Proxy Season Reminder of Changes to ISS Guidelines
As publicly-traded companies move into their proxy seasons, they should take note of recent updates to Institutional Shareholder Services, Inc.’s (“ISS”) U.S. proxy voting guidelines. These new guidelines took effect for annual shareholders’ meetings held on or after February 1, 2016. This alert summarizes the recent updates and steps you should consider if you are a company that is public or considering going public, or on the board of directors of such a company.
Avoiding Director Overboarding
ISS lowered the number of public boards on which a non-CEO director can serve (from 6 to 5) before the director is considered “overboarded.”
Change: Beginning February 1, 2017, ISS will recommend a vote “against” or “withhold” for non-CEO directors who serve on more than 5 public company boards. During the period before that date, ISS (1) would not issue a negative recommendation for non-CEO directors who sat on 6 public company boards, but would instead make a notation in its analysis about the director’s public board service, and (2) would consider non-CEO directors “overboarded” (and thus subject to a negative recommendation) only if they sat on more than 6 public company boards.
Reason for Change: This change is intended to address concerns regarding directors’ increased involvement in multiple public companies. It should be noted that ISS did not change its guidelines with respect to the number of boards on which a CEO director can serve before the CEO is considered “overboarded” (which is currently 2, not including the CEO’s own company), but it noted that it “will continue evaluating the optimal level of directorships for individuals who are CEOs of public companies.”
Next Steps: Consider taking the following steps during 2016:
- Identify whether any non-CEO directors serve on at least 6 public company boards, consider the impact of receiving a negative recommendation from ISS, and reduce the non-CEO director board positions if necessary.
- Revise policies and other governing documents, as needed, to limit directors’ public company boards to no more than 5.
Discouraging Unilateral Board Actions
ISS has had a policy to discourage unilateral changes by the board that adversely impact shareholders, but its policy did not differentiate between pre- and post-IPO companies. ISS revised its policy to provide separate guidelines for pre- and post-IPO companies.
For existing public companies, ISS will continue to recommend a vote “against” or “withhold” from directors individually, committee members, or the entire board (except new nominees) in accordance with its longstanding policy, but now each year following ISS’s “against” or “withhold” recommendation, ISS will make voting recommendations on a case-by-case basis on new director nominees unless the adverse amendment is reversed or submitted to a binding shareholder vote. Also, ISS will generally recommend a vote “against” the director nominees (other than new nominees) if the directors classified the board, adopted supermajority vote requirements to amend the bylaws or charter, or eliminated shareholders’ ability to amend bylaws.
If prior to or in connection with a company’s initial public offering the board approves an amendment to bylaws or charters of the newly-public company that include provisions that ISS determines are “adverse” to shareholders, ISS will recommend a vote “against” or “withhold” from directors, committee members or the entire board (except new nominees) after considering the following factors:
- The level of impairment of shareholders’ rights caused by the provision;
- The company’s or the board’s rationale for adopting the provision;
- The provision’s impact on the ability to change the governance structure in the future (e.g., limitations on shareholder right to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter);
- The ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure; and
- A public commitment to put the provision to a shareholder vote within three years of the date of the initial public offering.
In addition, each year following ISS’s “against” or “withhold” recommendation, ISS will make voting recommendations on a case-by-case basis unless or until the adverse provision is reversed or submitted to a vote of public shareholders.
Reason for Change: The new recommendations are intended to discourage unilateral board actions that adversely impact shareholders and to address the guidelines for pre- and post-IPO companies.
Next Steps: If a current provision or anticipated update of your charter or bylaws adversely impacts shareholders, consider the following:
- the impact of a negative recommendation from ISS;
- revising the charter or bylaws to reverse the adverse provision (or forgo the anticipated amendment); or
- submitting the amendment for a binding shareholder vote, if necessary.
New Factors for Analyzing Proxy Access Rights
ISS clarified which factors it will consider in evaluating directors who are nominated pursuant to a proxy access right (i.e., directors who are nominated by company shareholders who have the right to include their own nominees to the board of directors on the company’s proxy card).
Change: ISS will make voting recommendations on a case-by-case basis using any relevant factors including, but not limited to, the below factors if directors are nominated pursuant to a proxy access right:
- Nominee/Nominator-specific factors:
- Nominators’ rationale;
- Nominators’ critique of management/incumbent directors; and
- Nominee’s qualifications, independence, and overall fitness for directorship.
- Company-specific factors:
- Company performance relative to its peers;
- Background of the contested situation (if applicable);
- Board’s track record and responsiveness;
- Independence of directors/nominees;
- Governance profile of the company;
- Evidence of board entrenchment;
- Current board composition (skill sets, tenure, diversity, etc.); and
- Ongoing controversies, if any.
- Election-specific factors:
- Whether the number of nominees exceeds the number of board seats; and
- Vote standard for the election of directors.
Reason for Change: This change is due to the significant increase in proxy access rights nominations from 2014 to 2015 (18 to 90).
Next Step: If you currently allow proxy access (or are considering allowing proxy access), revise your proxy access procedures to better address the evaluation factors that will be considered by ISS.
More Detailed Reporting of Executive Compensation by Externally-Managed Issuers
ISS revised its guidelines to discourage insufficient executive compensation disclosures from externally managed issuers (“EMIs”). EMIs are companies (such as REITs) that contract for external management services to compensate the EMIs’ executives. Since EMIs do not pay executives directly, but rather reimburse the external managers through management fees, the EMIs’ compensation disclosures have tended to be less detailed than other issuers. As a result, ISS was concerned that shareholders of an EMI might not have the information needed to adequately assess an EMI’s pay programs and practices.
Change: ISS will recommend a vote “against” an EMI’s say-on-pay proposal if it determines that the EMI’s executive compensation disclosures are not sufficient in such a way that prevents its shareholders from making a reasonable/informed decision.
Reason for Change: This change is intended to ensure that shareholders of an EMI receive sufficient executive compensation disclosures from the EMI to allow them to make informed decisions. ISS did not provide any guidance on what it considers to be “sufficient” information; however, it appears that ISS will consider a disclosure of the aggregate portion of the fees that an EMI pays to external managers that are allocable to executive compensation expenses, or detailed pay information provided on behalf of the EMI’s external manager, to be “sufficient” information.
Next Steps: If you may qualify as an EMI, consider the following steps:
- Ensure 2016 and future compensation disclosures include information that is necessary for shareholders to make a reasonable assessment of your executive pay programs and practices; and
- Revise compensation disclosure practices or procedures (if any) to make sure that adequate information is provided regarding executive compensation provided by external managers.
Factors That Will Be Considered In Reviewing Equity Retention Policies
ISS clarified the factors it will consider when analyzing shareholder proposals to approve equity retention policies for senior executive officers.
Change: ISS will consider the following factors in reviewing any shareholder proposals that require senior executive officers to retain shares they receive under compensation plans:
- The percentage/ratio of net shares required to be retained;
- The time period required to retain the shares;
- Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness of such requirements;
- Whether the company has any other policies aimed at mitigating risk-taking by executives;
- Executives’ actual stock ownership and the degree to which it meets or exceeds the suggested holding period/retention ratio or the company’s existing requirements; and
- Problematic pay practices, current and past, which may demonstrate a short-term versus a long-term focus.
Reason for Change: This change clarifies the factors considered by ISS.
Next Step: Review current and proposed equity retention policies to determine whether any changes are needed to better address these factors.
If you have any questions about these updates or whether and how they impact your company, please contact one of our Executive Compensation and Employee Benefit partners.
Nelson Mullins Executive Compensation and Employee Benefits attorneys are ready to assist with your compensation and benefits related matters in a cost-effective and responsive manner. Please contact one of our Executive Compensation and Employee Benefits partners or the Nelson Mullins attorney with whom you work.
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