Following its 2019 benchmark voting policy consultation period, Institutional Shareholder Services (“ISS”) recently released its updated voting guidelines for the 2019 proxy season.[1]

A summary of notable governance and compensation policy updates is provided below.  Most significantly, the updated guidelines suggest that ISS continues to be focused on enhancing shareholder rights through increased board responsiveness and accountability.  In general, the updated proxy voting guidelines will be in effect for annual meetings occurring on or after February 1, 2019.  In connection with their preparations for the 2019 proxy season, U.S. public companies should consider the applicability of the new guidelines in light of their individual facts and circumstances.

Shareholder Proposal Related Policies

  • Ratification Proposals. ISS has issued new and updated policies that, together, codify its approach to analyzing management ratification proposals of existing governance provisions.  The new ISS guidelines echo Glass Lewis’ recent policy updates regarding conflicting and excluded proposals, reflecting a concern among proxy advisory firms about companies’ attempts to exclude shareholder proposals in a manner that is detrimental to shareholder rights.[2]
    • Management Proposals to Ratify Existing Charter or Bylaw Provisions. ISS noted an uptick in companies’ use of board-sponsored proposals to ratify existing charter or bylaw provisions during the 2018 proxy season as a basis for SEC no-action relief under Rule 14a-8(i)(9) (“conflicting” management-sponsored proposal).  In response, ISS has issued a new policy pursuant to which it will generally recommend voting against or withholding votes from individual directors, members of the governance committee or the full board where boards ask shareholders to ratify existing charter or bylaw provisions.  ISS will consider the following factors in its analysis:
      • Presence of a shareholder proposal addressing the same issue on the same ballot;
      • Board rationale for seeking ratification;
      • Disclosure of actions to be taken by the board should the ratification proposal fail;
      • Disclosure of shareholder engagement regarding the board’s ratification request;
      • Level of impairment to shareholders’ rights caused by the existing provision;
      • History of management and shareholder proposals on the provision at the company’s past meetings;
      • Whether the current provision was adopted in response to the shareholder proposal;
      • Company’s ownership structure; and
      • Previous use of ratification proposals to exclude shareholder proposals.

The updated proxy voting guidelines also provide that ISS will recommend voting against any management proposal to ratify existing charter or bylaw governance provisions where such provisions are not reflective of best practice.  These new policies reflect ISS’ concern that such ratification proposals are aimed at preventing shareholder proposals with more shareholder-favorable governance provisions from reaching the ballot without any material concessions by boards in existing governance provisions.  As with Glass Lewis’ recently updated policies, there is a particular focus on the use of these methods to fend off proposals regarding shareholder rights to call special meetings.

    • Board Responsiveness Policy. In connection with this new policy on ratification of existing charter and bylaw provisions, ISS updated its existing board responsiveness policy to provide that it will not only recommend voting on a case-by-case basis on individual directors, committee members or the entire board as appropriate if the board failed to act on a shareholder proposal that received majority support in the previous year, but also if the board failed to act with respect to a management proposal seeking to ratify an existing charter or bylaw provision that was opposed by a majority of shares cast in the prior year.
  • Environmental and Social Proposals. ISS updated its approach by indicating that in determining whether to recommend, on a case-by-case basis, shareholder proposals relating to environmental or social issues, it will “examine primarily” whether the implementation of the proposal is likely to enhance or protect shareholder value (rather than merely taking this into consideration).  In updating its policy, ISS has also made it more explicit that it will consider whether there are significant controversies, fines, penalties or litigation associated with the company’s environmental or social practices.  ISS stated that this updated policy merely codifies the factors that it already takes into consideration in its recommendations on environmental and social shareholder proposals.

Board Makeup and Performance Related Policies

  • Board Gender Diversity. For annual shareholder meetings occurring in 2019, ISS will not issue adverse vote recommendations due to a lack of gender diversity on a company’s board.  However, effective for annual meetings occurring on or after February 1, 2020, adverse voting recommendations may be issued against nominating committee chairs (or other directors on a case-by-case basis) at companies in the Russell 3000 or S&P 1500 indices with no women directors on the board.  Under the updated policy, the absence of gender diversity may be mitigated by: (i) a firm commitment, as disclosed in the company’s proxy statement, to appoint at least one female director to the board in the near term; (ii) the presence of a female director on the board at the preceding annual meeting; or (iii) other applicable relevant factors.  However, it is important to note that ISS believes the ability to explain and excuse a lack of gender diversity temporarily should be limited to “exceptional circumstances.”  ISS cited several factors that influenced this policy change, including investor preference for gender-diverse boards, a positive correlation between board gender diversity and company performance and the fact that gender-diverse boards are becoming the market norm.  ISS also noted that although investors and non-investors alike prefer board and management engagement as a means of addressing a lack of board diversity, an increasing number believe that adverse director recommendations may be warranted.  This update is in line with Glass Lewis’ new policy of recommending against the nominating committee chair of a board with no female directors as well as general trends in the governance space, though it is worth noting that the Glass Lewis policy will be effective for meetings taking place on or after January 1, 2019.  Companies that do not currently have gender-diverse boards should consider how to address these new policies or adequately disclose any relevant mitigating factors.
  • Director Attendance. ISS will continue to recommend voting against or withholding votes from directors with poor attendance.  ISS generally defines “poor attendance” as the failure of a director to attend at least seventy-five percent (75%) of board and applicable committee meetings during his or her period of service without an acceptable reason for absence.  New this year: in cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, ISS will generally recommend voting against or withholding votes from members of the nominating or governance committees or the full board.  For these purposes, “chronic poor attendance” is defined as three or more consecutive years of poor attendance without reasonable explanation, though the revised policy may also apply in certain non-consecutive situations, such as poor attendance in the previous year and three out of the four prior years.
  • Director Performance Evaluation. Under ISS’ general Accountability policy ­─ and more specifically its Director Performance Evaluation policy ─ it will recommend a vote against or withhold from the entire board of directors of  those Russell 3000 companies that lack processes to ensure board accountability and oversight and that have sustained poor performance relative to their peers.  Sustained poor performance was previously measured by one- and three-year total shareholder returns (“TSR”) that fell in the bottom fifty percent (50%) of a company’s four-digit GICS industry code.  In an attempt to reduce the number of companies that will be scrutinized under this policy, ISS will now also evaluate five-year TSR as a primary factor in determining sustained poor performance (as opposed to its prior policy of considering five-year TSR only as an additional factor).  As a result, ISS will not recommend a vote against or withhold under this policy for companies who are not deemed to underperform relative to peers based on five-year TSR.  Consistent with prior years, in determining whether a board’s accountability and oversight is lacking, ISS will continue to take into account problematic governance provisions (e.g., supermajority voting requirements, classified board, inability of shareholders to call special meetings, etc.).

Executive Compensation

  • Pay for Performance. During its benchmark voting policy consultation period, ISS received conflicting feedback from institutional investors and other commentators regarding its proposal to update the Financial Performance Assessment (“FPA”) measure in its pay-for-performance secondary screen to use Economic Value Added (“EVA”) in lieu of unadjusted GAAP measures.  As a result of this feedback, EVA metrics will be featured in ISS research reports on a phased-in basis over the 2019 proxy season for informational purposes, but will not be introduced into the quantitative pay-for-performance model for 2019.  ISS indicated that it will continue to explore the potential for future use of EVA to add additional insight as part of the financial performance analysis.


  • Reverse Stock Splits. ISS codified its approach to evaluating reverse stock splits at companies that are not listed on major stock markets or exchanges and that are not proportionately reducing their authorized shares.  ISS will now recommend voting for management proposals to implement a reverse stock split if the effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.[3]  This factor was previously part of ISS’ secondary analysis, but now will directly influence ISS’ vote recommendation.

Action Items

Given the quickly approaching 2019 proxy season, we recommend companies review their own situations in light of ISS’ new guidance and suggest the following action items:

  • Companies receiving shareholder proposals for enhanced shareholder governance rights should think twice before including a “conflicting” management proposal to ratify existing charter or bylaw provisions in an attempt to obtain no-action letter relief from the SEC to exclude the proposal; a strategy that emerged last year. If a company determines to proceed with such a proposal, it should consider whether the provision to be ratified is consistent with best practices and include detailed disclosure regarding the board’s rationale, actions that would be taken should the proposal fail and any relevant engagement with shareholders.
  • Companies that have submitted ratification proposals in prior years that failed to pass should take stock of what actions (if any) have been, or should be, taken in response to that result and consider including disclosure about the approach and rationale in the upcoming proxy statement to proactively address potential ISS concerns.
  • When evaluating environmental and social (“E&S”) proposals, companies should ensure they give appropriate consideration to the proposal’s potential impact on shareholder value. If a company decides to oppose an E&S proposal, its opposition statement should include a detailed rationale as to why the proposal is not in the best interests of its shareholders, particularly if the company has, or has material exposure to, significant controversies, fines, penalties or litigations related to its E&S practices.
  • Companies should continue to evaluate board composition regularly. If a company’s board lacks gender diversity, it should devise an action plan for addressing the issue in the short term and ensure that the nominating and governance (or equivalent) committee is taking active steps to seek out potential female board candidates.  If such actions do not result in a female board nominee, the company should describe in the proxy statement the steps that it has taken thus far.  Companies should also be sure to review the skills or qualifications they believe are necessary for a successful board, determine whether their current board members adequately demonstrate those skills and qualifications, and assess whether, and how, they could add diverse candidates in order to increase the overall effectiveness of the board.
  • Companies should continue to encourage director attendance at board and committee meetings. Where a director exhibits poor attendance without reasonable justification, the company should consider whether it is appropriate to ask that director to step down or decline to stand for re-election.
  • In light of ISS’ Director Performance Evaluation Policy, companies should review both their one-, three- and five-year TSR performance and any potentially problematic governance provisions they may have to determine whether an ISS vote recommendation against the entire board may be received and, if so, begin to prepare an appropriate response.

[1] The policy updates can be found at:

[2] For additional detail about Glass Lewis’ policy updates, please see our prior blog post “Recent Updates to Proxy Advisory Firm Guidelines”, available at

[3] ISS’s Common Stock Authorization policy was last updated in 2018.  Under the policy, ISS will vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with a transaction on the same ballot that warrants support; vote against proposals to increase the number of authorized shares of the class of common stock that has superior voting rights at companies with more than one class of common stock; vote against proposals to increase the number of authorized common shares if a vote for a reverse stock split on the same ballot is warranted despite the fact that the authorized shares would not be reduced proportionally and vote case-by-case on all other proposals to increase the number of shares of common stock authorized for issuance, taking into account company-specific factors.