[author: Craig D. Miller]
On November 16, 2012, Institutional Shareholder Services ("ISS") released its 2013 "Corporate Governance Policy Updates and Process," which will be used in its proxy voting recommendations for this upcoming annual meeting season. Public companies should be aware of two key changes in ISS's recommendations on voting for directors.
Board Responsiveness: Governance Failures
ISS believes that hedging of company stock and significant pledging of company stock by directors or executive officers demonstrate a material failure of the Board of Directors in risk oversight. Accordingly, ISS will now consider hedging and pledging as one factor in determining whether to vote AGAINST or WITHHOLD for a particular director or the Board of Directors as a whole.
ISS notes that hedging activities (whether by covered call, collar or other derivative actions) sever the alignment of directors with shareholders' interests. In addition, ISS considers pledging activity as an irresponsible use of equity and a problematic practice, as pledging directors or officers may be forced to sell company stock, which may negatively impact the company's stock price or otherwise violate insider trading policies.
In determining vote recommendations for companies where directors or executive officers have pledged company stock, ISS will review the presence in the proxy statement of an antipledging policy with regard to future pledging activity, disclosure of progress in reducing the magnitude of aggregate pledged shares over time, and the overall magnitude of aggregate pledged shares in terms of total common shares outstanding, market value of shares outstanding and total trading volume.
Board Responsiveness: Majority-Supported Shareholder Proposals
ISS believes that board responsiveness to majority-supported shareholder proposals is a key measure of corporate governance, even if "majority" support came from a majority of votes CAST at a particular meeting rather than a majority of outstanding shares. Accordingly, ISS will be implementing the following transitional policy:
Vote AGAINST or WITHHOLD an individual director or the entire Board of Directors if:
For 2013, the Board failed to act on a shareholder proposal that received the support of a majority of the shares outstanding the previous year;
For 2013, the Board failed to act on a shareholder proposal that received the support of a majority of shares cast in the last year and one of the two previous years;
For 2014, the Board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year.
Manatt, Phelps & Phillips, LLP will continue to monitor changes in policies and procedures from both regulatory agencies and nonregulatory advisory firms that affect our public company clients. ISS’s 2013 voting policy updates can be found here.