The answer: when ISS is evaluating a public company’s corporate governance under its revised policies for the 2013 proxy season. We previously blogged about the potential insider trading issues that could theoretically arise when insiders pledge company stock to secure loans. Now, with the implementation of the revised ISS governance standards, there are additional reasons for publicly traded companies to implement antipledging and antihedging policies.
ISS specifically addressed hedging and pledging activity in its 2013 U.S. corporate governance policy updates, which were posted in November of last year. In these updates, ISS included a footnote to its policy on voting for director nominees in uncontested elections in circumstances where there are perceived corporate governance failures. Under the new policy, ISS will recommend “against” or “withhold” votes for directors (individually, committee members, or, in extreme cases, the entire board) due to “[m]aterial failures of governance, stewardship, risk oversight, or fiduciary responsibilities at the company”. The new footnote cites hedging and significant pledging of company stock as examples of activities that will be considered failures of risk oversight. Other cited examples of risk oversight failures include bribery, large or serial fines or sanctions from regulatory bodies, and significant adverse legal judgments or settlements.
The rationale behind this new update seems to be based on ISS’s belief that pledging any amount of company stock by insiders for a loan is
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