Today, the proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) announced proposed changes to its voting policy on independent chair shareholder proposals and opened the comment period until October 29, 2014, to solicit feedback on the changes. This is one of two significant proposals ISS announced today that would impact U.S. companies for the 2015 proxy season.
Currently, ISS generally recommends a vote “For” proposals requesting that the chair of a company’s board be independent unless the company satisfies specific criteria that include: (1) having a designated lead director with certain duties specified by ISS; (2) not exhibiting “sustained poor total shareholder return (TSR) performance” over one- and three-year periods; and (3) not having any governance issues that ISS considers “problematic.
ISS proposed two major changes to this policy: (1) adding new governance, board leadership, and performance factors to the current list of criteria it considers in evaluating independent chair proposals; and (2) looking at all of the criteria “in a holistic manner” so that companies would no longer need to satisfy all of the criteria in the voting policy in order for ISS to recommend “Against” the shareholder proposal. Specifically:
- ISS is considering adding the following new criteria to its policy: (1) the absence/presence of an executive chair; (2) recent board and executive leadership transitions at the company; (3) director/CEO tenure; and (4) evaluation of a longer, five-year TSR performance period rather than the one- and three-year periods that are currently used. In announcing the proposed changes, ISS specifically mentioned the first one—presence of an executive chair—as cause for concern, citing a study that (according to ISS) found that retaining a former CEO in the role of executive chair “may prevent new CEOs from making performance gains by dampening their ability to make strategic changes at the company.” ISS also expressed concern about whether a lead independent director can act as “an effective counterbalance to both a CEO and an executive chair.” ISS did not address how the other factors it listed may affect its evaluation.
- ISS proposes to now review all of the criteria in the voting policy “in a more holistic manner.” Under its current methodology, ISS will recommend votes “Against” an independent chair shareholder proposal only if a company satisfies all of ISS’s criteria. Under the proposed approach, ISS indicated that any one factor that may previously have resulted in a “For” or “Against” recommendation could be mitigated, either positively or negatively, by other criteria. While the proposed change appears to give ISS greater flexibility in applying the policy, it will also lead to greater uncertainty among companies seeking to assess ISS’s likely voting recommendation.
ISS assessed the potential impact of the proposed new voting policy by applying it to companies where independent chair shareholder proposals were voted on in 2014. ISS found that the policy resulted in a “higher level of support” for these shareholder proposals without providing more details. Independent chair proposals were the most popular shareholder proposal submitted to companies in 2014, and ISS recommended “Against” 32 of the 62 proposals that went to a vote as of June 30. Independent chair shareholder proposals averaged support of 31.2% of votes cast at 2014 annual meetings, with four of these shareholder proposals receiving support from a majority of votes cast.
ISS has requested comments on the proposed changes, and has specifically asked for feedback on: (1) what factors are most important when determining whether an independent chair shareholder proposal warrants support; (2) how much weight should be given to recent changes in board leadership structure (e.g., a switch from an independent chair to a non-independent chair or a recombination of the CEO/chair roles); and (3) what timeframe ISS should use for the stock price performance test when evaluating independent chair shareholder proposals.
Comments may be submitted via email to email@example.com. For more information, the ISS release discussing the proposed revisions is available here. ISS’s final 2015 proxy voting policies are expected to be released around November 7 and typically apply to shareholder meetings held on or after February 1.