On November 12, the Institutional Shareholder Services (ISS) published its U.S. 2020 Proxy Voting Guideline Updates, which will be effective for shareholder meetings held on or after February 1, 2020. In general, the updates involve clarification of guidelines and formalization of factors to codify ISS’s existing approach on recommendations relating to specific issuers. These updates are also intended to bring certain references within ISS’s existing guidelines up to date. Particularly significant changes are summarized below.
ISS has revised the definition of “new nominee” to mean a director who is being presented for election by shareholders for the first time and has stated that only a new nominee who has been on a board for less than one year may, on a case by case basis, not be held responsible for problematic governance actions taken by the board before such new nominee joined the board. This update intends to close a previous loophole under which a new nominee may have included directors who served on the board up to three years (depending on the class to which he/she was appointed before being elected by shareholders) and directors who may have served on the board for years prior to the company’s public offering.
ISS clarified that nominees who served for only part of the fiscal year, rather than all new nominees, are exempt from its policy to generally recommend a vote against or withhold from directors who attend less than 75 percent of board and committee meetings for the period for which they served.
ISS will recommend voting against the chair of the nominating committee (or other directors as applicable) if there are no women on the company’s board, unless the company makes a firm commitment in its proxy statement to appoint at least one woman to the board within one year, with such exception only available through 2020.
Newly public companies
The ISS updates regarding newly public companies create two distinct policies that separately address problematic (1) governance provisions and (2) capital structure.
Problematic Governance Provisions:
ISS will generally recommend voting against or withholding voting for directors (excluding new nominees considered on a case-by-case basis) if, prior to or in connection with the company’s public offering, the company or its board adopts bylaw or charter provisions materially adverse to shareholder rights without a reasonable sunset clause. The update clarifies and narrows the focus of ISS’s policy regarding certain highly problematic governance structures, such as supermajority voting requirements to amend the bylaws or charter, a classified board structure or other provisions ISS deems egregious. Additionally, unless the adverse provision is reversed or removed, ISS may continue to vote against or withhold voting for such directors in subsequent years.
Problematic Capital Structure:
ISS created a new policy regarding capital structure for newly public companies, stating that it will generally recommend voting against or withholding voting for directors (excluding new nominees, who will be considered on a case-by-case basis) if prior to the company’s initial public offering, the company or its board implements a multi-class capital structure that leads to unequal voting rights without a reasonable sunset clause. To assess whether such sunset clause is reasonable, ISS will consider (1) the company’s lifespan, (2) post-IPO ownership structure and (3) the board’s disclosed rationale for the sunset period (so long as such period is less than seven years). Unless the adverse provision is reversed or removed, ISS may continue to vote against or withhold voting for such directors in subsequent years.
Restrictions on shareholders’ rights
ISS clarified that subject matter restrictions, such as prohibitions on the ability of shareholders to amend particular bylaws that govern their ability to amend bylaws, are also considered undue restrictions on shareholders’ rights. ISS will generally recommend voting against or withholding voting for members of the governance committee until shareholders are provided with an unfettered ability to amend the company’s bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Independent board chair shareholder proposals
ISS generally recommends voting for a shareholder proposal that requires the chair of the board to be an independent director. This policy has been updated to largely codify ISS’s existing practice by adding six factors that are given “substantial weight” and will increase the likelihood of a recommendation supporting the proposal in question. The six factors taken into consideration are whether the company has (1) a majority non-independent board and/or non-independent directors on key board committees, (2) a weak or poorly defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role, (3) an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair and/or a departure from a structure with an independent chair, (4) evidence that the board failed to oversee and address material risks, (5) a material governance failure, particularly if the board failed to adequately respond to shareholder concerns or materially diminished shareholder rights, and (6) evidence that the board failed to intervene when management’s interests are contrary to shareholders’ interests.
Share repurchase program proposals
ISS expanded its existing policy that recommends shareholders vote for management proposals to institute open-market share repurchase plans, in which all shareholders may participate on equal terms to also recommend voting for proposals that grant the board authority to conduct open-market repurchases, each absent company-specific concerns regarding (1) the use of targeted share buybacks as greenmail to threaten a takeover, (2) use of buybacks to inappropriately manipulate incentive compensation metrics, (3) threats to the company’s long-term viability and (4) other company-specific factors as warranted.
Additionally, ISS clarified that it will vote on a case by case basis on proposals to repurchase shares directly from specified shareholders, evaluating any such proposal based upon the stated rationale and the possibility for misuse, such as the repurchase of shares from insiders at a premium.
Evergreen provisions in equity-based and other incentive plans
ISS expressed its view that the environment, following the 2017 tax reform, raises concerns regarding evergreen provisions that automatically replenish plan reserves and circumvent regular shareholder reapproval at reasonable time intervals. Evergreen provisions in equity-based compensation plans are now considered an overriding factor in ISS’s Equity Plan Scorecard evaluation and may lead to a recommendation that shareholders vote against an equity-based compensation plan proposal.
Pay gap data
ISS generally recommends voting on a case-by-case basis on requests for reports on a company’s pay data by gender or policies and goals to reduce any gender pay gap and has updated its existing guidelines to cover requests made on the basis of race or ethnicity.
The full text of the ISS 2020 Americas Proxy Voting Guidelines Updates is available here.