ISS (Institutional Shareholder Services) has released its annual 2015 Proxy Voting Guidelines Updates (available here). These guidelines apply to annual meetings to be held on or after February 1, 2015. Many of our clients have investors who do not routinely follow ISS guidelines, while others do. Regardless of your company’s investor profile and how closely they follow the recommendations of ISS, it’s a good idea to review and consider your position with respect to these matters as a general matter of good corporate governance.
Among the key points for consideration in the ISS guidelines this year are the following:
Unilateral Bylaw or Charter Amendments. ISS has adopted a stand-alone policy (as opposed to the prior policy, in which this topic was included as part of an overall “governance failures” topic) that it will generally recommend voting against or withholding votes from individual directors, committee members, or the entire board (except new nominees, who will be considered on a case-by-case basis) if the board amends the company’s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders. ISS does not specify what kinds of amendments would qualify as “materially diminishing” or “adversely impacting” shareholders’ rights, but we can surmise that these would include provisions such as raising the voting threshold necessary to approve certain actions, or taking away the right to act by written consent of shareholders. ISS notes that it will consider the following factors in deciding whether to recommend a negative vote in this context:
- The board’s rationale for adopting the bylaw/charter amendment without shareholder ratification;
- Disclosure by the company of any significant engagement with shareholders regarding the amendment;
- The level of impairment of shareholders’ rights caused by the amendment to the bylaws/charter;
- The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;
- The company’s ownership structure;
- The company’s existing governance provisions;
- Whether the amendment was made prior to or in connection with the company’s initial public offering;
- The timing of the board’s amendment to the bylaws/charter in connection with a significant business development; and
- Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
In the commentary on the updates, ISS notes a recent “substantial increase” in the number of unilateral bylaw or charter amendments that it finds problematic, which prompted its formulation of this position as a separate, standalone policy.
Independent, Separate Board Chair. ISS notes that it will generally recommend voting in favor of shareholder proposals requiring that the board chair position be filled by an independent director, taking into consideration the following:
- The scope of the proposal, including:
- whether the proposal is precatory or binding; and
- whether the proposal is seeking an immediate change in the chairman role or the implementation of a change at the next CEO transition.
- The company’s current board leadership structure, including:
- the presence of an executive or non-independent chair in addition to the CEO;
- whether there has been a recent recombination of the role of CEO and chair, and/or a departure from a structure with an independent chair; and
- any recent transitions in board leadership and the effect such transitions may have on independent board leadership, as well as the designation of a lead director role.
- The company’s governance structure and practices, including:
- overall independence of the board;
- the independence of key committees;
- the establishment of governance guidelines;
- board tenure and its relationship to CEO tenure;
- poor compensation practices;
- material failures of governance and risk oversight,
- related-party transactions or other issues putting director independence at risk;
- corporate or management “scandals;” and
- actions by management or the board with potential or realized negative impact on shareholders.
- Company performance over the past one, three, and five years compared to the company’s peers and the market as a whole.
- Any other relevant factors that may be applicable.
In the commentary on the updates, ISS notes that calls for independent board chairs were the most prevalent type of shareholder proposal offered for consideration at U.S. companies’ annual meetings in 2014, and the number of proposals calling for independent board chairs has more than doubled over the past five years.
Litigation Rights (Including Exclusive Venue and Fee-Shifting Bylaw Provisions). ISS notes that it will use a case-by-case approach to recommendations as to voting on proposed bylaws that impact shareholders’ litigation rights, such as a provision requiring litigation to be brought in a particular forum, or a “fee-shifting” provision that requires a shareholder who sues a company unsuccessfully to pay all litigation expenses of the defendant corporation. (For further discussion of these kinds of bylaws, click here.) The factors it will consider include:
- The company’s stated rationale for adopting such a provision;
- Disclosure of past harm from shareholder lawsuits in which plaintiffs were unsuccessful or shareholder lawsuits outside the jurisdiction of incorporation;
- The breadth of application of the bylaw, including the types of lawsuits to which it would apply and the definition of key terms; and
- Governance features such as shareholders’ ability to repeal the provision at a later date (including the vote standard applied when shareholders attempt to amend the bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections.
ISS will generally recommend a vote against bylaws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., in cases where the plaintiffs are partially successful).
Disclosure on Political Contributions. ISS notes that it will generally recommend a vote in favor of shareholder proposals requesting greater disclosure of a company’s political contributions and trade association spending policies and activities, considering:
- The company’s policies, and management and board oversight related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes;
- The company’s disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and
- Recent significant controversies, fines, or litigation related to the company’s political contributions or political activities.
Disclosure on Greenhouse Gas Reduction Goals. ISS noted that it will apply a case-by-case standard to shareholder proposals that call for the adoption of greenhouse gas (GHG) reduction goals from products and operations, taking into account:
- Whether the company provides disclosure of year-over-year GHG emissions performance data;
- Whether company disclosure lags behind industry peers;
- The company’s actual GHG emissions performance;
- The company’s current GHG emission policies, oversight mechanisms, and related initiatives; and
- Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions.
The 2015 Proxy Voting Guidelines Updates also include a new “scorecard” model for its evaluation of equity compensation plan-related proposals. That model will be examined in a separate blog post.