On January 13, ISS released FAQs expressing its views on a board’s adoption of director compensation bylaws. To counteract the increasing practice implemented by hedge funds and other dissident shareholders of paying their director nominees compensation arrangements tied to their election to a board or performance-based metrics, some companies are implementing director nomination and qualification bylaws. These bylaws would disqualify any director nominee who receives compensation from a third party. The ISS has now formalized its position on such director disqualification bylaws.
ISS generally opposes the adoption of a director compensation bylaw that would disqualify a director nominee who receives third-party compensation without putting such a bylaw to a shareholder vote. It takes the position that such adoption without shareholder approval could be considered “a material failure of governance because the ability to elect directors is a fundamental shareholder right…[and] [b]ylaws that preclude shareholders from voting on otherwise-qualified candidates unnecessarily infringe on this core franchise right.” Consistent with its policy on “Governance Failures,” ISS could, therefore, recommend a vote against or withhold from director nominees for any such material failures.
ISS has distinguished these disqualification bylaws from bylaws in which a director nominee is disqualified for failing to disclose third-party compensation arrangements. In the latter case, ISS is not recommending a vote against directors for approval of such bylaws since they may promote better-informed voting decisions.
ISS’s position is not a blanket disapproval of director compensation/disqualification bylaws. Rather, if a director compensation/disqualification bylaw is put to a shareholder vote, ISS will apply a case-by-case approach, “taking into consideration, among other factors, the board’s rationale for proposing the bylaw, whether the proposed bylaw materially impairs and/or delivers any off-setting improvements in shareholder rights, and any market-specific practices or views on the underlying issue.”
Critics of ISS’s general opposition to director compensation/disqualification bylaws say that the ISS voting policy is misguided and ignores the legitimate corporate interests served by such bylaws, including addressing the conflict of interest underlying special compensation arrangements, particularly those involving “pay-for-performance” metrics, that may be paid by a dissident shareholder for board service.
To view the ISS FAQs, click here.