On November 19, 2018, Institutional Shareholder Services (ISS) published updates to its 2019 benchmark proxy voting policies. The new policies will be applicable to all meetings held on or after February 1, 2019. The key policies that have been added or significantly updated relate to the issues of board diversity, management proposals to ratify existing charter or bylaw provisions and reverse stock splits. Other policy changes relate to director attendance, director performance evaluation and evaluating environmental and social shareholder proposals.
Georgeson's discussion of ISS's 2019 policy updates follows.
The 2019 Americas Proxy Voting Guidelines Updates are available on the ISS Policy Gateway. A full updated policy list will likely be available from ISS in January 2019.
Board Diversity – New for 2019
ISS is adopting a new policy generally to recommend against or withhold from the chair of the nominating committee (or other directors at companies with no formal nominating committee) at companies lacking at least one female director on the company's board. The policy allows for a one-year grace period, becoming effective for meetings on or after Feb. 1, 2020, and will be applicable for companies in the Russell 3000 and the S&P 1500 indices.
ISS will excuse the absence of gender diversity only in exceptional circumstances such as:
- A firm commitment by the company to include at least one female director in the near term (before the next year's annual meeting)
- The company board included at least one female director at the immediately preceding annual meeting.
Over the past few years, the issue of board gender diversity has gathered momentum amongst investors. Recently, several large institutional investors have adopted their own voting policy or otherwise acknowledged the importance of the issue. Given these developments, companies that lack board gender diversity should consider refreshing their board to add at least one female director in the near term.
Georgeson's 2018 Annual Corporate Governance Review details director election support among top investors during the period 2015- 2018.
Management Proposals to Ratify Existing Charter or Bylaw Provisions – New for 2019
ISS has adopted a new policy to recommend against management proposals seeking to ratify existing charter or bylaw provisions, when such provisions no longer align with best practice.
Additionally, ISS may recommend voting against/withhold from individual directors, members of the governance committee, or the full board, based on consideration of the following factors:
- The presence of a conflicting shareholder proposal on the same ballot
- The board's rationale for seeking ratification
- The disclosure of shareholder engagement and actions that the board would take if the ratification proposal were to fail
- Whether the provision was adopted in response to a shareholder proposal, and any restrictions to the shareholder rights contained in the provision
- The history of proposals relating to the provision
- Previous use of ratification to exclude shareholder proposals; and
- The company's ownership structure.
ISS has also added this issue to its board responsiveness policy. Accordingly, ISS may recommend against/withhold from individual directors, or the entire board, if the board fails to respond to a ratification proposal that attracted a majority of shares against the measure in the previous year.
A company seeking to exclude a shareholder proposal on the basis of ratification of an existing provision should evaluate the risk of shareholder opposition in light of the proxy advisory firms'1 policies. The companies should also engage with their shareholders to explain their approach and solicit feedback.
Reverse Stock Splits – Updated policy for 2019
ISS is updating its policy to codify its current approach for companies that are not listed on major stock exchanges. Since delisting notices do not apply to such companies, ISS is broadening its policy to include additional factors. For determining its vote recommendation, ISS will consider any going concerns or critical risks that a company might face if the reverse stock split proposal were to fail.
The companies that are not proportionately reducing their authorized shares in a reverse stock split proposal should clearly disclose any business or financial risks that they face as a consequence of the failed proposal. Such disclosure would help with ISS's case-by-case analysis of the proposal.
Additionally, ISS has made the following policy updates:
- ISS has codified its policy approach in case of chronic poor attendance2 without reasonable justification. In addition to recommending against the election of the director with poor attendance, after three years ISS will recommend against the chair of the nominating or governance committee, after four years against the entire nominating or governance committee, and after five years against the entire board.
- Under its Director Performance Evaluation policy, ISS will include the five-year total shareholder returns performance metric as part of its initial screen instead of as part of the secondary evaluation.
- In codifying its approach to evaluating environmental and social shareholder proposals, ISS has indicated that it also considers, among other factors, whether there are significant controversies, fines, penalties or litigation associated with the company's environmental or social practices.
Pay for Performance Quantitative Analysis- Remains Unchanged for 2019
ISS will not be incorporating the use of Economic Value Add (EVA) measures in the Financial Performance Assessment (FPA) screen of its pay-for-performance quantitative analysis for 2019. Rather, the FPA screen will continue to use its current financial accounting (GAAP) measures. ISS had sought feedback on the inclusion of EVA metrics earlier in the process. Investors expressed a desire for more time to understand better the EVA methodology and its impact on pay-for-performance evaluation. ISS will include in its report EVA metrics for informational purposes for the 2019 proxy season, and will continue to explore for the future its potential use in the FPA screen.
Given the inclusion of EVA metrics in ISS's reports and the potential for their use in the FPA screen in the future, the companies should consider verifying the reported EVA information and watch for any future methodology changes.
1Glass Lewis has disclosed a similar new policy. See Georgeson Report 2019 Glass Lewis Policy Updates, dated 26 November, 2018
2Defined as three or more consecutive years of less than 75 percent attendance of the aggregate of board and committee meetings.