New ISS voting guidelines ramp up expectations for public companies

Last week Institutional Shareholder Services updated its proxy voting guidelines for annual shareholder meetings to be held on or after February 1, 2020.  The updates take a major step forward to advocate greater gender diversity on public company boards, express fresh opposition to super-voting shares and evergreen plan provisions, enhance support for independent board chairs, and make other important modifications.

  • Gender diversity: As it signaled last year, ISS is ramping up its expectations for gender diversity on corporate boards. ISS will now recommend voting against the chair of the nominating committee (or other appropriate directors) of any Russell 3000 or S&P 1500 company that does not have any women on its board.  These companies may be able to avoid the adverse recommendation if:
    • The company makes a firm commitment to appoint at least one woman to its board within a year. This one-time exception will apply only during the 2020 proxy season;
    • The company’s board included a woman at the preceding annual meeting and the company makes a firm commitment to appoint at least one woman to the board within a year; or
    • The Company demonstrates other relevant mitigating factors. It remains to be seen which mitigating factors ISS will determine to be sufficient.
  • Problematic IPO Capital Structure: ISS will now generally recommend voting against the entire board (other than new nominees) of newly public companies with a class of super-voting stock without a reasonable sunset provision.  The sunset can be no longer than seven years after the IPO, and its reasonableness will be judged case-by-case.  ISS will maintain the adverse recommendation until the problematic capital structure is eliminated.
  • Evergreen Provisions: An evergreen provision in an equity plan (i.e., a feature that automatically replenishes shares) is now an “egregious” factor that will warrant a recommendation to vote against approval of the plan.  ISS adopted this position to encourage companies to submit their equity plans for stockholder approval more frequently than they otherwise would.
  • Independent Board Chair: ISS has generally codified its existing views regarding proposals that the board chair be independent.  ISS will generally recommend voting for such proposals where:
    • a majority of the board is not independent, or non-independent directors serve on key committees;
    • the lead independent director does not appropriately counterbalance a strong CEO/Chair;
    • the Chair is a former executive, the CEO and Chair roles were recently combined, or there was previously an independent Chair;
    • there are failures of risk management, oversight or governance; or
    • management has interests contrary to the shareholders and the board fails to intervene.
  • Problematic IPO Practices: ISS will now generally recommend voting against directors (other than new nominees) of newly public companies that, prior to the IPO, adopted supermajority voting requirements for amendments to the company’s charter or bylaws, a classified board or other “egregious” provisions.  A reasonable sunset provision may be a mitigating factor. Until the problematic provisions are removed, ISS will evaluate each director’s nomination on a case-by-case basis.
  • New Director Nominees: Only first-time director nominees who have served for less than one year will be reviewed on a case-by-case basis for exclusion from any adverse voting recommendations.  Other directors, including first-time nominees who have served for a year or more, will not be considered “new” and will receive the same voting recommendations as longer-serving directors.
  • Restrictions on Binding Bylaw Amendments: ISS already opposes undue restrictions on shareholders’ ability to propose binding bylaw amendments where those restrictions go beyond Rule 14a-8.  ISS has clarified that it also opposes any restrictions on the amendment provisions themselves, such as a ban on shareholder amendments to bylaws requiring shareholders to satisfy a minimum holding period or a minimum ownership threshold in order to submit a binding amendment proposal. Moreover, ISS will no longer tolerate the delaying tactic of first asking shareholders whether they want to amend problematic bylaw provisions.  Instead, ISS will expect companies to fix the problematic provision directly or, when necessary, to submit for shareholder approval a proposal that fixes the problematic provision.  ISS will generally recommend voting against the members of the governance committee of any company with these problematic restrictions.
  • Share Repurchase Programs: ISS clarified that its existing policy of recommending votes in favor of share repurchase programs depends on the absence of company-specific concerns regarding greenmail, the use of repurchases to manipulate management incentives, threats to long-term viability, or other relevant factors. ISS expressed specific concern about possible misuse of repurchase programs to buy shares from insiders at premium prices.
  • Diversity Pay Gap: ISS already recommends votes in favor of proposals requesting a management report on pay gaps based on gender; this year, it expanded this policy to cover pay gaps based on race and ethnicity as well.

As public companies prepare for the upcoming proxy season, they should review their governance structures and give careful consideration to potential opposition from ISS or other advisory firms to director elections or other company proposals.

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