CLS Blue Sky Blog

King & Spalding Discusses ISS Voting Policies for 2018

On November 16, 2017, Institutional Shareholder Services (“ISS”) issued its updated proxy voting guidelines for the upcoming 2018 proxy season.  Notable updates applicable to U.S. companies include new or revised policies:

ISS also clarified its policies on a number of other topics.  The full text of the 2018 proxy voting guidelines published by ISS may be accessed here.

Non-Employee Director Compensation

Under the new guidelines, ISS will recommend voting against board committees responsible for approving or setting pay for non-employee directors where there is a recurring pattern of excessive non-employee director compensation without a compelling rationale or other mitigating factors.

The new policy will apply only in situations where ISS identifies excessive non-employee director compensation over a period of two or more consecutive years, and ISS specifically noted that the new policy will not be applicable to its voting recommendations for the 2018 proxy season.

ISS recognizes that non-employee director compensation varies by industry and company size.  For companies with a pattern of excessive non-employee director compensation, ISS will issue adverse vote recommendations for board committee members responsible for approving or setting the non-employee director compensation.  ISS will not issue an adverse vote recommendation if the company provides a compelling reason for the compensation decision or if there are mitigating circumstances.

This policy update continues the trend of increasing scrutiny of director compensation, and ISS noted broad support among investors in its 2017–2018 Policy Application Survey for adverse vote recommendations based on a pattern of excessive non-employee director compensation.  In the past few years, shareholders have challenged director compensation through both proxy contests and legal action.  While not explicitly required by ISS or under SEC regulations, companies may want to consider including additional discussion of the process for setting non-employee director compensation, including any peer group comparisons, in future proxy statements, beginning with their 2018 proxy statement.

Director Elections at Companies with Poison Pills

ISS also updated its policies regarding shareholder rights plans, or “poison pills,”  to simplify the existing guidelines issued in 2009 while reiterating its views that shareholders should have the right to vote on poison pills.

The new policies provide that:

Because these updates reaffirm ISS’s long-held view that any poison pills should promptly be put to a shareholder vote, they are unlikely to have a widespread impact.

The updated policy does not specifically address rights plans adopted to preserve net operating losses, which we expect will continue to be evaluated under existing ISS policies on a case by case basis.

Shareholder Proposals on Gender Pay Gap

ISS adopted a new policy to address shareholder proposals on gender pay gap issues, specifically shareholder proposals requesting that a company report whether there is a gender pay gap at a company as well as on measures being taken to mitigate any existing gender pay gaps.

Under the new policy, ISS will consider proposals related to gender pay gaps on a case-by-case basis, taking into account the following four factors:

The updated guidelines provide more clarity on how ISS will evaluate shareholder proposals related to gender pay gaps, versus the general ISS policies on shareholder proposals relating to diversity and equality of opportunity, and reflect the growing interest of institutional shareholders in gender diversity issues generally.  ISS anticipates seeing more shareholder proposals on this topic in the coming years.

Gender pay gap and other environmental, social and governance (“ESG”) issues are becoming increasingly more prominent issues with institutional investors, and we expect to see more companies include disclosure of their ESG practices and policies in 2018 proxy statements.

Other Policy Changes

In addition to the three policy changes noted above, ISS made various other updates to its policies, some of which will have substantive effects.

Board Diversity

ISS added sufficient board diversity to the fundamental principles it considers in voting for board nominees  and will now highlight boards that are lacking gender diversity (specifically, those with no female directors), although this will not lead to an adverse vote recommendation.

Board Accountability

Pledging of Stock by Executives and Directors

ISS clarified its existing position on pledging of stock by executives or directors.  ISS will vote against the members of the committee that oversees risks related to pledging  where ISS finds “excessing” pledging, considering the following factors:

Compensation-Related Matters

Shareholder Proposals on Climate Change

ISS updated its policy on shareholder proposals requesting disclosure on a board’s evaluation of risk associated with climate change to clarify that ISS will generally vote for shareholder proposals that request company disclosure on the financial, physical or regulatory risks a company faces related to climate change on its operations and investments, or on how the company identifies, measures and manages such risks. These revisions are intended to align ISS policy with the recommendations of the Task Force of Climate-Related Financial Disclosures, released in a 2017 report.

This post comes to us from King & Spalding LLP. It is based on the firm’s client alert, “ISS Issues 2018 Voting Policies Update,” dated November 20, 2017, and available here.

Exit mobile version