ISS finalizes new U.S. shareholder voting policies

Leading proxy advisor Institutional Shareholder Services has initiated its annual review of voting policies, a process that will seek out viewpoints from the global corporate governance community.

Each year, ISS solicits commentary and opinions from institutional investors, issuers, and other market constituents in response to a global policy survey. The results of that survey were released in September, followed by the release of recommended policy changes, and the opening of a comment period on Oct. 31.

Voting policy updates will be applied for shareholder meetings taking place on or after Feb 1, 2017. Comments are due by 6 p.m. EST on Nov. 10, and ISS will release final 2017 policies the week of Nov 14.

Unilateral board actions—multi-class capital structure at IPO

The solicitation for comments notes that U.S. policy does not explicitly address director accountability with respect to a company’s capital structure in place at the time of its initial public offering.

The proposed policy update is intended to clarify ISS policy in light of the fact there has been an increase in the number of companies completing IPOs with multi-class structures. Seventeen companies holding their first annual meeting in 2016 (as of Aug. 30) were identified as having a multi-class share structure.

The proposed policy update generally allows for adverse director recommendations to be warranted when a company completes its public offering with a multi-class capital structure in which the classes do not have identical voting rights. In addition, current policy references to putting adverse provisions to a shareholder vote as an evaluation factor for director recommendations have been removed. Instead, ISS will consider the inclusion of a reasonable sunset provision on the adverse capital structure or governance provisions.

Specific feedback is sought on the following matters:

What factors do you consider as an appropriate sunset provision?

Should a sunset provision always be based on duration, or is another factor such as ownership makeup considered appropriate?

What length of time do you consider appropriate for a sunset provision?

Should the terms of a sunset provision differ based on the feature being sunset (e.g., classified board vs. supermajority vote requirements vs. multi-class capital structure)? If so, how?

The update does not affect the manner in which ISS evaluates and determines initial vote recommendations with respect to problematic unilateral bylaw and charter amendments, and the principle underlying the policy continues to be that shareholders should have the right to opine on changes that materially affect their rights, particularly when those changes would diminish their rights or increase the risk of board and management entrenchment.

Restrictions on binding shareholder proposals

Shareholders’ ability to amend bylaws is considered “a fundamental right,” ISS says. Under SEC Rule 14a-8, shareholders who have held shares valuing at least $2,000 for one year are permitted to submit shareholder proposals, both precatory and binding, to amend bylaws. Some states, however, allow for companies to restrict this right in their charters.

Over the last several years, shareholders have launched several campaigns at companies that do not provide this right and have specifically submitted precatory proposals on this issue. These campaigns, often contentious, have generated interest in the wider investor community on prohibitions of binding shareholder proposals. Some companies have offered as alternatives management proposals that require higher holding levels or time periods for shareholders to submit a binding proposal to amend the bylaws. In most cases, those proposals have not been approved.

Among its proposed U.S. changes, ISS will vote against or withhold from members of the governance committee if the company’s charter or articles of incorporation impose undue restrictions on shareholders’ ability to amend the bylaws. These restrictions include, but are not limited to, outright prohibition on the submission of binding shareholder proposals, share ownership requirements, and time holding requirements in excess of SEC Rule 14a-8.

Questions posed by ISS include:

Is the vote recommendation to withhold from members of the governance committee on an ongoing basis sufficient?

Going forward, how would you consider boards should address this issue?

Would the introduction by a company of a super-majority vote requirement to approve binding shareholder proposals in place of a previous prohibition be viewed as sufficiently responsive?

General share issuance mandates for cross-market companies

Corporate laws in certain countries require shareholder approval for any share issuances. To avoid the need to call a special meeting every time new shares are issued, companies in these markets typically seek approval every year for a general mandate for share issuances in the coming year, up to a specified percentage of issued share capital.

A number of formerly U.S.-based companies, treated as U.S. domestic issuers by the SEC, have reincorporated in recent years to jurisdictions where such shareholder approval is required, but there is not currently a U.S. policy on general share issuance mandates. This is largely because companies incorporated in the United States are not required to seek approval for share issuances except in certain specified circumstances.

Where non-U.S.-incorporated, U.S.-listed companies seek approval for share issuance mandates, these are currently evaluated by ISS under the policy of the country of incorporation; most commonly U.K./Irish policy or Continental European policy. Those policies are often driven by local listing rules and best practices, however, which do not generally apply to companies without a listing in that market. Meanwhile, U.S.-listed companies are subject to NYSE or NASDAQ rules on share issuances, which are not reflected in non-U.S. policies.

ISS policy changes under consideration include recommending in favor of general share issuance authorities (those without a specified purpose) up to a maximum of 20 percent of currently issued capital, as long as the duration of the authority is clearly disclosed and reasonable.

The proposed policy is intended to better reflect U.S. listing rules and the expectations of investors in the U.S. market. This would apply to companies treated as U.S. domestic issuers by the Securities and Exchange Commission, with a sole listing in the United States, but which are required by the laws of the country of incorporation to seek approval for all share issuances. Share issuance mandates at dual-listed companies, which are required to comply with listing rules in the country of incorporation, will continue to be evaluated under the policy for that market.

As proposed, the new policy would effectively extend the NYSE/NASDAQ requirement for shareholder approval of issuances above 20 percent to scenarios in which the listing rules do not currently apply, such as public share issuances for cash.

Suggested questions for those submitting comments:

Do you believe that 20 percent is an appropriate threshold for such cross-market companies, or would it be more appropriate to grant a mandate for issuances up to a lower or higher level?

Should such companies seek annual approval for share issuance mandates, or would a longer mandate (2-3 years) be acceptable?

Should the same policy also apply to companies treated by the U.S. SEC as Foreign Private Issuers?

Executive pay assessments

A growing number of companies around the world are incorporated in one country but listed in a different country (often the United States) and may be required to include multiple compensation proposals on the same ballot relating to the same pay program. For example, a company incorporated in the United Kingdom but listed in the United States may have a “say on pay” advisory vote on executive compensation mandated by laws in both jurisdictions, as well as the forward-looking binding vote on remuneration policy required only by U.K. law.

Under ISS’ current approach, items that are on the ballot solely due to the requirements of another market (listing, incorporation, or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” market coverage. However, as the number and significance of cross-market companies have increased, both investors and non-investors have indicated a preference for aligning voting policy and recommendations for multiple proposals on the same compensation program in certain situations.

SURVEY SAYS...

Below are some results from the ISS policy survey.
As for the policy survey that helped shape this year’s slate of policy recommendations, ISS received 439 responses, from 417 organizations.
As in past years, the largest number of respondents—312 in all—were from organizations based in the United States, while 31 were from groups based in Canada, and 67 from groups based in Europe. Responses were also received from organizations in Hong Kong, Japan, Korea, Taiwan, Malaysia, Australia, South Africa, Russia, and Bermuda. Many respondents, however, have a focus that goes beyond their own home country or domicile.
Overboarding
U.S. survey respondents were asked whether the “overboarding” standard, which should apply to an executive chairman who is not also the company's CEO, should be the same standard as that applied to a sitting CEO (no more than three total boards) or the standard applied to a non-executive director (no more than five total boards).
Among investors, 64 percent of respondents favored the stricter overboarding standard applied to CEOs, while 36 percent favored the more lenient standard. Among non-investors, the percentages were nearly reversed, with 38 percent responding that the stricter standard should be applied and 62 percent preferring the more lenient non-executive director standard.
Comments from investors were divided, with some expressing support for even stricter limits on board service than the above-mentioned three and five, while others favored leaving such determinations to the board. Other investors suggested that the appropriate number would depend on the individual roles on outside boards, including committee memberships and service as a lead director or chairman.
Among non-investors, several commented that the executive chairman’s role differs from company to company and suggested that a chairman whose primary role is to aid in the CEO transition or foster client relationships would have more leeway to serve on outside boards than a chairman who plays a role in day-to-day management. Others rejected the idea that there should be any fixed limits on board service and indicated that all overboarding determinations should be case-by-case.
Post-IPO, post-bankruptcy
Respondents were asked whether ISS should consider recommending votes against directors at companies that go public, or emerge from bankruptcy, with a capital structure that includes multiple classes of stock with unequal voting rights given the potential for abuse and the extreme difficulty of abolishing such a structure once the company goes public.
Among investors, 57 percent supported negative recommendations, while 19 percent opposed them, and 24 percent opposed negative recommendations as long as there is a sunset provision on the unequal voting rights.
Among non-investors, 46 percent opposed negative recommendations on directors altogether, while a majority supported a negative recommendation when such provisions were put in place permanently; 24 percent supported negative recommendations on directors when multi-class share structures were put in place in an IPO or bankruptcy situation, and 31 percent opposed such recommendations only where the unequal voting rights are subject to sunset.
Most corporations that commented on this question either urged the adoption of a case-by-case approach, depending on the stated reasons for the multi-class structure and the other governance attributes of the company in question.
Board refreshment
Investors are increasingly focusing on lengthy director tenure as a potential obstacle to adding new skill sets and diversity to boards and as a potential risk to the independence of long-serving directors. Survey respondents were asked which tenure-related factors would give rise to concern about a board’s nominating and refreshment processes, with multiple answers allowed.
Among investors, 53 percent identified an absence of newly appointed independent directors in recent years as indicative of a problem, while slightly more than half flagged lengthy average tenure as problematic, and 68 percent responded that a high proportion of directors with long tenure is cause for concern. Eleven percent of investors said that tenure is not a concern, although several of these investors also indicated that an absence of newly appointed directors is a concern.
In the comments, several investors identified other factors of concern, such as director ages, a high degree of overlap between the tenure of the CEO and the tenure of the non-executive directors, or lengthy average tenure coupled with underperformance.
Twenty-six percent of non-investors responded that the absence of newly appointed independent directors would be cause for concern; 19 percent identified lengthy average tenure as problematic; and 31 percent flagged a high proportion of directors with long tenure. Nearly a third of non-investors stated that lengthy tenure by itself is not a concern, but conceded that a lack of board refreshment is problematic.
Maryland’s requirements
The state of Maryland is home to nearly 80 percent of publicly traded Real Estate Investment Trusts (REITs) in the United States. The state’s REIT law gives boards the ability to specify that shareholders do not have the right to amend the bylaws and the ability to increase the number of authorized shares without shareholder approval. More than two-thirds of Maryland REITs have taken advantage of these provisions.
Survey respondents were asked whether vote recommendations against directors would be warranted for failure to opt out of such provisions. Among investor respondents, 18 percent supported recommendations against the chair of the governance committee, nearly a third supported recommendations against the full governance committee, and 25 percent against the full board. Only 15 percent of investors did not believe that negative recommendations on directors would be warranted.
Among non-investor respondents, slightly more than half indicated that no negative recommendations on directors would be warranted, while 9 percent supported recommendations against the governance committee chair, 8 percent against the full committee, and 11 percent against the full board.
Another Maryland law, the Maryland Unsolicited Takeover Act (MUTA), allows boards of companies registered in that state to unilaterally (without shareholder approval) take steps such as classifying the board and limiting shareholders’ ability to call a special meeting.
Survey respondents were asked whether vote recommendations against directors would be warranted for failure to opt out of these provisions of MUTA. Among investors, 20 percent supported recommendations against the chair of the governance committee, while 31 percent supported recommendations against the full governance committee, and 27 percent against the full board. Six percent expressed support for a different approach. Fifteen percent of investors did not believe that negative recommendations on directors would be warranted.
Non-investors had different views, with 56 percent believing that no negative recommendations would be warranted. One corporate respondent suggested that shareholders concerned about these issues should raise those concerns with the company itself or with the Maryland legislature.
Say-on-pay frequency
In anticipation of the 2017 say-on-pay frequency votes mandated by the SEC for U.S. companies that have been holding say-on-pay votes for the past six years, respondents were asked whether they favored annual, biennial, or triennial management say-on-pay proposals on ballots, or whether the frequency should depend on the company.
A large majority (66 percent) of investor respondents favored across-the-board annual say-on-pay votes, with one commenting that “an annual say on pay is just the governance norm.” Eleven percent and 7 percent favored biennial and triennial votes, respectively. The remaining 17 percent of investors believe that the frequency should depend on company-specific factors, of which financial performance and the presence or absence of recent problematic pay practices were flagged by the greatest number of investors.
Annual say-on-pay votes were also favored by a plurality of non-investor respondents (42 percent), while seven and 19 percent preferred biennial and triennial votes. Thirty-one percent of non-investors responded that the frequency should depend on company-specific factors, and the level of shareholder support for say-on-pay at past meetings, as well as the presence or absence of recent problematic pay practices, were the factors most often cited by non-investors.
Several corporate respondents argued that annual votes focus too much attention on short-term results or short-term fluctuations in pay, and one senior corporate counsel commented that annual votes “may not allow enough time to adopt thoughtful changes to executive compensation,” in light of the time it takes for shareholder outreach and compensation changes based on feedback from that shareholder outreach.
Executive pay assessments
A growing number of companies around the world are incorporated in one country, but listed in a different country, and may be obligated to hold multiple compensation-related votes each year, such as the backward-looking advisory votes on executive compensation mandated by U.S. and U.K. law and the forward-looking binding vote on remuneration policy required by U.K. law.
Survey respondents were asked whether, in these situations, the vote recommendations should be aligned so as not to produce inconsistent evaluations of a single pay structure, or whether conflicting vote recommendations are acceptable as long as each is based on the policy of the market that mandates the proposal in question.
Sixty-five percent of investors answered that the vote recommendations should be aligned, while 27 percent responded that differing recommendations would be acceptable. Eight percent favored another approach, such as aligning the recommendations to achieve the strictest evaluation, or evaluating compensation proposals using the policy of the market where the executives are based and where the company competes for talent.
Among non-investors, 59 percent responded that vote recommendations should be aligned, and 28 percent said that differing recommendations would be acceptable.
Source: ISS

Suggested ISS policy changes would apply to U.S. domestic issuers only (foreign incorporated companies that have a majority of shareholders in the United States, meet other criteria as determined by the SEC, and are subject to the same disclosure and listing standards as U.S. incorporated companies).

U.S. domestic issuers with multiple compensation proposals on ballot that pertain to the same pay program will be assessed on a case-by-case basis using the following guiding principle: align voting recommendations so as to not have inconsistent recommendations on the same pay program, and use the policy perspective of the country in which the company is listed (for example, U.S. say-on-pay policy for proposals relating to executive pay). If there is a compensation proposal on ballot under which there is no applicable U.S. policy, however, then the policy of the country that requires it to be on ballot would apply.

This is a limited carve-out for U.S.-listed companies. Most markets’ say-on-pay proposals would be viewed from a U.S. say-on-pay policy perspective, aligned to the U.S. management say-on-pay vote recommendation.

In the most recent policy survey, respondents were asked whether, in these situations, the vote recommendations should be aligned so as not to produce inconsistent evaluations of a single pay structure or whether differing vote recommendations are acceptable as long as each is based on the policy of the market that mandates the proposal in question. The majority of respondents (65 percent of investors and 59 percent of non-investors) supported aligning the voting recommendations for multiple proposals covering the same compensation program.

A question posed to interested parties: How should companies that are dual-listed or have dual incorporations fit into this framework?

Survey says …

As for the policy survey that helped shape this year’s slate of policy recommendations, ISS received 439 responses, from 417 organizations.

As in past years, the largest number of respondents—312 in all—were from organizations based in the United States, while 31 were from groups based in Canada, and 67 from groups based in Europe. Responses were also received from organizations in Hong Kong, Japan, Korea, Taiwan, Malaysia, Australia, South Africa, Russia, and Bermuda. Many respondents, however, have a focus that goes beyond their own home country or domicile.

Overboarding

U.S. survey respondents were asked whether the “overboarding” standard, which should apply to an executive chairman who is not also the company's CEO, should be the same standard as that applied to a sitting CEO (no more than three total boards) or the standard applied to a non-executive director (no more than five total boards).

Among investors, 64 percent of respondents favored the stricter overboarding standard applied to CEOs, while 36 percent favored the more lenient standard. Among non-investors, the percentages were nearly reversed, with 38 percent responding that the stricter standard should be applied and 62 percent preferring the more lenient non-executive director standard.

Comments from investors were divided, with some expressing support for even stricter limits on board service than the above-mentioned three and five, while others favored leaving such determinations to the board. Other investors suggested that the appropriate number would depend on the individual roles on outside boards, including committee memberships and service as a lead director or chairman.

Among non-investors, several commented that the executive chairman’s role differs from company to company and suggested that a chairman whose primary role is to aid in the CEO transition or foster client relationships would have more leeway to serve on outside boards than a chairman who plays a role in day-to-day management. Others rejected the idea that there should be any fixed limits on board service and indicated that all overboarding determinations should be case-by-case.

Post-IPO, post-bankruptcy

Respondents were asked whether ISS should consider recommending votes against directors at companies that go public, or emerge from bankruptcy, with a capital structure that includes multiple classes of stock with unequal voting rights given the potential for abuse and the extreme difficulty of abolishing such a structure once the company goes public.

Among investors, 57 percent supported negative recommendations, while 19 percent opposed them, and 24 percent opposed negative recommendations as long as there is a sunset provision on the unequal voting rights.

Among non-investors, 46 percent opposed negative recommendations on directors altogether, while a majority supported a negative recommendation when such provisions were put in place permanently; 24 percent supported negative recommendations on directors when multi-class share structures were put in place in an IPO or bankruptcy situation, and 31 percent opposed such recommendations only where the unequal voting rights are subject to sunset.

Most corporations that commented on this question either urged the adoption of a case-by-case approach, depending on the stated reasons for the multi-class structure and the other governance attributes of the company in question.

Board refreshment

Investors are increasingly focusing on lengthy director tenure as a potential obstacle to adding new skill sets and diversity to boards and as a potential risk to the independence of long-serving directors. Survey respondents were asked which tenure-related factors would give rise to concern about a board’s nominating and refreshment processes, with multiple answers allowed.

Among investors, 53 percent identified an absence of newly appointed independent directors in recent years as indicative of a problem, while slightly more than half flagged lengthy average tenure as problematic, and 68 percent responded that a high proportion of directors with long tenure is cause for concern. Eleven percent of investors said that tenure is not a concern, although several of these investors also indicated that an absence of newly appointed directors is a concern.

In the comments, several investors identified other factors of concern, such as director ages, a high degree of overlap between the tenure of the CEO and the tenure of the non-executive directors, or lengthy average tenure coupled with underperformance.

Twenty-six percent of non-investors responded that the absence of newly appointed independent directors would be cause for concern; 19 percent identified lengthy average tenure as problematic; and 31 percent flagged a high proportion of directors with long tenure. Nearly a third of non-investors stated that lengthy tenure by itself is not a concern, but conceded that a lack of board refreshment is problematic.

Maryland’s requirements

The state of Maryland is home to nearly 80 percent of publicly traded Real Estate Investment Trusts (REITs) in the United States. The state’s REIT law gives boards the ability to specify that shareholders do not have the right to amend the bylaws and the ability to increase the number of authorized shares without shareholder approval. More than two-thirds of Maryland REITs have taken advantage of these provisions.

Survey respondents were asked whether vote recommendations against directors would be warranted for failure to opt out of such provisions. Among investor respondents, 18 percent supported recommendations against the chair of the governance committee, nearly a third supported recommendations against the full governance committee, and 25 percent against the full board. Only 15 percent of investors did not believe that negative recommendations on directors would be warranted.

Among non-investor respondents, slightly more than half indicated that no negative recommendations on directors would be warranted, while 9 percent supported recommendations against the governance committee chair, 8 percent against the full committee, and 11 percent against the full board.

Another Maryland law, the Maryland Unsolicited Takeover Act (MUTA), allows boards of companies registered in that state to unilaterally (without shareholder approval) take steps such as classifying the board and limiting shareholders’ ability to call a special meeting.

Survey respondents were asked whether vote recommendations against directors would be warranted for failure to opt out of these provisions of MUTA. Among investors, 20 percent supported recommendations against the chair of the governance committee, while 31 percent supported recommendations against the full governance committee, and 27 percent against the full board. Six percent expressed support for a different approach. Fifteen percent of investors did not believe that negative recommendations on directors would be warranted.

Non-investors had different views, with 56 percent believing that no negative recommendations would be warranted. One corporate respondent suggested that shareholders concerned about these issues should raise those concerns with the company itself or with the Maryland legislature.

Say-on-pay frequency

In anticipation of the 2017 say-on-pay frequency votes mandated by the SEC for U.S. companies that have been holding say-on-pay votes for the past six years, respondents were asked whether they favored annual, biennial, or triennial management say-on-pay proposals on ballots, or whether the frequency should depend on the company.

A large majority (66 percent) of investor respondents favored across-the-board annual say-on-pay votes, with one commenting that “an annual say on pay is just the governance norm.” Eleven percent and 7 percent favored biennial and triennial votes, respectively. The remaining 17 percent of investors believe that the frequency should depend on company-specific factors, of which financial performance and the presence or absence of recent problematic pay practices were flagged by the greatest number of investors.

Annual say-on-pay votes were also favored by a plurality of non-investor respondents (42 percent), while seven and 19 percent preferred biennial and triennial votes. Thirty-one percent of non-investors responded that the frequency should depend on company-specific factors, and the level of shareholder support for say-on-pay at past meetings, as well as the presence or absence of recent problematic pay practices, were the factors most often cited by non-investors.

Several corporate respondents argued that annual votes focus too much attention on short-term results or short-term fluctuations in pay, and one senior corporate counsel commented that annual votes “may not allow enough time to adopt thoughtful changes to executive compensation,” in light of the time it takes for shareholder outreach and compensation changes based on feedback from that shareholder outreach.

Executive pay assessments

A growing number of companies around the world are incorporated in one country, but listed in a different country, and may be obligated to hold multiple compensation-related votes each year, such as the backward-looking advisory votes on executive compensation mandated by U.S. and U.K. law and the forward-looking binding vote on remuneration policy required by U.K. law.

Survey respondents were asked whether, in these situations, the vote recommendations should be aligned so as not to produce inconsistent evaluations of a single pay structure, or whether conflicting vote recommendations are acceptable as long as each is based on the policy of the market that mandates the proposal in question.

Sixty-five percent of investors answered that the vote recommendations should be aligned, while 27 percent responded that differing recommendations would be acceptable. Eight percent favored another approach, such as aligning the recommendations to achieve the strictest evaluation, or evaluating compensation proposals using the policy of the market where the executives are based and where the company competes for talent.

Among non-investors, 59 percent responded that vote recommendations should be aligned, and 28 percent said that differing recommendations would be acceptable.