On November 11, 2019, Institutional Shareholder Services (ISS) released its 2020 Proxy Voting Guidelines, which are generally effective for meetings on or after February 1, 2020.
Key updates for the 2020 proxy season include:
- Problematic Governance Structure – Newly Public Companies. In an important change for newly public companies (or those thinking of going public), ISS bifurcated 1) its policy for companies with problematic charter and bylaw provisions from 2) its policy for companies with problematic multi-class capital structures.
- Problematic Governance Structure. ISS will generally recommend a vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if, prior to or in connection with the company's initial public offering, the company or the board adopted bylaw or charter provisions that are materially adverse to shareholder rights. In its updates for the 2020 proxy season, ISS provided a specified list of bylaw or charter provisions that it considers to be materially adverse: supermajority vote requirements to amend the bylaws or charter; a classified board structure; or other "egregious provisions." However, the policy provides that a reasonable sunset to these provisions would be a mitigating factor in ISS's voting recommendations. ISS will continue to consider voting recommendations on incumbent directors in subsequent years on a case-by-case basis unless the adverse provision is reversed or removed.
- Problematic Capital Structure. ISS will generally recommend a vote against or withhold from the entire board (except new nominees, who should be considered case-by-case) if, prior to or in connection with the company's initial public offering, the company or the board implemented a multi-class capital structure with unequal voting rights. In its updates for the 2020 proxy season, ISS clarified that its voting recommendation would be predicated on whether the company had a "reasonable time-based sunset" and that ISS would consider the following factors in determining the reasonableness of the sunset: the company's lifespan; the company's post-IPO ownership structure; and the board's disclosed rationale for the sunset period selected. Notably, ISS will not consider any sunset in excess of seven years to be reasonable. In addition, ISS will now recommend a vote against or withhold from incumbent directors in subsequent years (not a case-by-case analysis), unless the problematic capital structure is reversed or removed.
- New Nominees. ISS defines a "new nominee" as a director nominee that is being presented for election to the shareholders for the first time. As part of its 2020 updates, ISS clarified that this could include a director that was appointed by the board to fill a vacancy and thus had already served on the board for some period prior to being subject to a shareholder vote. Of note, ISS further clarified that only those new nominees who have served on the board for less than one year may be excused from responsibility for problematic governance issues, meaning that ISS will consider them on a case-by-case basis (including for purposes of the problematic governance structure policy and problematic capital structure policy, each discussed above).
- Independent Board Chair – Shareholder Proposals. ISS will generally recommend a vote for shareholder proposals requiring that the chair of the board be an independent director, taking into consideration: the scope of the shareholder proposal; the company's current board leadership structure, governance structure, and practices; company performance; and other relevant factors that may be applicable. For 2020, ISS updated this list of factors to include the "rationale" for the shareholder proposal. In addition, ISS removed its commentary on how it will analyze each of the foregoing factors and noted that it intends to update and relocate this analysis to its Policy FAQ documents. ISS also added a list of specific factors that will increase the likelihood of a recommendation to vote for an independent chair shareholder proposal, including: a weak or poorly defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role; the presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair; evidence that the board has failed to oversee and address material risks facing the company; a "material governance failure"; or evidence that the board has failed to intervene when management's interests are contrary to shareholders' interests.
- Board Composition – Attendance. While ISS will continue to generally recommend a vote against or withhold from directors who attend less than 75 percent, in the aggregate, of their board and committee meetings absent disclosure in the proxy statement of an acceptable reason for their absences, ISS clarified that this policy would not apply to nominees for director who had served as a director for only part of the past fiscal year.
- Board Composition – Diversity. Consistent with its update last year, ISS will generally recommend a vote against or withhold from chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the board of directors. The existing mitigating factor relating to a company having a firm commitment to appoint at least one woman to the board within a year will end after 2020.
- Board Composition – Restrictions on Shareholders' Rights. ISS generally recommends a vote against or withhold from the members of the governance committee if the company's governing documents impose undue restrictions on shareholders' ability to amend the bylaws. In its 2020 updates, ISS added "subject matter restrictions" as an example of an "undue restriction." In its commentary, ISS clarified that this change is intended to capture "prohibitions on shareholders' being able to amend the particular bylaws that govern their ability to amend the bylaws…" In addition, ISS will continue to be skeptical of management proposals to approve or ratify requirements in excess of Rule 14a-8 for the submission of binding bylaw amendments, as it views these as an insufficient restoration of shareholder rights. ISS will now generally recommend a vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
- Share Repurchase Program Proposals. ISS will recommend a vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms. While most share buyback programs for U.S. companies require only board approval, ISS noted that there are exceptions to this rule. Accordingly, ISS will now also recommend a vote for management proposals to grant the board authority to conduct open-market repurchases. However, ISS will only provide a favorable voting recommendation on share repurchase programs in the absence of company-specific concerns, including: greenmail; the use of buybacks to inappropriately manipulate incentive compensation metrics; threats to the company's long-term viability; or other company-specific factors as warranted. ISS clarified that this policy would apply not just to U.S.-incorporated companies but also to foreign-incorporated U.S. domestic issuers that are traded solely on U.S. exchanges. In addition, ISS will consider voting recommendations on a case-by-case basis on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.
- Equity-Based and Other Incentive Plans – Evergreen Provision. ISS will now generally consider automatic share replenishment features (commonly known as "evergreen" provisions) to be an egregious factor that would warrant a recommendation against approval of an equity plan proposal.
- Diversity – Gender Pay Gap. ISS will now generally vote on a case-by-case basis for reports on a company's pay data by race or ethnicity or a report on a company's policies and goals to reduce any race or ethnicity pay gap, after considering various factors. Previously, ISS generally only voted for such reports related to gender.