A week after Glass Lewis issued its 2020 proxy voting guidelines, Institutional Shareholder Services (ISS) released its final updates to its 2020 proxy voting policies. The updated policies will be applied to shareholder meetings beginning on February 1, 2020, and the changes to U.S. polices are summarized below.
Problematic Governance & Capital Structures for Newly Public Companies
ISS has clarified its policies in regard to governance and capital structures in newly public companies (i.e., companies that emerge from bankruptcy, spin-offs, direct listings and initial public offerings). First, ISS will recommend an against or withhold vote for the entire board (except new nominees who will be considered on a case-by-case basis) of newly public companies with multi-class capital structures in which the classes have unequal voting rights in the absence of a reasonable time-based sunset provision. When assessing the reasonableness of a sunset provision, ISS will consider the lifespan of the company, the post-IPO ownership structure and the board’s publicly disclosed rational for the sunset period selected; provided, however, that a sunset in excess of 7 years from the date of the IPO will be considered unreasonable.
Second, ISS will recommend an against or withhold vote in respect of individual directors, certain committee members, or even the whole board (except new nominees who will be considered on a case-by-case basis) of newly public companies with certain bylaw or charter provisions that are materially adverse to shareholder rights. The specified provisions include supermajority vote requirements for bylaw or charter amendments, classified board structures, and other “egregious provisions.” ISS will treat reasonable sunset provisions as a mitigating factor when assessing these provisions.
Restricting Binding Shareholder Proposal
ISS will generally recommend an against or withhold vote for members of the governance committee of a company with governing documents that impose restrictions on shareholders’ ability to amend bylaws that go beyond the requirements under SEC Rule 14a-8, including subject matter restrictions. In light of the uptick in management proposals to approve or ratify such restrictions, the policy update clarifies that ISS views such proposals as insufficient and that it will continue its negative recommendation until shareholders are provided an unfettered ability to amend the bylaws or a proposal providing for such unfettered rights is submitted to shareholders for approval.
Shareholder Proposals for Independent Board Chairs
ISS also slightly modified its policy on shareholder proposals requesting an independent board chair. Though ISS will continue to evaluate independent chair proposals using a comprehensive approach, the policy update includes specific factors ISS will consider when recommending support for such proposals. The most significant of these factors are a weak lead independent director role that fails to balance out the power of the combined CEO/chair role, the presence of an executive chair who is not the CEO, recombination of the role of CEO and chair, or departure from a structure with an independent chair. Other factors include evidence that the board has failed to oversee and address material risks facing the company or to intervene when management’s interests are contrary to those of shareholders and the board’s material diminishment of shareholder rights or failure to respond to shareholder concerns. This change comes as shareholder support of independent chair positions continues to grow.
Voting on Director Nominees in Uncontested Elections
- New Nominee Exception. When recommending whether to vote for a director nominee, ISS generally considers new nominees for board positions on a case-by-case basis, taking into account whether a nominee with prior tenure should be held responsible for board actions occurring before such nominee joined the board. ISS is clarifying its current policy application by specifically noting that only those new nominees who have not been voted upon by shareholders and have served for less than one year will be considered on a case-by-case basis. The implication of this clarification is that those board members who have served for more than a year, whether or not previously voted upon by shareholders, will be held accountable for prior actions of the board. The policy update also noted that the change to the definition of “new nominee” will apply to other policies regarding director election recommendations including independence, responsiveness and composition.
- Director Attendance. In conjunction with its change to the definition of new nominees, ISS made a conforming change to its policy to vote against or withhold from directors who attend less than 75% of board or committee meetings without disclosure of an acceptable reason. ISS has now limited the exception from its attendance policy to directors who have served only a part of a fiscal year.
- Diversity. As indicated last year, beginning in 2020, ISS will recommend voting against the chair of the nominating committee of a Russell 3000 or S&P 1500 company that has no women on its board. The mitigating factors that ISS may consider include (i) the presence of a woman on the board at the preceding annual meeting coupled with a firm commitment (defined as a plan, with measurable goals, outlining the way in which the board will achieve gender diversity) to appoint another woman to the board within a year, (ii) until February 1, 2021 only, a firm commitment in a company’s proxy statement to appoint at least one woman to the board within a year or (iii) other relevant factors ISS determines to be applicable.
Share Repurchase Programs
Generally, ISS continues to support share repurchase programs, but the policy update is intended to safeguard against the misuse of such programs. In particular, ISS may now recommend voting against share repurchase programs where there are concerns that such repurchases (i) serve as “greenmail” or otherwise reward company insiders by repurchasing shares at a premium, (ii) are being used to boost EPS or other compensation metrics in order to manipulate executive incentive compensation, or (iii) threaten the company’s long-term viability. Share repurchase programs have been subject to some recent controversy – activists favor and are often successful in pressuring companies to start or increase buyback programs, and many shareholders are not opposed to share buybacks. There has been some pushback, including politically, on the ways in which companies can use share repurchases to manipulate their stock prices or for executive benefit, and these changes seem designed to address that tension. ISS also specified that, unlike many of its U.S. policies, the policy on shareholder repurchase programs applies to foreign-incorporated companies which file U.S. domestic issuer reports and which are traded on solely on a U.S. exchange, as well as U.S.-incorporated companies.
ISS will support shareholder proposals for disclosures of pay data by race or ethnicity, an update from its policy to support pay gap proposals on the basis of gender. The gender pay gap has been a focus of shareholder proposals for some time, but increasingly, investors are considering the implications of pay equity more broadly, including in terms of race and ethnicity. According to the updated ISS recommendation, ISS will consider these shareholder proposals on a case-by-case basis, taking into account the company’s current policies and disclosures, any recent controversies related to gender, race, or ethnicity pay gaps, and how the company’s current reporting on these issues compares to its peers.
ISS assesses equity plan proposals on a case-by-case basis, as evaluated using its “Equity Plan Scorecard” (EPSC), which takes into account plan cost, plan features and grant practices. ISS will generally recommend an against vote on equity plan proposals if the combination of such factors indicates that the overall plan is not in the interests of shareholders, or if certain egregious factors apply. This year, ISS added evergreen (automatic share replenishment) features to its list of egregious factors that may result in a recommendation of an against vote. ISS indicated that as a result of the elimination of the performance-based compensation exemption under Section 162(m) of the Internal Revenue Code, there has been a decrease in the number of equity plans that have been put up for a shareholder vote. In its view, evergreen provisions that automatically replenish share reserves may “circumvent” shareholder re-approval of such plans and may allow plans to continue perpetuating features that are disadvantageous to shareholders.
The latest update also officially implements a change that ISS considered last year to its Pay-for-Performance model. ISS will now incorporate Economic Value Added (EVA) metrics in the model’s secondary Financial Performance Assessment screen. EVA is a framework that aims to measure true underlying economic performance and capital productivity by applying a series of systematic adjustments to financial statement accounting data.
Finally, there were a couple of notable omissions from ISS’ policy update.
Unilateral Exclusion of Shareholder Proposals
In its 2020 updated proxy voting guidelines, Glass Lewis unveiled its policy regarding adverse vote recommendations for governance committee members of companies that exclude shareholder proposals when the SEC declines to take a view on their exclusion, as the SEC indicated it may do in the 2020 proxy season. ISS has not addressed whether it would take adverse action against companies that unilaterally exclude proposals under those circumstances.
Overboarding has been an issue of concern for some large shareholders in recent years, reflecting in particular shareholder concern about the amount of time that active CEOs have available to devote to board responsibilities at companies other than the ones at which they are employed. Blackrock generally capped sitting CEOs at two public boards beginning in 2018 and Vanguard adopted that same limit in 2019, at the end of last year’s proxy season. Glass Lewis imposes the same limit, and, while there was speculation that ISS would follow suit for this year’s proxy season, its current policy of voting against or withholding from directors who sit on more than five public boards, or are CEOs of a public company and also sit on more than two boards besides their own, remains unchanged.
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If you have any questions or would like to discuss ISS’ policy updates further, please do not hesitate to reach out to your regular contacts at the firm.
 See our blog post “Glass Lewis Updates its 2020 Proxy Voting Guidelines”, available at https://www.clearymawatch.com/2019/11/glass-lewis-updates-its-2020-proxy-voting-guidelines/.
 SEC Rule 14a-8 provides that in order to be eligible to submit a shareholder proposal, a shareholder must have continuously held at least $2,000 in market value, or 1%, of the company’s securities entitled to be voted on the proposal at the meeting for at least one year by the date the shareholder submits the proposal and the shareholder must continue to hold those securities through the date of the meeting. SEC Rule 14a-8 also permits companies to exclude proposals based on subject matter in certain specified cases.
 Shareholders press US boards to split chief executive and chairman roles, Financial Times, Aug. 31, 2019, https://www.ft.com/content/0820940e-8489-3ed7-8630-8468aeab5a36.
 This change is noted in ISS’s press release announcing the 2020 policy updates, but not in the text of the updated guidelines. See “ISS Announces 2020 Benchmark Policy Updates,” available at https://www.issgovernance.com/iss-announces-2020-benchmark-policy-updates/.
 See United States Proxy Voting Guidelines, Dec. 6, 2018, available at https://www.issgovernance.com/file/policy/active/americas/US-Voting-Guidelines.pdf.