No Proposal on Unilateral Bylaw Amendments; U.S. Policy Changes Would Introduce Uncertainty for Independent Chair Shareholder Proposals and Implement a Scorecard for Equity Plan Proposals
Yesterday, Institutional Shareholder Services, the proxy advisory firm, published proposed changes to its proxy voting guidelines for the 2015 proxy season. The proposals applicable to U.S. companies are limited and do not include any proposed change relating to unilateral bylaw amendments. ISS had recently surveyed institutional investors and public companies and reported receiving strong responses from investors against boards that unilaterally adopt bylaw amendments that reduce shareholder rights.
As U.S. issuers plan for the 2015 proxy season, they should take into account the proposed changes to ISS's voting polices on independent chair and equity plan proposals. Comments on the proposed changes are due by October 29, 2014.
ISS 2015 PROPOSED POLICY UPDATES
For U.S. issuers, the 2015 proposals would modify the corporate governance criteria that guide recommendations on shareholder proposals to separate the CEO and chair roles and would introduce a “more nuanced” scorecard for assessing equity plan proposals.
Independent Chair Shareholder Proposals
Currently ISS supports shareholder proposals to separate the CEO and chair roles unless six specific criteria are all satisfied, including the presence of a lead independent director with specified authority and other governance and performance criteria. ISS is proposing to modify this policy to provide for a more “holistic review” of relevant factors, such that any single factor that may have previously resulted in a “for” or “against” recommendation may be mitigated by other positive or negative factors, and to add the following new factors that are to be considered:
- the absence/presence of an executive chair;
- recent board and executive leadership transitions;
- director/CEO tenure; and
- a five-year total shareholder return (or TSR) period (increased from three years).
The proposal will result in more uncertainty with respect to independent chair proposals, and ISS notes that, in backtesting, the new methodology resulted in a higher level of support for such shareholder proposals.1
Equity Plan Scorecard
The second proposed change for U.S. issuers relates to equity plan proposals. As a substitute for ISS’s current approach in determining when an equity incentive plan proposal warrants an “against” recommendation, ISS proposes to implement an “Equity Plan Scorecard.” This Scorecard will consider a range of factors under three main categories—cost, plan features, and grant practices, as follows:
- Shareholder Value Transfer relative to industry/market capitalization peers under a dual cost measurement approach
- equity plan features such as minimum vesting periods, discretionary vesting authority, share recycling and single trigger change-in-control
- historical grant practices
The factors will be weighted based on company size and status, with companies keyed to one of the following: the S&P 500, Russell 3000 (excluding S&P 500), Non-Russell 3000, or Recent IPO/Bankruptcy Emergent companies. Although ISS will generally continue to consider a range of factors in evaluating equity plan proposals, some equity plan features, such as the authority to reprice options without shareholder approval and excessive equity grants, will automatically trigger “against” recommendations.
Importantly, a company’s burn rate would be considered as part of the Scorecard evaluation and would be measured against the company’s respective group. As a result, this would eliminate the potential for burn rate commitments to mitigate historic grant levels.
The proposed policy is not designed to increase or decrease the number of proposals that would receive adverse vote recommendations although ISS notes that, in the current environment, investors may be more critical of equity transfers to management, particularly in the absence of shareholder-friendly plan features and grant practices
Comments on the proposed changes are due by October 29, 2014. The proposals are available at http://www.issgovernance.com/policy-gateway/2015-benchmark-policy-consultation/, as are instructions for providing comments.