Institutional Shareholder Services Inc. (ISS) recently issued, in the form of Frequently Asked Questions, a further update to its 2016 proxy voting guidelines to outline the types of management-sponsored proxy access provisions that ISS will deem responsive to shareholder-supported proxy access proposals, and those that ISS will deem too restrictive of shareholders’ ability to nominate director candidates or propose other items of business at annual shareholder meetings through the company’s proxy statement. With more than 90 shareholder proposals made at annual meetings in 2015 (more than 50 of which received majority support), proxy access has gained considerable momentum and more proposals are anticipated in 2016. ISS’s pronouncement, issued under its Board Responsiveness Guideline, lets both proponents and companies know where ISS will fall in any debate between a proponent and management as to the proper parameters of a “fair” proxy access provision. Companies that implement a proxy access provision in response to a majority- supported shareholder proxy access proposal that falls outside of these parameters will be deemed “unresponsive” and subject to adverse vote recommendations for individual directors, nominating/governance committee members, or the entire board, in future director elections.
ISS’s proxy access FAQs follow the release by ISS and Glass Lewis and Co. (Glass Lewis) of the 2016 updates to their proxy voting guidelines, which are summarized below.
Any policy adopted by management that is more restrictive of shareholders’ ability to nominate director candidates or propose other items of business than those included in a majority-supported proxy access shareholder proposal with respect to the following, at a minimum, may prompt an adverse voting recommendation for directors in future elections:
- Ownership thresholds above three percent
- Ownership duration longer than three years
- Aggregation limits below 20 shareholders
- Cap on nominees below 20 percent of the board
An adverse recommendation may also be forthcoming when there is a lack of disclosure regarding differences in the cap or aggregation limit from what was in a shareholder proposal or if an implemented policy or policy proposed by management includes any of the following restrictions or conditions on proxy access nominees:
- Prohibitions on resubmission of failed nominees in subsequent years;
- Restrictions on third-party compensation of proxy access nominees;
- Restrictions on the use of proxy access and proxy contest procedures for the same meeting;
- How long and under what terms an elected shareholder nominee will count towards the maximum number of proxy access nominees;
- When the right will be fully implemented and accessible to qualifying shareholders;
- Counting individual funds within a mutual fund family as separate shareholders for purposes of an aggregation limit; and
- The imposition of post-meeting shareholding requirements for nominating shareholders.
ISS and Glass Lewis 2016 Updates to Proxy Voting Guidelines
Citing concerns regarding the ability of directors to devote sufficient time and attention to their board responsibilities, both ISS and Glass Lewis announced that they are lowering the number of board positions they consider acceptable for directors who are not currently public company CEOs from six total public company boards to five total public company boards. ISS will provide a grace period of one year before fully implementing this policy change. In 2016, ISS and Glass Lewis will note as a concern in their analysis any non-CEO director who sits on more than five public company boards. Beginning in 2017, ISS and Glass Lewis will recommend against, or withhold from, any non-CEO directors who sit on more than five public company boards.
For CEO directors, ISS has not changed its policy and will continue to issue negative vote recommendations (for elections to the “outside” boards) against individual directors who sit on more than two other public company boards. Glass Lewis has changed its policy with respect to “executive directors” (i.e. broader than CEOs) to no more than one other public company board (down from two other boards). Glass Lewis will note as a concern company executives sitting on more than one board in addition to their own in 2016, and in 2017 will recommend voting against those directors on their “outside” boards.
Unilateral Board Action — Bylaw and Charter Amendments
ISS’s proxy voting guidelines have generally provided for adverse vote recommendations at the following year’s annual meeting for any directors who unilaterally (i.e. without shareholder approval) approve amendments to company charters or bylaws that “materially diminish shareholders’ rights or that could adversely impact shareholders.”
Factors that ISS considers in connection with its vote recommendation are:
- The board’s rationale for adopting the amendment without shareholder approval;
- Disclosure by the company of any significant engagement with shareholders regarding the amendment;
- The level of impairment of shareholders’ rights caused by the board’s unilateral amendment;
- The board’s track record with regard to unilateral board action on charter/bylaw amendments or other entrenchment provisions;
- The company’s ownership structure;
- The company’s existing governance provisions;
- Whether the amendment was made prior to, or in connection with, the company’s IPO;
- The timing of the board’s amendment to the charter/bylaws in connection with a significant business development; and
- Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
For 2016 and beyond, ISS will now bifurcate its unilateral board action voting policy into two policies — one for directors who approve unilateral board actions prior to or in connection with an initial public offering, and another for directors who approve unilateral board actions after the company has already completed its initial public offering. For existing public companies, ISS will now generally recommend against a board that amends the company’s charter or bylaw to (1) classify or stagger the board, (2) adopt supermajority voting requirements, or (3) eliminate shareholders’ ability to amend the bylaws. ISS will continue to consider adverse vote recommendations in subsequent years unless the board reverses the action or submits the change to the shareholders for ratification. When looking at action before, or in connection with, an IPO, ISS will consider:
- The level of impairment of shareholders’ rights caused by the provision;
- The impact on shareholders’ ability to change the governance structure in the future;
- Whether or not the board is classified (staggered);
- The company or board’s rationale for adopting the provision; and
- Whether or not the board has publicly committed to putting the amended provisions to a vote within three years of the IPO.
Glass Lewis has a similar policy that provides for voting against the chairman of the governance committee, or the whole governance committee, after a board unilaterally adopts a charter or bylaw provision that materially impacts shareholder rights. Glass Lewis will no longer recommend voting against the chairman of a nominating and governance committee when an exclusive forum provision is unilaterally adopted in connection with an IPO. Instead, Glass Lewis will weigh the presence of an exclusive forum provision in a newly public company’s bylaws in conjunction with other provisions that may limit shareholder rights, such as supermajority vote requirements, a classified board or a fee-shifting bylaw. However, Glass Lewis did not change its policy to recommend voting against the chairman of the nominating and governance committee when a company adopts an exclusive forum provision without shareholder approval outside of a spin-off, merger or IPO. Note that ISS generally does not consider a unilaterally adopted exclusive form provision to be materially adverse where the venue is the company’s state of incorporation, although ISS will consider it on a case-by-case basis.
Management and Shareholder Conflicting Proposals
In light of the SEC’s Staff Legal Bulletin No. 14H (SLAB 14H) issued in October 2015, Glass Lewis updated its policy for reviewing conflicting management and shareholder proposals. Glass Lewis identified the following bulleted factors it will consider when making its recommendation:
- The nature of the underlying issue;
- The benefit to shareholders from implementation of the proposal;
- The materiality of the differences between the terms of the shareholder proposal and
- management proposal;
- The appropriateness of the provisions in the context of a company’s shareholder base, corporate structure and other relevant circumstances; and
- A company’s overall governance profile and, specifically, its responsiveness to shareholders as evidenced by a company’s response to previous shareholder proposals and its adoption of progressive shareholder rights provisions.
ISS will review both a management and a shareholder proposal under its applicable voting policy.
Boards should be cognizant of these factors during proxy season as SLAB 14H will make it increasingly difficult for a company to convince the SEC to allow it to exclude a shareholder proposal from its proxy statement based on management’s determination that the proposal conflicts with one of its own proposals.
The preceding post comes to us from McDermott Will & Emery, and is based on their memorandum dated January 5, 2016, available here.