On April 8, Institutional Shareholder Services (“ISS”) published additional guidance on application of its benchmark voting policies amid the COVID-19 pandemic.[1] ISS had previously issued its 2020 benchmark policies update to be applied for shareholder meetings on or after February 1, 2020.[2] Noting the societal and economic uncertainty wrought by COVID-19 since its prior update, ISS provides further guidance focused on four key areas:

  • Annual General Meeting (“AGM”) Issues;
  • Poison Pills, Shareholder Rights and Boards/Directors;
  • Compensation Issues; and
  • Capital Structure and Payouts.

AGM Issues

ISS notes that AGM postponements have been widespread in certain markets (especially Asia and Europe) responding to COVID-19. While certain companies have AGM deadlines set by statute, regulation, market listing rules or their own governing documents, others have flexibility to either postpone AGMs or hold them virtually. Notices of meeting postponements via standard disclosure documents and electronic communications (such as webcasts and conference calls) to shareholders are viewed favorably. Where permitted, ISS notes that virtual-only meetings offer a safer solution, allowing shareholders, directors and executives to maintain social distance while remaining a reasonably effective approach under the circumstances.[3] Bearing these trends in mind, ISS encourages companies opting for virtual-only meetings to clearly disclose the reasoning behind that decision (i.e., whether related to COVID-19 or not) and to provide shareholders with opportunities to participate in meetings as fully as possible.[4]

Poison Pills, Shareholder Rights and Boards/Directors

ISS addresses recent efforts by boards to adopt shareholder rights plans (often referred to as “poison pills”) and other defensive measures in response to COVID-19, along with a discussion of director attendance at scheduled board meetings and changes to boards or senior management during the pandemic. For a discussion of poison pills and related defensive measures see our separate post.[5]

  • Director Attendance. In response to COVID-19 health and safety concerns, ISS notes that many directors may decide not to attend AGMs or board meetings in person. For those jurisdictions in which a director’s telephonic or electronic participation is not normally counted as being “present,”[6] ISS will look for adequate disclosure explaining the use of alternative forms of director attendance. ISS will also expect, to the extent directors’ attendance at or absence from board or committee meetings is relevant, information adequate to allow shareholders to make informed decisions although it acknowledges there may be reasonable privacy concerns related to an individual director’s health.
  • Changes to the Board or Senior Managers. ISS indicates that boards should have broad discretion to appoint individuals as necessary in response to the pandemic and states that it will adjust application of its policies regarding issues such as independence, overboarding and diversity accordingly for exceptional circumstances.

Compensation Issues

ISS discusses potential changes to compensation programs that may emerge in the wake of COVID-19 – in particular, changes to incentive plan performance metrics, goals or targets and potential stock option repricings.[7]

  • Changes to Compensation Plan Metrics, Goals and Targets. ISS acknowledges that material changes in 2020 annual bonus plan performance metrics, goals and targets are likely given the recent drop in markets and possible recession in the wake of COVID-19. Though public disclosures regarding such changes would not ordinarily be made until a company’s 2021 proxy statement, ISS encourages disclosure of the rationale for any such changes to be made to shareholders contemporaneous with the decision to make such changes. ISS is less supportive of “midstream” or “in-flight” changes to multi-year long-term incentive plan performance elements, and thus will assess any such changes on a case-by-case basis to determine whether directors exercised appropriate discretion and adequately explained their rationale to shareholders. With respect to new long-term incentive plans adopted after the start of the pandemic, ISS states that any structural changes to program design will be assessed under its existing benchmark policy frameworks.
  • Option Repricing. Though options are no longer as popular as they once were—having taken a backseat to performance-based full value awards—ISS acknowledges that given the current state of the market, many companies may seek to reprice “out-of-the-money” stock options.  ISS states that boards seeking to undertake option repricing without shareholder approval will be subject to scrutiny under its benchmark policy board accountability provisions.  For those who do seek shareholder approval at 2020 meetings, ISS will assess on a case-by-case basis considering (among others factors) whether: (1) the change is neutral to shareholder value, (2) surrendered options are added back to the plan reserve, (3) replacement awards are immediately vested and (4) executive officers and directors are excluded. This analysis largely reflects prior policy approaches, which ISS considers still appropriate in the context of COVID-19.

Capital Structure and Payouts

ISS addresses potential changes to capital structure and payouts during the pandemic, particularly dividends, share repurchases and capital raises.

  • Dividends. Given the recent market downturn and the need to manage cash in an uncertain economic environment, ISS supports broad discretion for boards to set dividend payout ratios that may fall below historic levels or customary market practice.[8] In its analysis of related proposals, ISS will particularly look at whether boards disclose plans to use any cash preserved from dividend reductions to protect the company’s business and workforce.
  • Share Repurchases. ISS notes the high degree of public scrutiny attracted by share repurchases in the wake of COVID-19 and the related market turmoil. In accordance with recent company efforts to conserve cash in an uncertain economic environment, ISS underscores the reputational, regulatory and business risks that boards may be subject to if a company undertakes share repurchases now (whether under existing or new repurchase authority). While ISS acknowledges that companies may consider it prudent to maintain some flexibility for the future by seeking new repurchase authority in this time period (and having authority does not mandate use of the authority to actually repurchase), it will review repurchase activity over the course of 2020 to consider whether risks were managed in a responsible manner.
  • Capital Raises. In assessing potential financing options for companies seeking additional capital during the pandemic, ISS considers its existing guidance applicable, generally providing for case-by-case assessment of requests for increased authorized common or preferred stock, share issuances or other related proposals. Two financing options in particular are discussed: share issuances and private placements.
    • Share Issuances. ISS notes their existing policy framework generally provides for case-by-case recommendations on proposals to increase the number of shares of common or preferred stock authorized for issuance and will continue to apply this policy to general authorization and share issuance requests with appropriate local market adaptations (accounting for applicable regulatory relaxations or new guidance relating to COVID-19). They also note that current policies in most markets consider factors including: (1) proxy statement disclosure (or equivalent), (2) risks to shareholders if the request is not approved, (3) the size and potential dilutive impact and (4) in the case of preferred shares, whether the requested shares are “blank check preferred” and can be used for antitakeover purposes. ISS also notes that its existing policies provide flexibility for exceptional circumstances in which proposals exceeding normal limits on size and dilutive effect emanate from a “clear and compelling justification,” confirming the current environment would constitute such a circumstance.
    • Private Placements. Similarly, ISS notes that existing policy guidance also allows for case-by-case analysis of private placements, specifically considering: (1) the rationale for the private placement, (2) potential dilution to existing shareholders, (3) the discount/premium in the issuance price relative to prior “unaffected” share price, (4) conflicts of interest, (5) alternative options and (6) the market’s reaction to the proposed private placement. As with share issuances, ISS considers whether exceptional circumstances (such as whether the company is expected to file for bankruptcy if the transaction is not approved or if the company’s auditor or management has indicated going concern issues) apply as it evaluates these factors.

As a final summary note, ISS indicates it may consider additional policy adjustments (both short- and long-term) in light of regular engagement with companies in advance of the 2021 proxy season.

[1] Impacts of the COVID-19 Pandemic – ISS Policy Guidance, available at https://www.issgovernance.com/file/policy/active/americas/ISS-Policy-Guidance-for-Impacts-of-the-Coronavirus-Pandemic.pdf.

[2] See our prior blog post “ISS Updates is 2020 Proxy Voting Policies”, available at https://www.clearymawatch.com/2019/11/iss-updates-its-2020-proxy-voting-policies/.

[3] ISS notes their prior guidance has favored a “hybrid” structure (physical meeting combined with virtual participation) over virtual-only meetings; however, most ISS benchmark policies (including those applied to U.S. companies) do not recommend votes against companies who hold virtual-only meetings. In those scenarios where ISS benchmark policies do discourage virtual-only meetings, ISS will alter the application of those policies to oppose voting recommendations against companies holding virtual-only meetings until it is safe to hold in-person meetings again.

[4] Additionally, ISS encourages boards to commit to returning to in-person or hybrid meetings (or to allow shareholders to decide) as soon as practicable.

[5] For a full discussion of poison pills and related defensive measures in response to COVID-19, please see our prior blog post “ISS and Glass Lewis Issue Guidance for Poison Pills in COVID-19 Pandemic”, available at https://www.clearymawatch.com/2020/04/iss-and-glass-lewis-issue-guidance-for-poison-pills-in-covid-19-pandemic/#more-3436.

[6] ISS notes that in some markets, including the U.S., attendance disclosure required under applicable law or regulation counts telephonic or electronic participation as full participation in board and committee meetings.

[7] For a further discussion of incentive plan changes and option repricing in the midst of COVID-19, please see our prior blog post “The Executive Pay Dilemma”, available at https://www.clearymawatch.com/2020/04/the-executive-pay-dilemma/.

[8] ISS notes that some market-specific policies would ordinarily look for dividend payout ratios to be within a certain range based on earnings for the prior year. In addition to the market downturn overall, it also notes some government assistance programs have prohibited dividend payments for companies that accept loans or other assistance (and some pending programs are considering similar measures).