Institutional Shareholder Services (ISS) is seeking feedback on policy questions as part of its process for updating its policies for the 2016 proxy season. Corporate issuers should consider communicating company views on proxy voting issues by participating in the survey, which can be accessed here.1 Feedback is due by September 4, 2015 at 5:00 p.m. ET. Survey results are scheduled to be released in September and draft policy revisions are scheduled to be released for comment in late September or early October.
Survey topics provide an early indicator of potential areas for policy revision. This year’s questions signal that ISS may refine its position on:
- Proxy access bylaw features
- Director overboarding
- Defensive governance provisions adopted pre-IPO or by a board without shareholder approval
- Sunset provisions for net operating loss poison pills
- Equity compensation of non-employee directors
- Use of adjusted metrics in incentive programs
- Say-on-pay in relation to disclosure by externally-managed issuers
- Use of financial metrics and financial ratios to assess capital allocation decisions, share buybacks and board stewardship
Notably the “hot topic” of director tenure is not addressed in the survey. This is no guarantee that ISS will not change its policy. Last year ISS policy changed significantly with respect to independent chairs even though the 2014 policy survey did not cover that topic. Both the independent chair issue and director tenure were discussed in ISS’ long-term benchmark policy consultation launched in February 2014. Director tenure continues to be a factor considered by ISS in its determination of a company’s QuickScore governance rating and may be the subject of a future proxy voting policy change.
Key Survey Questions
The survey questions of relevance to U.S. companies relate to governance, compensation and capital allocation, as follows:
- Proxy access: If a board adopts proxy access with material restrictions not contained in a majority-supported shareholder proposal, which types of restrictions should be viewed as problematic enough to call into question the board’s responsiveness and potentially warrant “withhold” or “against” votes against directors? For example:
- ownership threshold in excess of 3% or 5%
- ownership duration greater than three years
- aggregation limit of less than 20 shareholders
- cap on nominees set at less than 20% of the existing board (rounded down)
- more restrictive advance notice requirements
- information disclosures that are more restrictive than those required of the company’s nominees, by the company, the SEC or relevant exchanges
- re-nomination restrictions in the event a proxy access nominee fails to receive a stipulated level of support or withdraws his or her nomination
- restrictions on compensation of access nominees by nominating shareholders
- Overboarding: What should be the maximum number of boards on which directors should serve (e.g., six, five, four)? What should be the limit for active CEOs (e.g., three including the home board, two including the home board)? Should a stricter policy be applied to other executive directors with demanding full-time jobs such as CFOs or law firm partners? Should exceptions be made for service on boards of non-operating companies, or for service by investment holding company executives on boards of publicly traded companies in which the investment holding company has an interest?
- Director independence “cooling-off” periods: When should the clock begin to run on the cooling-off period for director independence applicable to former company executives (e.g., upon retirement from an executive position, upon retirement from the board and all executive positions, should depend on whether the board is chaired by the CEO to whom the director formerly reported or by a different or independent director)? Should some cooling-off period be required before a former employee of a firm providing significant professional services to the company can be treated as an independent director?
- Unilateral adoption or amendment of charter or bylaws: For how long should incumbent directors be held accountable for adopting charter or bylaw provisions that materially diminish shareholder rights (e.g., only at the annual meeting immediately following the unilateral action, the first time each incumbent director is on the ballot for re-election after the unilateral action, until the shareholder rights are restored)? Which unilateral amendments warrant continuing to hold directors accountable until rights are restored (e.g., diminishing rights to call special meetings or act by written consent, classifying the board, establishing supermajority vote requirements, increasing authorized capital, adopting fee-shifting provisions, restricting third-party director compensation arrangements, increasing advance notice requirements)?
- Pre-IPO bylaw amendments: How should a board’s accountability be evaluated when the board adopts a pre-IPO bylaw amendment that materially diminishes shareholders’ rights?
- Net operating loss (NOL) poison pills: Should a shorter-term sunset provision be considered when an NOL poison pill is renewed? What governance features might lead to opposition of an NOL poison pill proposal (e.g., supermajority vote requirement, classified board, lack of shareholder rights to act by written consent and call a special meeting, dual class share structure, recent history of proxy contests)?
- Controlled companies: Do organizations distinguish between controlled and non-controlled companies when making investment decisions or proxy voting decisions? Do organizations engage with controlled companies to a larger extent than non-controlled companies? Is engagement with controlled companies more or less constructive/productive as compared with non-controlled companies?
- Equity compensation for non-executive directors: Which types of equity compensation are appropriate for non-employee directors (e.g., shares, stock options, stock appreciation rights, time-vesting restricted stock, options or restricted stock units, performance-vesting restricted stock or options)?
- Use of adjusted metrics in incentive programs: If and when is it appropriate to use adjusted metrics for compensation purposes (e.g., commonly used metrics, metrics that are described and explained, metrics that are fully reconciled to GAAP in the proxy statement)? Which exclusion adjustments to reported or GAAP measures are appropriate or not appropriate with respect to incentive compensation performance measures (e.g., acquisition expenses, goodwill write-downs or impairments, compensation expense, impact of discontinued operations, non-recurring/extraordinary charges, foreign exchange adjustments, expenses from lawsuits and penalties)?
- Externally-managed issuers (EMIs): What recommendation should ISS make with respect to say-on-pay where an EMI makes minimal or no disclosure about executive compensation payments or practices on the part of an external manager that is receiving fees for management services provided to the company? What factors should ISS consider when assessing compensation programs and practices for EMIs when the EMI does not disclose details around compensation arrangements and there is no say-on-pay resolution on the ballot?
- Capital allocation: Which five-year historical financial metrics, if included in ISS reports, would be helpful in assessing capital allocation decisions, share buybacks and the efficacy of board stewardship (e.g., share buybacks, dividends, capital expenditures, cash balances)?
- Share buybacks: Which financial ratios, if included in ISS reports, would be helpful in assessing capital allocation decisions, share buybacks and the efficacy of board stewardship (e.g., current year buyback and/or five-year cumulative buyback each as a percentage of market capitalization, current year buyback and/or five-year cumulative buyback each as a percentage of current cash balance)?
ISS has stated that it will release its final policy updates in November 2015.
1 A complete set of the policy survey questions is available here.
If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or
|Holly J. Gregory
|John P. Kelsh
|Claire H. Holland
To receive Sidley Updates, please subscribe at www.sidley.com/subscribe.
Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300; One South Dearborn, Chicago, IL 60603, 312.853.7000; and 1501 K Street, N.W., Washington, D.C. 20005, 202.736.8000.