On Nov. 21, 2016, Institutional Shareholder Services, or ISS, released its voting policy updates for the 2017 proxy season. This release followed ISS’ review of the results of its policy survey, which was summarized in the Oct. 31, 2016 edition of GT Insights. The following is a brief summary of the policy updates:

  • Overboarding of Executive Chairs. ISS will generally recommend against a director that sits on more than five (formerly six) public company boards or, if the director is also the CEO of the public company, more than two public company boards besides their own.

  • IPO Company Dual Class Structures and other Provisions. ISS will generally recommend against directors of the board of newly public companies that, in connection with an IPO, adopted capital structures with multiple classes of stock that have different voting rights or adopted charter or bylaw provisions materially adverse to the rights of shareholders. A commitment to put the provisions to shareholder vote within three years will no longer be sufficient, and a sunset provision on the unequal voting rights would be necessary to avoid a negative recommendation.

    ISS will consider the following factors in making its recommendation: (1) the level of impairment of shareholders’ rights; (2) the disclosed rationale; (3) the ability to change the governance structure (e.g., limitations on shareholders’ right to amend, or supermajority vote requirements to amend, the bylaws or charter); (4) the ability of shareholders to hold directors accountable (i.e., is the board classified or are there annual elections); (5) any reasonable sunset provision; and (6) other relevant factors.

  • Company-Imposed Restrictions on Binding Shareholder Proposals. ISS will recommend against the members of the governance committee if the company’s governing documents impose undue restrictions on shareholders’ ability to amend the company’s bylaws, such as prohibiting the submission of binding shareholder proposals or imposing share ownership or holding periods in excess of that required under Rule 14a-8. These recommendations would continue until the restrictive provisions were eliminated.

  • Stock Distributions: Splits and Dividends. ISS will generally recommend in favor of a management proposal to increase the company’s authorized common shares for stock splits or stock dividends, provided the “effective” increase (formerly just “increase”) in authorized shares is within the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.

  • Equity and Other Compensation Plans. ISS will add dividends payable prior to vesting as a plan feature in connection with its evaluation of a company’s Equity Plan Scorecard (EPSC). A company will earn full EPSC points if the plan expressly prohibits, for all award types, the payment of dividends before the vesting of the underlying award, but will earn no EPSC points if the plan is silent or does not include the prohibition, even if the company in practice does not pay dividends until vesting. In addition, a minimum vesting period of one year for all award types must be specified under the plan in order to receive full EPSC points for this factor, but no points will be earned if the plan allows for individual award agreements that reduce or eliminate the one-year vesting requirement.

  • Proposals for Shareholder Ratification of Director Compensation. ISS will evaluate, on a case-by-case basis, management proposals seeking advisory shareholder ratification of non-employee director compensation, based on the following factors: (1) if the equity plan under which non-employee director grants are made is on the ballot, whether it warrants support; (2) the relative magnitude of director compensation as compared to similar companies; (3) the presence of problematic director compensation pay practices; (4) director stock ownership guidelines and holding requirements; (5) vesting schedules; (6) the mix of cash and equity-based compensation; (7) meaningful limits on director compensation; (8) the availability of retirement benefits or perquisites; and (9) the quality of director compensation disclosure.

  • Non-Employee Director Equity Plans. ISS will broaden the factors considered when assessing non-employee director equity plans. Under its revised policy, ISS will evaluate these plans on a case-by-case basis based on: (1) the total estimated cost of the company’s equity plans relative to industry/market cap peers. This will be measured by the company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; (2) the company’s three-year burn rate relative to its industry/market cap peers; and (3) the presence of any egregious plan features (such as an option repricing provision or liberal change in control vesting risk). Where the plans exceed the plan cost or burn rate benchmarks when combined with employee/executive stock plans, ISS will also consider the same qualitative factors considered in evaluating management proposals seeking advisory shareholder ratification of non-employee director compensation (as described above).

  • Amendments to Cash and Equity Plans. ISS has more clearly defined its framework for evaluating proposals to amend plans, such as its approach to those presented only for 162(m) purposes, as compared to those involving multiple amendments for other purposes. ISS will generally recommend in favor of proposals that seek to address administrative features and those seeking approval only for 162(m) purposes (but only if the administering committee consists entirely of independent outsiders as defined by ISS). ISS will evaluate on a case-by-case basis amendments to cash incentive plans (including initial post-IPO proposals) and other bundled material amendments.

    For proposals to amend equity incentive plans, ISS will vote on a case-by-case basis. If the proposal requests additional shares and/or the amendments may potentially increase the transfer of shareholder value to employees, the recommendation will be based on the EPSC evaluation as well as an analysis of the overall impact of the amendments. If the plan is being presented for vote for the first time post-IPO, the recommendation will be based on the EPSC evaluation as well as an analysis of the overall impact of any amendments (whether or not additional shares are being requested). If, however, there is no request for additional shares and the amendments are not deemed to potentially increase the transfer of shareholder value to employees, then the recommendation will be based entirely on an analysis of the overall impact of the amendments.