On October 26, 2015, proxy advisor Institutional Shareholder Services, Inc. (ISS) released three proposed changes to its voting policies for U.S. issuers in preparation for the 2016 proxy season. These proposed changes follow ISS’s release last month of the results from its annual survey of over 420 institutional investors, issuers, advisors and other market constituents. The current proposed changes to ISS’s policies concerning U.S. issuers include revisions to:
- combat director “overboarding,” by decreasing the number of public company boards on which CEOs and other non-CEO directors may serve;
- discourage boards of directors from unilaterally amending charters and bylaws to create classified boards or establish supermajority vote requirements, by issuing and maintaining adverse vote recommendations for director nominees until such unilateral action is reversed or ratified; and
- incentivize externally-managed issuers (EMIs) to increase compensation arrangement disclosures, by issuing adverse recommendations on such EMIs’ say-on-pay or compensation-related proposals until sufficient disclosures are made.
The summary of results for the 2015 ISS Global Policy Survey is available here. A complete list of the draft policies proposed is available here. ISS has requested comments by November 9, 2015, and will announce final policies for the 2016 proxy season on November 18, 2015.
Combating Director Overboarding
ISS’s proposal on director overboarding reported that the national average of time devoted by directors to their board duties across directorships was 278 hours in 2014, according to a 2014–2015 survey conducted by the National Association of Corporate Directors (NACD). This figure represents a 46% increase over the same measure in the NACD’s 2005 survey. As a result, ISS’s proposal expressed concern about directors’ having sufficient time to prepare, attend and participate meaningfully at board and committee meetings.
ISS currently considers non-CEO directors sitting on more than six public company boards, and CEO directors sitting on more than two public company boards (excluding their own), to be overboarded. ISS’s 2015 survey showed that 52% of investor respondents believed that four to five boards is an appropriate limit for non-CEO directors, while 48% of these investor respondents believed that one other public company board (in addition to the CEO’s home board) is an appropriate limit for CEO directors.
In response to these results, ISS has proposed lowering the limits in its policies for both non-CEO and CEO director nominees.
- For non-CEO nominees, ISS is considering reducing the maximum number of public company boards to four or five.
- For CEO nominees, ISS is considering reducing the current threshold of more than two public company boards besides the CEO’s own, to no more than one outside board besides the CEO’s own.
ISS’s proposal acknowledged that often a CEO may sit on multiple entities’ boards within the same organization. ISS’s current policy considers all subsidiary boards as separate boards, but considers further whether a subsidiary is “controlled” by the parent when deciding whether to recommend a “withhold” vote for a director nominee. ISS will not recommend a “withhold” vote against the CEO of a parent company board or any of its controlled subsidiaries (generally considered greater than 50% ownership), but may do so with respect to subsidiaries that are not controlled by the parent and boards outside the parent/subsidiary relationship.
For more detail and to see a summary of ISS’s 2015 survey results on Director Overboarding limits, please see the ISS proposal on Director Overboarding availablehere.
Discouraging Unilateral Board Actions
ISS’s proposal on unilateral board actions noted that recent years have witnessed an increasing trend of unilateral amendments made by boards to U.S. company charters and bylaws without shareholder approval or ratification. The 2015 survey responses from investors expressed concerns over such actions in areas such as classifying the board, establishing supermajority vote requirements on issues important to or impacting shareholders, diminishing shareholders’ rights to call a special meeting, mandating fee shifting to unsuccessful litigants, and restricting third-party compensation of directors.
In response to the feedback received from institutional investors, ISS has proposed a policy change to issue adverse vote recommendations for director nominees of boards who have acted unilaterally to (1) classify the board or (2) establish supermajority vote requirements on items materially important to shareholders’ rights in any period after the completion of a company’s initial public offering (IPO). The update will also specifically address pre-IPO related amendments to classify the board or establish supermajority vote requirements to amend the bylaws or charter, and may institute a policy to issue adverse vote recommendations for director nominees at subsequent annual meetings following the completion of an IPO. As proposed, ISS would maintain these adverse vote recommendations against director nominees until a board has reversed its unilateral action, or until shareholders have ratified such action. The magnitude of such an adverse vote recommendation for director nominees has already yielded results—the ISS proposal notes that in 2015, ISS issued adverse vote recommendations for director nominees at three public companies whose boards have acted unilaterally in either classifying the board or adopting supermajority measures. As a result, one of these three companies has already committed to declassify its board.
For more detail, please see the ISS proposal on Unilateral Board Actions availablehere.
Incentivizing More Comprehensive Compensation Disclosures by Externally-Managed Issuers
Externally-managed issuers (EMIs) are companies that engage and contract for external management services to compensate their executive teams. ISS has identified approximately 60 EMIs in the United States (typically REITs) and, unlike other issuers that compensate executives directly (and thus disclose the specific details and methods of such compensation to the public in annual filings), an EMI’s executives are compensated by the EMI’s external manager, who is then reimbursed by the EMI through management fees. ISS’s proposal raised its concern that EMIs’ executive compensation disclosures have been less detailed than those of non-EMI issuers, with little to no uniformity in practices across companies. Without sufficient disclosures, ISS maintains that shareholders of the EMI are ill-equipped to assess pay programs, compare current or proposed compensation against the EMI’s performance, or consider any conflicts of interest in pay arrangements that may exist.
ISS has proposed to update its policies to increase transparency around executive compensation and to incentivize EMIs to provide more comprehensive disclosures. The proposed changes provide that ISS will recommend against an EMI’s say-on-pay proposal (or proposals relating to its compensation committee members, compensation committee chair or full board, as appropriate, in the absence of a specific say-on-pay proposal on its ballot) that does not provide sufficient compensation disclosures to make a comprehensive pay analysis, until sufficient disclosure practices are adopted. ISS’s proposal noted that, assuming the proposal is adopted as-is, most of the current EMIs in the United States would have received recommendations against their say-on-pay proposals last season.
For more detail, please see the ISS proposal on Compensation at Externally-Managed Issuers available here.