Recently, proxy advisors Institutional Shareholder Services Inc. (ISS) and Glass Lewis released updates to their benchmark voting policies for the 2017 proxy season. In the case of ISS, additional guidance is expected in the coming weeks, but the released summary of updates provides an overview of the changes to their guidelines for the 2017 proxy season. Below is a summary of the major updates of both proxy advisory firms. The ISS updates are effective on or after February 1, 2017 and the Glass Lewis updates are effective on or after January 1, 2017.
Starting with the 2017 proxy season, ISS will recommend against directors who sit on more than five public company boards (as opposed to the previous six-board cap). The change in policy was announced last year and this year's guidelines confirm that the stated transition period, which allowed time for directors to make changes to their directorships, if needed, has ended. For CEOs of public companies, ISS has retained its existing policy of recommending against directors sitting on the board of more than two public companies (excluding their own, for a total of three boards).
Beginning with the 2017 proxy season, Glass Lewis will recommend voting against a director (i) who sits on more than a total of five public company boards (as opposed to the previous six-board cap) and (ii) an executive officer of a public company who sits on more than two public company boards (including their own, for a total of two boards).
Board Evaluation and Refreshment
Glass Lewis has clarified its policy regarding board evaluation, succession planning and refreshment to focus on the assessment and alignment of director skills with company strategy, rather than solely relying on age or tenure limits. Glass Lewis strongly supports routine director evaluations, including independent external reviews and periodic board refreshment, to foster the sharing of diverse perspectives and the generation of new business ideas.
Restricting Binding Shareholder Proposals
Starting with the 2017 proxy season, ISS will generally vote against, or withhold support from, members of the governance committee if the company's charter imposes undue restrictions on shareholders' ability to amend the company's bylaws, including a prohibition on the submission of binding shareholder proposals or share ownership or time holding requirements in excess of the requirements of Rule 14a-8.
Unilateral Bylaw/Charter Amendments IPO Companies
In the latest update, ISS has noted the increase in companies completing IPOs with multi-class capital structures, and has updated its policy to provide adverse vote recommendations for directors, committee members or the entire board if, prior to or in connection with the IPO, the company or its board adopted bylaw or charter provisions materially adverse to shareholder rights, or implemented a multiclass capital structure in which the classes have unequal voting rights.
Under its revised policy, Glass Lewis will consider recommending an adverse vote against the members of the governance committee or the directors in cases where it believes the board has approved governing documents that significantly restrict the ability of shareholders to effect change. Such determination will be based on the severity of the concern, and will include review of factors such as antitakeover mechanisms, supermajority vote requirements, and general shareholder rights such as the ability of shareholders to remove directors and call special meetings.
Stock Distributions: Splits and Dividends
ISS has clarified that it will generally vote for management proposals to increase the common share authorization for a stock split or stock dividend, provided that the effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS' Common Stock Authorization Policy. The update is meant to take into account instances in which proposals to increase authorized shares may be tied to the implementation of a planned stock split or stock dividend.
Non-Employee Director Pay
ISS has expanded its framework for evaluating non-employee director pay and certain non-employee director pay proposals to include consideration of the following qualitative factors: (i) the relative magnitude of director compensation as compared to companies of a similar profile; (ii) the presence of problematic pay practices relating to director compensation; (iii) director stock ownership guidelines; (iv) equity award vesting schedules; (v) the mix of cash and equity-based compensation; (vi) meaningful limits on director compensation; (vii) the availability of retirement benefits or perquisites and (viii) the quality of the disclosure of director compensation.
Equity Plan Scorecard
ISS has revised the factors and weightings under the U.S. Equity Plan Scorecard policy to include an additional factors -- an evaluation of the payment of dividends on unvested awards. Under this factor, full points under the scorecard system will be earned if the equity plan expressly prohibits the payment of dividends before the vesting of the underlying award (with no deduction of points if the plan permits the accrual of dividends payable upon vesting), and no points will be earned if such prohibition is absent from the text of equity plan.
In addition, the policy has been revised with respect to the minimum vesting factor. Under the revised policy, full points will be earned if the equity plan specifies a minimum vesting period of one year for all award types, and no points will be earned if the plan allows individual award agreements to provide for less than a minimum of one year of vesting.