Today Institutional Shareholder Services (“ISS”) proposed for comment three changes to its 2016 U.S. proxy voting policies. Comments on the proposed changes can be submitted via e‑mail to email@example.com by 6 p.m. ET on November 9, 2015. ISS will take the comments into account as part of its policy review and expects to release its final 2016 U.S. policy updates on November 18, 2015. We note that ISS’s final 2016 proxy voting policies, which will apply to shareholder meetings held on or after February 1, 2016, likely will reflect additional changes beyond these on which ISS has solicited comments.
The proposed U.S. policy updates are available at http://www.issgovernance.com/policy-gateway/2016-benchmark-policy-consultation/ and are discussed below.
Limits on Directors’ Public Company Boards (“Director Overboarding”)
ISS has proposed to lower the total number of boards it views as acceptable for directors to serve on. The current ISS policy permits service on six public company boards, except that directors who are public company CEOs may not sit on the boards of more than two public companies besides their own. ISS’s proposed policy updates would lower the limit from six to either five or four public company boards and, for directors who are public company CEOs, from two to one public company board besides the director’s own. ISS has proposed a one-year transition period for the new policy, where it would include cautionary language in proxy reports for 2016 annual meetings but would not recommend votes “against” directors who are overboarded under the new policy until 2017. In its request for comments, ISS has solicited feedback on whether lowering these limits is appropriate, and whether, for directors who are not public company CEOs, the limit should be five or four total public company directorships.
The proposed policy set forth in ISS’s request for comment reflects the results of ISS’s annual policy survey, available at http://www.issgovernance.com/file/publications/ISS2015-2016PolicySurveyResultsReport.pdf, which ISS uses as part of its annual proxy voting policy formulation process. ISS received a total of 421 responses (including responses from 114 institutional investors, 257 corporate issuers and others). Of the 114 investor respondents, 34% indicated that directors generally should be considered “overboarded” if they serve on more than four boards, while 18% supported a limit of five boards and 20% supported ISS’s current limit of six boards. For directors who are public company CEOs, a plurality of investors (48%) indicated that directors who are active CEOs should be considered “overboarded” if they serve on more than two total boards (i.e., one board besides their own), while 32% supported ISS’s current limit of three total boards (i.e., two boards besides their own).
Negative Vote Recommendations on Directors for Unilateral Board Action Diminishing Shareholder Rights
ISS also has requested comment on a proposal to extend the period of time it recommends votes “against” directors when a board unilaterally adopts bylaw/charter amendments that “materially diminish shareholder rights.” Under the proposed policy, ISS would recommend votes “against” directors beyond the annual meeting immediately following the unilateral board action, as follows:
- certain bylaw or charter amendments adopted by the board without shareholder approval—including adopting a classified board structure or implementing supermajority vote requirements for bylaw/charter amendments—would lead to continued negative vote recommendations on directors until shareholders ratify the amendment or until the board reverses the amendment; and
- similarly, when a board unilaterally adopts such bylaw or charter amendments prior to or in connection with the company’s IPO, ISS would issue negative vote recommendations on directors at subsequent annual meetings following the IPO.
ISS’s request for comment also solicits views on whether there are other unilateral board actions—in addition to board classification and supermajority vote requirements—that should lead to continued negative vote recommendations on directors.
In response to ISS’s annual policy survey, of the respondents who indicated that it is appropriate, or sometimes appropriate, to hold directors accountable until the rights are restored, 92% of investor respondents and 52% of non-investor respondents indicated that it is appropriate to do so in the event of unilateral amendments to classify the board, while 89% of investors and 49% of non-investors indicated it is appropriate for unilateral amendments to establish supermajority vote requirements. A smaller majority of investor respondents also supported continued vote recommendations “against” directors for other types of unilateral amendments (not mentioned in ISS’s request for comment), including amendments to diminish shareholder rights to call special meetings or act by written consent (85%, with 48% of non-investors notably also in support), adopt fee-shifting provisions (78%) or restrict third-party compensation for directors or director candidates (77%).
Compensation-Related Votes at Externally-Managed Issuers
Finally, for externally-managed issuers (“EMIs”) such as many REITs, ISS has proposed recommending votes “against” the say-on-pay proposal—or, in the absence of a say-on-pay proposal, the compensation committee members or chair or the entire board, as appropriate—if the EMI does not provide sufficient disclosure about the compensation arrangements and payments made to its executives by the external manager for ISS to perform a comprehensive pay-for-performance analysis. Special thanks to Kasey Levit Robinson for the detailed summary.