This morning, ISS released its 2013 Policy Updates. This blog will describe the 2013 Updates in more detail next week, but today we will take partial credit for a small "victory for the good guys." Share pledging by officers and directors is certainly not the most important issue facing corporate America – and it is definitely not the most important issue covered in the 2013 Policy Updates. However, as discussed in the October 29 blog, we were asking for ISS to take a balanced approach to share pledging arrangement; recognizing that – despite two widely publicized blow-ups of share pledging arrangements – most arrangements are reasonable and no cause for alarm.
In the 2013 Update, ISS indicates, by footnote, that "under extraordinary circumstances," [my emphasis] hedging of company stock and significant pledging of company stock by directors and/or executives could be considered a failure of risk oversight that could lead ISS to vote AGAINST or WITHHOLD from directors individually, committee members, or the entire board.
Pledging of company stock at any amount as collateral for a loan is not a responsible use of equity. Pledging of company stock as collateral for a loan may have detrimental impact on shareholders if the officer or director is forced to sell company stock, for example, to meet a margin call. The forced sale of significant company stock may negatively impact the company's stock price, and may also violate company insider trading policies. In addition, pledging of shares may be utilized as part of hedging or monetization strategies that would potentially immunize an executive against economic exposure to the company's stock, even while maintaining voting rights...
In determining vote recommendations for election of directors of companies who currently have executives or directors with pledged company stock, the following factors will be considered:
- Presence in the company's proxy statement of an anti-pledging policy that prohibits future pledging activity;
- Magnitude of aggregate pledged shares in terms of total common shares outstanding or market value or trading volume;
- Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;
- Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and
- Any other relevant factors.
ISS still views excessive share pledging arrangements as a potential problem. However, it acknowledges that more modest pledging arrangements are acceptable.
On November 16, 1945, as part of "Operation Paperclip," the United States Army secretly admitted 88 German scientists and engineers to help in the development of rocket technology. The story of Operation Paperclip is a fascinating study of moral ambiguity. As you might expect, not all of these folks were free from the guilt of the Nazi regime. However, their knowledge and abilities led directly to the eventual U.S. dominance in the Cold War. I invite you to read up on the issue and make your own decision.