ISS and Glass Lewis Update Proxy Voting Guidance for COVID-19

McDermott Will & Emery

OVERVIEW


Institutional Shareholder Services and Glass, Lewis & Co. released revised proxy voting guidelines in light of the Coronavirus (COVID-19) pandemic. This On the Subject details key implications for the 2020 proxy season.

IN DEPTH


Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co., LLC (Glass Lewis) recently updated their respective proxy voting guidelines in response to the Coronavirus (COVID-19) pandemic. As revised, these guidelines have important implications for the 2020 proxy season.

ISS Policy Updates

Annual Meeting Issues

Meeting Postponements: ISS announced that it will take a positive view of companies and boards that use electronic communications (webcasts, conference calls, etc.) to engage with their shareholders even if their annual meetings have been postponed.

Virtual-Only Meetings: ISS does not have a policy to recommend voting against US companies that hold virtual-only shareholder meetings. ISS confirmed that there will be no change to its current approach for the remainder of the 2020 proxy season.

Poison Pills, Shareholder Rights and Boards/Directors

Poison Pills: ISS announced that its existing policy is “appropriately flexible” to account for the adoption of poison pills during the COVID-19 pandemic. The existing policy evaluates poison pills on a case-by-case basis, taking into consideration the board’s rationale and the specific provisions of the poison pill. ISS noted that a severe stock price decline due to the COVID-19 pandemic will likely be considered a valid reason for adopting a pill of less than one year duration without a shareholder vote, provided that the board discloses its rationale.

Director Attendance: ISS noted that telephonic/electronic participation counts as full participation in board and committee meetings for US companies.

Changes to the Board of Directors or Senior Management: ISS announced that its existing policies provide “appropriate discretion and flexibility” to account for changes to boards or senior management. If a board needs to fill vacancies or add critical expertise because of COVID-19, ISS will evaluate the situation on a case-by-case basis.

Compensation Issues

Compensation: ISS encourages boards to provide contemporaneous disclosure to shareholders of their rationale for making material changes to performance metrics, goals or targets used in short-term compensation plans for 2020. Midstream or in-flight changes to awards granted under long-term compensation plans will be evaluated on a case-by-case basis to determine whether boards exercised appropriate discretion and provided adequate explanation to shareholders.

Option Repricing: ISS will apply its existing US benchmark policy on board accountability to repricing actions taken without seeking shareholder approval/ratification in a timely fashion. If a board seeks shareholder approval/ratification of repricing actions, ISS will apply its existing case-by-case approach. ISS generally recommends opposing repricing that occurs within one year of a precipitous drop in the company’s stock price. The factors taken into consideration include whether:

  • The design is shareholder value neutral (a value-for-value exchange).
  • Surrendered options are not added back to the plan reserve.
  • Replacement awards do not vest immediately.
  • Executive officers and directors are excluded.

Capital Structure and Payouts

Dividends: ISS supports broad discretion by boards that set payout ratios falling below historic levels or customary market practice.

Share Repurchases: ISS encourages boards to consider the reputational, regulatory and business risks associated with undertaking a share buyback program, even if approved by shareholders. ISS announced that it will consider whether a board appropriately managed risks for any repurchases in 2020.

Share Issuances: ISS will apply is existing case-by-case analysis to general authorization and share issuance requests, but will also adapt the approach for any regulatory relaxations or new guidance as a result of COVID-19. Factors under the existing framework include:

  • Proxy statement disclosure of the specific purposes for the proposed increase
  • The risks to shareholders of not approving the request
  • The size and potential dilutive impact of the request combined with any market-specific guidelines on limits and preemptive rights.

Private Placements: ISS’s existing voting policies provide for case-by-case analysis of private placement issuances considering:

  • The rationale for the private placement issuance
  • The potential dilution to existing shareholders
  • The discount/premium in issuance price to the unaffected share price before the announcement of the private placement
  • Any conflicts of interest
  • Consideration of alternatives
  • The market’s reaction to the proposed private placement since announcement.

ISS also will consider whether there are any exceptional circumstances.

Glass Lewis Policy Updates

Virtual Shareholder Meetings: Glass Lewis announced a change to its standard policy on virtual-only shareholder meetings. For companies holding virtual-only shareholder meetings because of COVID-19, Glass Lewis will generally refrain from recommending to vote against the governance committee members so long as the company discloses its rationale, including citing COVID-19. Glass Lewis will revert to its standard policy for virtual meetings occurring after the 2020 proxy season.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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