameliorate problematic issues your company may be facing.