Institutional Shareholder Services and Glass Lewis have issued their voting policies for the 2015 annual meeting season. For the most part, both proxy advisory firms’ 2015 policies are refinements of those already in place. However, companies should carefully review their 2015 annual meeting agendas against the updated policies to anticipate possible issues. A summary of the new policies and some issues they raise follows. You can find the ISS policies here and the Glass Lewis policies here.
Unilateral Bylaw/Charter Amendments: Under its current policy, ISS treats the following as “governance failures”: material failures of governance, stewardship, risk oversight or fiduciary responsibilities; failure to replace management; and “egregious” actions relating to a director’s service on another board. In what ISS refers to as “extraordinary circumstances,” the occurrence of one or more of these failures will generally result in withhold or negative votes for individual directors, committee members or the full board.
Beginning in 2015, ISS will create a separate category of “governance failures” consisting of bylaw or charter amendments, adopted without shareholder approval, that “materially diminish shareholder rights” or that “could adversely impact shareholders.” ISS regards the creation of a separate category as little more than a codification of current policy. As is typical, these standards leave ISS lots of wiggle room in determining voting recommendations.
On the occurrence of an offending amendment, ISS will generally recommend voting against or withholding the vote from individual directors, committee members or the full board (other than new nominees, who will be considered on a case-by-case basis), giving consideration to various factors, including the rationale for the amendment, the company’s disclosure of shareholder engagement on the amendment, the board’s track record, the company’s ownership structure and existing governance provisions, and “other factors, as deemed appropriate”.
The discussion of the new policy does not refer to any specific bylaw or charter amendments, but it seems clear that ISS is concerned with amendments that may impair shareholder rights to legal recourse, such as bylaws requiring arbitration of shareholder claims, exclusive venue provisions and, most recently, fee-shifting or “loser pays” bylaws (more on that below). Additionally, ISS focuses on IPO companies that go forth into the world with a “suite” of shareholder-unfriendly governance provisions.
Independent Chair Shareholder Proposals: Current ISS policy is to generally support shareholder proposals seeking an independent chair, unless a company meets all of the criteria in a lengthy laundry list. ISS claims to be merely updating the policy by taking a more holistic view of the topic. However, as previously reported, ISS has noted that the new policy is not expected to change the percentage of independent chair proposals that it will support, so it seems that the new policy creates a distinction without much of a difference.
Litigation Rights: Current ISS policy calls for a case-by-case evaluation of company proposals seeking to add exclusive venue provisions to bylaws and charters. For 2015, this policy is being expanded to apply to other provisions that impact shareholder rights to sue the company, such mandatory arbitration provisions and fee-shifting provisions that have been upheld by the Delaware courts. Note that the case-by-case approach will not apply to provisions that mandate fee-shifting unless the plaintiff is completely successful on the merits; ISS policy is generally to vote against such provisions.
It will be interesting to see the data for both 2014 and 2015 indicating the number of times that the case-by-case approach results in support for the company’s proposal.
Equity-Based and Other Incentive Plans: As previously reported, ISS is adopting a new “equity plan scoreboard” model to evaluate equity incentive plan proposals. The new scorecard will use three index groups and will measure plan cost, plan features and grant practices against these groups. The good news is that voting recommendations are to be made on a case-by-case basis, unless the combination of factors indicates that the plan is not in the shareholders’ interests or if certain plan features are present. However, where a case-by-case determination is to be made, it’s impossible to tell how the components – or, indeed, the new scorecard itself – will be weighed or will work, thus assuring that companies seeking shareholder approval of equity plans will have to continue to use ISS’s consulting service to find out whether a new plan will pass muster.
Environmental and Social Issues: ISS is making minor changes to its policies on shareholder proposals seeking greater disclosure of political contributions and trade association spending, and proposals seeking to adopt goals to reduce greenhouse gas emissions. The changes consist of language changes that ISS says are designed merely to clarify the current policy, but they still leave ISS considerable leeway in developing its voting recommendations on these proposals.
Governance Committee Performance: For 2015, GL is adopting a policy to address cases where a board has amended governing documents (e.g., charters and bylaws) to reduce or remove “important” shareholder rights. Like ISS, GL is concerned with amendments that limit shareholders’ ability to bring suits against the company and its board, such as fee-shifting bylaws or mandatory arbitration provisions. However, GL’s changes also address amendments that limit or eliminate shareholders’ ability to call special meetings or act by written consent; that impose super-majority voting requirements; that create staggered boards; and that eliminate shareholders’ ability to remove a director without cause. In any of these cases, GL may recommend voting against the chair of the governance committee or the entire committee, “depending on the circumstances”.
Board Responsiveness to Majority-Approved Shareholder Proposals: Current GL policy is generally to recommend voting against all members of the governance committee during whose tenure the board fails to respond adequately to a shareholder proposal that has received a majority of the votes cast (excluding abstentions and broker non-votes). Beginning in 2015, this policy has been tweaked to consider whether, in implementing a majority-approved proposal, the board has imposed any conditions that “unreasonably” interfere with the exercise of the right in question.
Vote Recommendations Following an IPO: GL continues to scrutinize provisions adopted prior to a company’s IPO and will consider recommending a vote against directors who served at the time of adoption of an anti-takeover provision if the provision is not submitted to a shareholder vote within one year following the IPO. GL will also recommend a vote against the governance committee chair in cases where an exclusive venue or fee-shifting bylaw is not put up for a shareholder vote following the IPO.
Material Transactions with Directors: Existing GL policy calls for a negative voting recommendation for any director employed by a “professional services firm” (such as a law firm, investment bank or consultant) that receives more than $120,000 per year in fees. For 2015, the policy is being modified to clarify that such a transaction may be deemed immaterial if (1) the amount represents less than 1% of the firm’s annual revenues and the board provides a “compelling rationale” as to why the director’s independence is not impaired by relationship.
Advisory Vote on Executive Compensation and Employee Stock Purchase Plans: There are no changes in policy on either matter. However, some language changes are being made to clarify GL’s approach to evaluating the matters in question.