On November 12, 2019, Institutional Shareholder Services (ISS) published updates to its U.S. benchmark proxy voting policies. The new policies are applicable to all meetings held on or after February 1, 2020. The key policy updates relate to problematic capital structures at newly public companies, independent chair shareholder proposals, share repurchase program proposals and company diversity practices.
Georgeson's summary of ISS's policy updates for 2020 follows. The 2020 Americas Proxy Voting Guidelines Updates, which summarize the changes being made as well as the rationale therefor, are available now on the ISS Policy Gateway. ISS's complete 2020 policy voting guidelines, which will incorporate these updates, will likely be available from ISS in January 2020.
Problematic Capital Structures – Newly Public Companies
With more newly-listed companies adopting multi-class share structures with unequal voting rights, ISS is bifurcating its existing policy relating to governance structures at newly public companies to carve out a separate policy for what it considers "problematic" capital structures. ISS will generally recommend voting against or withhold for the entire board (except new director nominees, who would be considered on a case-by-case basis) if the newly-listed company has adopted a multi-class capital structure with unequal voting rights without a reasonable sunset period.
ISS will consider the company's lifespan and its post-IPO ownership structure, as well as the board's disclosed rationale in assessing the reasonableness of the sunset period. However, under no circumstances will ISS consider a period exceeding seven years from the date of the IPO to be reasonable.
ISS's policy is in line with the Council of Institutional Investors' (CII) recommended seven-year sunset provision. Although the majority of companies that have multi-class share structures with unequal voting rights do not provide any time-based sunset, the overall impact of this policy will be limited. According to CII data, only approximately 50 companies from 2017 through June 2019 went public with unequal voting share structures in place.
Independent Board Chair Shareholder Proposals
Further codifying its existing policy, ISS has identified specific factors that will generally result in it recommending in support of independent chair shareholder proposals. ISS is likely to support proposals at companies it perceives to have a weak lead director role, a board failure to oversee material risks or poor responsiveness to shareholders' concerns.
A more detailed overview of how ISS will analyze these proposals will be included in ISS's updated policy FAQ document expected to be published in early- to mid-December.
Although this updated policy delineates the most heavily weighted factors ISS considers in making its recommendation, the guidance is essentially unchanged from ISS's existing policy. Therefore, the impact of this policy update is likely to be minimal.
Share Repurchase Programs
ISS has codified its existing policy to indicate specific factors that may cause it to recommend against share repurchase program management proposals. Certain financial institutions or foreign-incorporated companies that ISS assesses under its U.S. policies are required to obtain shareholder approval for these plans because they are U.S. Domestic Issuers for purposes of SEC rules and trade solely on U.S. exchanges. ISS generally supports management proposals for open-market repurchases unless there are company-specific concerns regarding:
- Use of buybacks to manipulate certain incentive compensation metrics
- Threats to a company's long-term viability, or
- Any other company-specific factors, as warranted
ISS will recommend on a case-by-case basis on targeted share repurchases directly from specified shareholders, balancing the stated purpose of the repurchase against potential abuse to reward company insiders.
This policy update makes explicit ISS's current approach to safeguard against certain rare but abusive practices. Accordingly, it is unlikely to affect most companies.
ISS has updated its existing policy regarding board gender diversity to recommend against or withhold support from the chair of the nominating committee at boards of S&P 1500 and Russell 3000 companies that lack any women directors. ISS has indicated that for boards that lack any women directors, a firm commitment from the company to add at least one woman to the board within a year will serve as a mitigating factor for 2020 only. For meetings occurring on or after February 1, 2021, it will accept such a commitment as a mitigating factor only if there was a woman on the board at the preceding annual meeting.
According to ISS Analytics, as of July 15, 2019, there were 329 companies in the Russell 3000 index with no women on their boards. Accordingly, absent a firm commitment to add a woman to the board within the next year, we expect support for nominating committee chairs at those companies to decline significantly in the 2020 proxy season.
Also, on the topic of diversity, ISS has added considerations related to race and ethnicity to its policy regarding gender pay gap shareholder proposals to also cover proposals seeking reporting on race or ethnicity pay gap matters.
Additionally, ISS has made the following policy updates:
- ISS will replace GAAP metrics with Economic Value Added metrics for the Financial Performance Assessment secondary modifier screen in its pay for performance quantitative analysis.
- ISS has clarified that in cases of recommending against directors as a means to hold them accountable for any problematic governance issues, exemptions for new nominees will be made on a case-by-case basis only if the director has been on the board for less than one year.
- ISS has simplified the language under its "Attendance at Board and Committee Meetings" policy by stating that any nominee who served on the board for only part of the fiscal year will be exempt from its attendance policy.
- ISS has updated its policy to recommend against members of the governance committee at companies that impose requirements in excess of SEC Rule 14a-8 regarding shareholders' ability to submit binding bylaw amendment proposals. ISS has specified that submitting a management proposal to ratify such restrictive requirements for shareholder approval will not be considered sufficient, and it will continue to oppose election of governance committee members until all restrictions are removed. ISS has also clarified that any subject matter restrictions are also considered undue restrictions on shareholders' rights.
- With respect to its U.S. Equity Plan Scorecard analysis, ISS has added the existence of an "evergreen provision" to its list of egregious overriding factors that will cause it to vote against an equity plan proposal.
As a global company with worldwide reach and operations in most major financial markets, Georgeson has a unique perspective and understanding of corporate governance and proxy issues. Perhaps no major issue in governance has become as significant across markets as gender diversity in the boardroom. Many investors and issuers appear to share the view that board gender diversity is an essential attribute of effective board governance. While the U.K. and continental Europe have made greater progress and have higher representation of women on the boards compared to the U.S., the progress across markets in recent years has stalled. Therefore, it is noteworthy that similar to its policy in the U.S., ISS has adopted a board diversity policy in both the U.K. and continental Europe generally to recommend against the election of the chair of the nominating committee (or other directors on a case-by-case basis) when there are no women directors on the board of a widely-held company. ISS's adoption of a board diversity policy across these global markets reflects the view that, while significant progress has been made, more needs to be done. It will be interesting to see if the pace of women representation on boards accelerates.