Recently Institutional Shareholder Services (“ISS”) updated its U.S. Proxy Voting Research Procedures & Policies Frequently Asked Questions. 1 In the last year, ISS tightened its policies on certain substantive areas covering responsiveness of the board of directors on majority‑supported shareholder proposals, recommendations on poison pills and unilateral bylaws and charter amendments, as well as gave additional information about how to engage ISS regarding proxy reports and research analysts. Noteworthy updates over the past year are described in greater detail below.
Governance Matters
Exception to Attendance Policy for Newly‑Appointed Directors. ISS modified its policy on disclosure of attendance of newly‑appointed directors to provide that such directors generally are exempted from a negative vote if they attended fewer than 75% of the board and committee meetings for the period for which they served, or if the disclosure is unclear as to whether they attended 75% of such meetings. Previously issuers had to disclose that new directors missed meetings due to scheduling conflicts.
Majority‑Supported Shareholder Proposals. ISS clarified its policy on proxy access proposals to provide that board‑implemented provisions, which provide broad and binding authority of interpretation, while problematic, may not void the board’s right of interpretation on its own but will be considered in connection with other problematic provisions.
Poision Pills.
ISS policy is to recommend against director nominees at issuers holding a long‑term poison pill that has not been ratified by its shareholders. The policy no longer grandfathers pills adopted or renewed prior to November 19, 2009.
If an issuer adopts a poison pill before it goes public, and if such pill was not put to a binding shareholder vote at the first shareholder meeting, ISS will recommend a withhold or negative vote against all director nominees. Issuers no longer have the additional option of committing to put the pill up to a vote within 12 months following the IPO.
ISS suggested that issuers could terminate poison pills prior to their expiration dates by accelerating the expiration dates to avoid the costs of redemption
Unilateral Bylaws/Charter Amendments. For newly‑public companies, the adoption of a multi‑class structure, classified board, and/or supermajority vote requirements generally will result in an ISS recommendation of withhold or negative vote against the director nominees. Fee‑shifting provisions also result in continued withhold recommendations.
Governance Failures. ISS’s Governance Failures policy is designed to catch one‑off egregious actions that are not covered under other policies. If a type of action applies to a large number of issuers or persists year after year, ISS generally will break such action out into its own standalone policy. In 2018, ISS added as standalone policies: 1) excessive pledging, and 2) the failure to opt out of state statutes requiring classified boards. ISS recently has been recommending against the director nominees of issuers incorporated in states requiring a classified board of directors where the issuer has not opted out of such requirement.
Procedural Matters
Proxy Reports. ISS generally issues U.S. proxy reports to issuers between 13 and 30 calendar days before the shareholder meeting. Issuers may access their own proxy reports through Governance Analytics, a web‑based platform hosted by ISS Corporate Solutions (“ICS”), by submitting a request through the ISS Help Center. Proxy reports are provided to issuers free of charge subject to the following conditions:
Proxy reports are only for an issuer’s internal use by its employees; and
The issuer is prohibited from making the report, or any portion thereof, public or sharing the report, profiles, or login credentials with any external parties, including shareholders and external advisors retained by the issuer, such as law firms, proxy solicitors and compensation consultants.2
Factual Errors. If an issuer believes a proxy report contains an error, the issuer should submit the matter through the ISS Help Center. If ISS agrees that a change or correction is required, it will issue a proxy alert to its clients.
Change of a Vote Recommendation. ISS will not disclose or guarantee a vote recommendation or change of vote recommendation to the issuer in advance of the proxy report. Instead, ISS will determine if any new information disclosed by the issuer warrants an update to the report or voting recommendation, and if so, ISS will issue a proxy alert featured at the head of the reissued proxy report. If an issuer is filing additional information on the issuer’s website or on EDGAR, the issuer must inform ISS of such filing at least five business days prior to the shareholder meeting.
Engagement of a U.S. Research Analyst. Issuers should submit a request for engagement with the U.S. research analysts through the ISS Help Center, including an agenda, list of participants, and preferred dates and times.
ISS accepts engagement requests at its sole discretion and prioritizes engagements with issuers with substantive governance issues. Engagements requested for non‑contentious meetings generally are scheduled between August and February, before the U.S. proxy season begins. With respect to engagements regarding contentious meetings, ISS generally will engage both sides once the proxy materials are released. All discussions with ISS are on‑the‑record and material non‑public information should not be disclosed. ISS analyses are based on publicly‑available information, and therefore, information provided by issuers should either be already publicly‑available to all shareholders or will be disclosed in the issuer’s filings for the upcoming shareholder meeting.
While the ISS research team is never in “blackout” with respect to contact with issuers, issuers should be aware that there is a blackout period for ICS during the period from the filing of the proxy through the date of the shareholder meeting. Due to the firewall between ISS and ICS, issuers should not mention any contact with ICS, disclose any information obtained from the purchase of ICS services or products, or identify the issuer as an ICS client.
