On Friday, December 18, ISS issued new guidance on how a board implements a majority-supported shareholder proposal for a proxy access bylaw. The guidance is contained in its Frequently Asked Questions on U.S. Proxy Voting Policies and Procedures.
This guidance identifies situations in which ISS may recommend votes against a company’s individual directors, nominating/governance committee members, or the entire board, based on the specific provisions of a company’s enacted proxy access bylaw.
Under the FAQ, ISS expects that a bylaw implemented in response to a majority-supported shareholder proposal will not be more stringent than the proposal with respect to the following:
- Ownership thresholds above three percent;
- Ownership duration longer than three years;
- Aggregation limits below 20 shareholders;
- Cap on nominees below 20 percent of the board.
The FAQ also states that ISS will review any restrictions or limitations contained in proxy access bylaws on a case-by-case basis, and conditions that may be potentially problematic, especially when used in combination, include, but are not limited to the following:
- Prohibitions on resubmission of failed nominees in subsequent years;
- Restrictions on third-party compensation of proxy access nominees;
- Restrictions on the use of proxy access and proxy contest procedures for the same meeting;
- How long and under what terms an elected shareholder nominee will count towards the maximum number of proxy access nominees; and
- When the right will be fully implemented and accessible to qualifying shareholders.
Practices on each of these points vary from company to company, and ISS’ guidance fails to indicate which types of provisions are acceptable. For example, most enacted bylaws count elected shareholder nominees toward the maximum number of proxy access nominees for a period of either 2 or 3 years, and in some cases as long as that person remains in office. It is unclear whether ISS views this standard 2 or 3 year limitation as acceptable, or if counting such a nominee toward the maximum number for any period of time would be viewed as problematic.
Finally, the FAQ states that two types of restrictions are “especially problematic” since they are restrictive enough to “effectively nullify” the right to proxy access:
- Counting individual funds within a mutual fund family as separate shareholders for purposes of an aggregation limit; and
- The imposition of post-meeting shareholding requirements for nominating shareholders.
Proxy access bylaws enacted by companies acting unilaterally in the absence of a majority-supported shareholder proposal, or those adopting pursuant to a shareholder settlement, are presumably not subject to scrutiny by ISS on these terms.