Institutional and Shareholder Services published its 2016 benchmark voting policy consultation last week and is seeking feedback on certain changes to its UK & Ireland Proxy Voting Guidelines.

Background

Institutional and Shareholder Services (ISS) is a proxy advisory firm and provides corporate governance and socially responsible investment research and recommendations to, amongst others, hedge funds and asset managers as well as institutional clients, and advises in particular on environmental, social and governance risk for the purposes of shareholder voting. 

The UK & Ireland Proxy Voting Guidelines (“UKI Guidelines”), first published on 7 January 2015, aim to assist shareholders in assessing how company resolutions affect their long-term interests as owners of a company. 

The UKI Guidelines set out a recommendation for all common items of shareholder business and cover, among other things: operational items (approval of accounts and reports, articles amendments, dividends and audit), directors, remuneration, capital structure and other items, including M&A proposals, related party transactions, mandatory takeover bid waivers, shareholder requisitions and proposals. The Guidelines are compliant with the most recent NAPF Corporate Governance Policy and Voting Guidelines (updated as of December 2014) and are not intended to introduce a materially different approach. However, the UKI Guidelines do refer to other good practice standards relevant to the UK market. 

Proposed changes to the UKI Guidelines

The proposed changes to the UKI Guidelines include the following:

Director overboarding

Given the importance for directors to have sufficient time to devote to their roles, ISS is proposing to introduce an "overboarding" policy which recommends the number of directorships an individual may hold, which is not referred to in the current UKI Guidelines. The proposed policy limits, which are consistent with ISS European policy, are:

  1. executive directors are not expected to hold other executive or chairmanship positions. However, they may hold up to two other non-executive directorships;
  2. a board chairman should not hold an executive position elsewhere or more than one other chairmanship position. The chairman may hold up to three other non-executive directorships;
  3. a non-executive director who does not hold an executive or chairmanship positions may hold up to four other non-executive directorships.

In assessing directorships, only publicly listed companies will be taken into account. When applying the policy, ISS will consider the nature and scope of the various appointments and the companies concerned and if any exceptional circumstances exist.

ISS states that in terms of potential impact, this policy is likely to result in a small increase in the number of vote recommendations against individual directors.

General authority to issue shares without pre-emptive rights

ISS is proposing to update its policy to reflect the Pre-Emption Group’s revised guidelines, which were published in March 2015. Previously the Pre-Emption Group recommended that a general authority to disapply pre-emption rights should be limited to no more than 5% of the issued share capital. The revised guidelines now permit companies to seek shareholder approval for an extra 5% disapplication of pre-emption rights in addition to the standard 5%, provided that the extra 5% is to be used only for the purposes of an acquisition or a specified capital investment.

ISS proposes to amend the UKI Guidelines to reflect this revised recommendation, but also to clarify that if a company subsequently abuses the authority throughout the year, ISS may issue a negative recommendation on the authority at the following AGM.

ISS expects this change to have a limited impact on the level of support for these general authorities, as it sees it as merely a codification of recent practice since the revised Pre-Emption Group recommendations were issued.

Auditors’ fees and smaller companies

ISS points out that investors have become increasingly concerned that non-audit services provided by the auditor of a company may impair audit objectivity, with the result that many investors do not support proposals authorising the board to fix fees payable to external auditors when such auditors receive significant non-audit fees.

The UKI Guidelines recommend voting against proposals relating to auditor fees when the ratio of non-audit fees to audit fees has been in excess of 100% for more than one year without adequate explanation. This recommendation relates to widely held companies and is not currently applied to smaller companies.  These are defined as members of the FTSE Fledgling Index, those listed on AIM and other companies not widely held.

ISS now proposes to extend this policy regarding fees for non-audit services to smaller companies as well. ISS expects the impact of this change to be fairly limited to just under 6% of smaller companies identified as such by ISS.

Next steps

Comments have been requested by 9 November 2015 and ISS will publish its final policies on 18 November 2015. The revised policies will be applied to shareholder meetings taking place on or after 1 February 2016. The guidelines can be found at:

http://www.issgovernance.com/file/policy/2015ukandirelandproxyvotingguidelines.pdf