Yesterday, ISS announced updates to its policies for next year. Like Glass Lewis a month ago, ISS is also—shall we say “unfriendly”— to boards of companies that submit to shareholders a charter or bylaw ratification proposal while excluding, as permitted under SEC rules and staff no-action positions, a conflicting shareholder proposal. Below are some of the highlights of the ISS updates:
Board gender diversity: No change for 2019, but, starting with 2020, for a company in the Russell 3000 or S&P 1500 indices, if there are no women on the company’s board, ISS will generally recommend a vote against the chair of the nom/gov committee (or other directors on a case-by-case basis). Mitigating factors include a firm commitment—stated in the proxy statement—to appoint at least one woman to the board in the near term or the inclusion of a woman on the board at the preceding annual meeting.
Why this change? According to ISS, it’s because investors favor gender diverse boards. And there are a variety of reasons for that preference, including enhanced long-term company performance. Based ISS survey results, only 3% of investor respondents and 13% of non-investors, “stated that they did not consider a lack of board gender diversity to be problematic….” What’s more, an ISS study found that women are just better at some things: women “nominees surpassed their male peers in the prevalence of skills related to audit, strategic planning, technology, sales, risk management, legal, government, CSR, and human resources.” From a market perspective, in 2017, 99 % of the S&P 500 and 87% of the S&P 1500 had at least one woman on the board and, in 2018, 84% of the Russell 3000 had at least one woman on the board. As a result, the impact of this policy change should not be that widespread, especially if non-compliant companies start now to address the issue.
Board attendance: Where poor attendance is chronic for any director (without reasonable justification), ISS will recommend a vote, not only against the offending director but also against appropriate members of the nom/gov committee or the full board. This change represents a codification of ISS’s current case-by-case approach. What does “chronic” mean? It means a “long-term pattern of absenteeism, such as poor attendance the previous year and three out of the four prior years.” More specifically, ISS will recommend against the committee chair after three years of poor attendance, against the full committee after four years and against all nominees after five years. Why? To hold the committee accountable for continuing to nominate the offending director.
Management proposals to ratify existing charter or bylaw provisions/ board responsiveness: Taking a page out of the Glass Lewis playbook (see this PubCo post)—and, some might contend, taking on some of the contours of a faux regulator—ISS will recommend against individual directors, members of the nom/gov committee, or the full board, if the board submits to shareholders a proposal to ratify existing charter or bylaw provisions, taking into account the following factors:
- “The presence of a shareholder proposal addressing the same issue on the same ballot;
- The board’s rationale for seeking ratification;
- Disclosure of actions to be taken by the board should the ratification proposal fail;
- Disclosure of shareholder engagement regarding the board’s ratification request;
- The level of impairment to shareholders’ rights caused by the existing provision;
- The history of management and shareholder proposals on the provision at the company’s past meetings;
- Whether the current provision was adopted in response to the shareholder proposal;
- The company’s ownership structure; and
- Previous use of ratification proposals to exclude shareholder proposals.”
In this same context, ISS is also updating its policy regarding board responsiveness in the context of ratification proposals. Here, ISS will recommend, on a case-by-case basis, against individual directors, committee members, or the entire board where the board “failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year.”
Moreover, unless the provisions submitted in the proposal for ratification align with best practice, ISS will recommend a vote against the ratification proposal, after taking the factors identified above into account.
These updates are designed to address the exclusion, permitted by staff no-action positions under Rule 14a-8(i)(9), of a shareholder proposal on the same topic as the company’s conflicting, but materially different, ratification proposal, consistent with, for example, the no-action relief granted to AES Corporation and Capital One. ISS observed that ratification proposals were submitted a number of times last year, apparently to “block” the conflicting shareholder proposal, and ISS did not view the ratification proposals as enhancing shareholder rights.
Director performance evaluation. In this context, ISS is expanding the initial screening review period for measuring sustained poor performance to consider one, three and now five years of TSR in the bottom half of the peer group. ISS states that the effect will be to reduce the number of companies that are scrutinized under the updated policy.
Reverse stock splits. ISS will recommend a vote in favor of a reverse stock split if there is a proportionate reduction in the authorized shares or if the increase in authorized shares is equal to or less than the allowable increase under ISS policy. Otherwise, ISS will take into account whether there has been a stock exchange notification of potential delisting, the company has disclosed a “going concern” qualification or the company’s other rationale. The policy is a codification of ISS’s current approach for unlisted companies that are proportionately reducing their authorized shares. The policy is also being expanded to take into account other critical factors applicable to all companies “where substantial risks exist—in particular, whether they will continue as going concerns.”
Social and environmental issues. The update indicates that, in considering these proposals on a case-by-case basis, ISS will consider “primarily whether implementation of the proposal is likely to enhance or protect shareholder value.” The update makes it clear that, when evaluating environmental and social shareholder proposals, in addition to other factors identified in the update, ISS will take into account “significant controversies, fines, penalties, or litigation associated with the company’s environmental or social practices.”