The Background: The novel coronavirus (COVID-19) pandemic has presented unprecedented uncertainties and challenges to public companies for the 2020 proxy season.
The Issue: Proxy advisor ISS published guidance on several of its voting policies that are likely to be implicated by the COVID-19 pandemic and the global response to it.
The Outcome: As expected, with few exceptions, ISS is relaxing its historically inflexible approach to a number of governance issues in light of the COVID-19 pandemic. The key in most instances will be clear articulation of the basis for any action that ISS would oppose in normal circumstances.
Annual General Meeting Issues
ISS recognizes that health and safety concerns have caused some companies to postpone their annual meetings or make them wholly or partially virtual. Although ISS generally prefers "hybrid" (both in-person and "virtual") meetings to those that are completely virtual, ISS recognizes that critical pandemic guidelines may make virtual meetings necessary. Accordingly, ISS will not recommend votes against companies who hold "virtual-only" meetings. ISS recommends that companies that opt to hold virtual meetings should note COVID-19's impact on that decision, provide shareholders opportunities to participate as fully as possible, and commit to return to in-person or hybrid meetings as soon as practicable.
ISS also recognizes that health and safety concerns may prevent directors from physically attending shareholder or board meetings.
Poison Pills, Shareholder Rights, and Directors
ISS is likely to consider a severe stock price decline due to the COVID-19 pandemic to be a valid justification for adopting a tactical poison pill—that is, a shareholder rights plan with a duration of less than a year. Boards should explain the choice of duration for the poison pill and, if applicable, the rationale for not putting the poison pill's renewal to a shareholder vote beyond that period. In this regard, companies that adopt poison pills well before their 2020 annual meetings may still be criticized by ISS and activist shareholders absent a clear justification to act, such as an accumulator or risk to NOL carryforwards, and a commitment to seek shareholder approval if the rights plan is not terminated within a period substantively shorter than a year.
Board and management team composition may be affected by the disability or incapacity of directors and executives during the pandemic. ISS will continue to examine changes to board composition or senior management on a case-by-case basis and will adjust the application of specific voting policies—such as those relating to independence, "overboarding," and board diversity—as appropriate for exceptional circumstances. As always, detailed disclosure is key.
ISS acknowledged that companies are likely to materially change the performance metrics, goals, or targets linked to their short-term compensation plans in response to the markets' decline. ISS encourages disclosure of the rationale for any such change contemporaneously with the change. ISS remains generally unsupportive of boards changing long-term compensation plans but will analyze even changes to long-term metrics on a case-by-case basis.
However, ISS will continue to generally recommend voting against any stock option repricing that occurs within one year of a precipitous drop in the company's stock price. ISS discourages companies from undertaking repricing actions without timely shareholder approval or ratification.
Capital Structure and Payouts
ISS noted that cash conservation and rules prohibiting dividend payments by companies participating in government assistance programs may impact set payout ratios. Although ISS generally continues to favor share repurchases within customary limits, ISS noted the potential reputational, regulatory, and business risks that accompany share repurchases undertaken after significant stock price declines.
Two Key Takeaways
- ISS's new guidance gives companies broader discretion and greater flexibility when making corporate decisions during the COVID-19 pandemic.
- While ISS's guidance on its voting policies should not change any company's practices or plans, adequate disclosure regarding the rationale for corporate action is critical.