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E-MailLisa Stimmell is a partner and Courtney Mathes is a practice support lawyer at Wilson Sonsini Goodrich & Rosati. This post is based on their WSGR memorandum.
On October 7, 2019, Institutional Shareholder Services (ISS) released its Proposed Benchmark Policy Changes for 2020, reflecting 17 proposed new policies or policy changes, three of which are applicable to U.S. issuers. ISS is soliciting feedback from governance stakeholders on its proposed benchmark voting policies through 5:00 p.m., ET, on October 18, 2019.
The following is a summary of the three proposed policy changes to the ISS United States Proxy Voting Guidelines Benchmark Policy Recommendations.
Problematic Governance Structure—Newly Public Companies.
Under its current voting policy, ISS generally recommends a vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if, prior to or in connection with the company’s initial public offering, the company or the board (a) adopted bylaw or charter provisions materially adverse to shareholder rights, or (b) implemented a multi-class capital structure having unequal voting rights. In addition, ISS provides a list of factors that it will consider in determining whether to recommend a vote against or withhold from the pre-IPO directors including, among others, the level of impairment of shareholders’ rights, the disclosed rationale, the ability to change the governance structure (e.g., limitations on shareholders’ right to amend the bylaws or charter, or supermajority vote requirements), and the ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure. [1]
Proposed Policy Changes.
ISS proposes to bifurcate its policy regarding problematic charter and bylaw provisions from its policy regarding problematic multi-class capital structure provisions.
- The first policy, which addresses problematic bylaw or charter provisions, provides a streamlined list of factors that ISS will consider in determining its vote recommendation, including: supermajority vote requirements to amend the bylaws or charter; a classified board structure; or other egregious provisions. In addition, the revised policy provides that a reasonable sunset would be a mitigating factor. ISS has left in place the provision that its vote recommendations would be case-by-case on director nominees in subsequent years unless the adverse provision is reversed or removed.
- The second policy, which addresses multi-class capital structures with unequal voting rights without a reasonable time-based sunset, provides a list of factors that ISS will consider in determining the reasonableness of the time-based sunset, including: the company’s lifespan; its post-IPO ownership structure; and the board’s disclosed rationale for the sunset period selected. Of particular note, the revised policy provides that no sunset period of more than seven years from the date of the IPO will be considered reasonable. Finally, ISS would also recommend a vote against or withhold from incumbent directors in subsequent years (not a case-by-case analysis), unless the problematic capital structure is reversed or removed.
Rationale for Proposed Changes.
In its rationale for the proposed changes, ISS discussed, among other things, the prevalence over the past several years of newly listed companies with dual-class stock with no time-based sunset provision, the results of two studies that it believes support the case for time-based sunset provisions, and the results of its recent 2019 Global Policy Survey, where 55 percent of investor respondents indicated that a maximum seven-year sunset was appropriate.
Independent Board Chair—Shareholder Proposals.
Under its current voting policy, ISS will generally recommend a vote for shareholder proposals requiring that the chairman’s position be filled by an independent director, taking into consideration the following factors: the scope of the proposal; the company’s current board leadership structure; the company’s governance structure and practices; company performance; and any other relevant factors that may be applicable. In addition, its current policy provides an overview of how ISS will analyze each of the factors listed above. [2]
Proposed Policy Changes.
ISS proposes to add the “rationale” for the shareholder proposal to the list of factors that it will consider in determining its vote recommendation. In addition, in lieu of the overview that describes how ISS will analyze each of the general factors, ISS proposes to add a list of specific factors that will increase the chances of a recommendation by ISS “for” the shareholder proposal, including: a weak or poorly defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role; the presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair; evidence that the board has failed to oversee and address material risks facing the company; a material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or evidence that the board has failed to intervene when management’s interests are contrary to shareholders’ interests.
Rationale for Proposed Changes.
In its rationale for the proposed changes, ISS notes that independent board chair proposals are among the most common shareholder proposals submitted to U.S. companies, and references the results of its 2019 Global Policy Survey, including that investor respondents cited ‘poor responsiveness to shareholder concerns’ as the top factor that would suggest the need for an independent board chair.
Share Repurchase Program Proposals.
Under its current voting policy, ISS will recommend a vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms. [3]
Proposed Policy Changes.
ISS proposes to expand its existing policy to include a recommendation of a vote for management proposals to grant the board authority to conduct open-market repurchases, as well as to limit its recommendation “for” management proposals relating to share repurchase programs only in the absence of company-specific concerns, including: greenmail; the use of buybacks to inappropriately manipulate incentive compensation metrics; threats to the company’s long-term viability; or other company-specific factors as warranted. In addition, ISS proposes to vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.
Rationale for Proposed Changes.
In its rationale for the proposed changes, ISS notes that while most U.S. companies can and do implement share buyback programs via board resolutions without shareholder votes, there are exceptions to this rule including certain financial institutions and U.S.-listed cross-market companies that may be required to solicit shareholder support by the law of their country of incorporation. Thus, while acknowledging that shareholders are generally supportive of buyback programs, ISS proposes to expand its policy for those issuers that may require a shareholder vote so long as no company-specific concerns, as set forth in the proposed revised policy, exist. In addition, ISS notes that this policy would apply to U.S. Domestic Issuers (DEF14 filers) listed solely in the U.S., regardless of their country of incorporation.
Endnotes
1See ISS United States Proxy Voting Guidelines Benchmark Policy Recommendations Effective for Meetings on or after February 1, 2019, Section 1, Board of Directors—Voting of Director Nominees in Uncontested Elections—Accountability—Problematic Takeover Defenses/Governance Structure, available at https://www.issgovernance.com/file/policy/active/americas/US-Voting-Guidelines.pdf (accessed October 7, 2019).(go back)
2Id.(go back)
3See ISS United States Proxy Voting Guidelines Benchmark Policy Recommendations Effective for Meetings on or after February 1, 2019, Section 4, Capital Restructuring—Capital, available at https://www.issgovernance.com/file/policy/active/americas/US-Voting-Guidelines.pdf (accessed October 7, 2019).(go back)
