Today, Institutional Shareholder Services Inc. (ISS) released its 2020 global proxy voting policy updates, which will generally be applicable for shareholder meetings on or after February 1, 2020. Consistent with the preview offered in its proposed 2020 voting policy changes (covered on our blog here), the updates to ISS’ U.S. proxy voting policies apply primarily to the proxy advisory firm’s treatment of (1) certain governance structures at newly public companies, including multi-class shares; and (2) annual meeting proposals calling for independent board chairs and share buybacks.
The updates released today confirm that ISS will include Economic Value Added (or EVA) metrics in its pay-for-performance model’s secondary Financial Performance Assessment (or FPA) screen. Notably, ISS’ current U.S. overboarding policy notably remains untouched in the updates. Finally, the updates make it clear that ISS’ policy to generally recommend voting against or withholding from the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the board will be in effect starting February 1, 2020.
I. Newly Public Company Governance
ISS has updated its policy related to newly public company governance by creating 2 distinct policies that seek to (1) clarify the focus of the current policy regarding provisions that ISS considers adverse to shareholder rights; and (2) address multi-class capital structures with disparate voting rights.
i. “Adverse” Governance Provisions. ISS has amended its policy regarding charter and bylaw provisions at newly public companies, narrowing its focus on the following structures that will result in a negative recommendation for individual directors, committee members or the entire board:
- Supermajority vote requirement;
- Classified board; or
- “Other egregious provisions.”
The updated policy also states that ISS will consider a sunset provision to be a mitigating factor when assessing the above governance structures.
ii. Multi-Class Structures. The changes establish a new policy under which ISS will generally recommend voting against or a withhold from the entire board of directors if:
- Prior to, or in connection, with the company’s public offering, the company implemented a multi-class structure with unequal voting rights; and
- The multi-class structure was not subject to a time-based sunset that ISS considers reasonable.
In assessing the reasonableness of a time-based sunset, ISS will give consideration to such factors as the company’s lifespan, its post public offering ownership structure and the disclosed reason for selecting the duration. However, a time-based sunset of more than 7 years will not be considered reasonable.
II. Independent Board Chair Shareholder Proposals
The policy update regarding independent board chair shareholder proposals codifies ISS’ current position by explicitly identifying the situations in which ISS will recommend voting for a proposal. More specifically, ISS will support “well-crafted” shareholder calls for independent board chairs when:
- The board of directors relies on a lead independent director role that is considered “weak”;
- There is evidence that directors failed to oversee material risks facing the company; or
- There is evidence that directors failed to adequately respond to shareholder concerns.
III. Share Buyback Proposals
ISS’ updated policy on share buybacks states that ISS will generally support management proposals to conduct buybacks in the absence of company-specific concerns regarding:
- “Targeted share buybacks” (e.g., greenmail or purchasing company insiders shares at higher prices than could be received in an open market);
- Using buybacks as a way to improve earnings per share (or other compensation metrics) in order to increase executive/insider payouts; or
- Engaging in repurchases that are adverse to a company’s long-term growth (or capitalization level for banks).
Note: ISS states that this policy is intended to apply to both U.S. incorporated companies and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges.
IV. Pay-for-Performance – EVA
ISS has confirmed that it will incorporate the use of EVA metrics into their quantitative pay-for-performance model’s secondary FPA screen. A whitepaper on the updated Pay-for-Performance Mechanics is expected to be published in the early half of December 2019, which will detail the introduction of EVA into the FPA screen for U.S. and Canada markets.
V. Board Gender Diversity
ISS’ 2019 policy states that it would not make, during the 2019 proxy season, negative voting recommendations due to lack of board gender diversity. ISS would instead highlight those boards with no gender diversity. The 2020 update removes this provision as well as the 1 year transition period, now passed, provided for companies to account for a lack of women on their boards. For the upcoming proxy season, ISS will recommend against the chair of the nominating committee or other directors, as appropriate, if:
- The board has no women directors; and
- The company lacks a “firm commitment” (i.e., a plan with measurable goals) to achieve gender diversity.
A “firm commitment” to appoint at least 1 woman director will be considered a mitigating factor only for 2020 and not beyond, as opposed to the 2019 policy, which considers this a mitigating factor for the “near term”. In addition, the 2020 updates state that having a woman on the board in the prior year, but not in the current, will not alone avoid a negative recommendation from ISS. Instead, companies in this situation will also need to provide a “firm commitment” to appoint at least 1 woman director within 1 year and will need to acknowledge the current lack of board gender diversity.
How ISS Updates Its Policies
The executive summary of the 2020 policy updates describes ISS’ process for developing and amending its proxy voting policies, which starts with an internal ISS review of notable trends and emerging issues followed by initiatives to hear from various market participants. These initiatives include conducting a global survey and posting the results, the most recent of which we covered on our blog here. After these efforts, ISS posts its draft policy updates and opens them up for comment.
The insights gathered from the entire policy development process inform the creation of ISS’ policy updates, as released today. ISS expects to release its actual 2020 policy updates in the second half of this month.
Legal assistant Sarah Foster contributed to this post.