United States: ISS Updates Proxy Voting Policies For 2015

Institutional Shareholder Services (ISS) recently published updates1 to its benchmark U.S. proxy voting guidelines (which ISS also refers to as "policies") for determining its proxy voting recommendations to the institutional investors who are its clients. ISS will use the updated benchmark U.S. policies to formulate voting recommendations for public company shareholder meetings occurring on or after February 1, 2015. The updates relate to ISS's proxy voting policies regarding:

  • voting on board proposals seeking approval of equity-based compensation plans (Equity Plans);
  • whether to vote against or withhold votes from individual directors, members of board committees or the entire board when boards have adopted bylaw or charter amendments materially diminishing shareholders' rights or that could adversely affect shareholders without shareholder approval or ratification of those amendments (Unilateral Amendments);
  • voting on shareholder proposals requiring board chairs to be independent directors;
  • voting on board proposals to adopt amendments to issuers' bylaws that will affect shareholders' litigation rights, specifically amendments involving exclusive venue and fee-shifting bylaw provisions;
  • voting on shareholder proposals relating to political contributions and trade association spending policies and activities; and
  • voting on shareholder proposals seeking adoption of greenhouse gas (GHG) emission reduction goals for issuers.

Many ISS clients follow, while others consider, ISS's voting recommendations when voting their shares on proposals at shareholder meetings. As a result, U.S. public companies should be aware of the ISS policy updates summarized and discussed in this alert. Moreover, ISS has again made it clear in the updated policies that the determinations of voting recommendations ISS makes on a case-by-case basis will depend in part on an issuer's disclosures and actions regarding the relevant subject matter. Accordingly, compliance personnel should consult the updates and the complete voting policies and related ISS guidance as they become available when making governance and compensation decisions and preparing 2015 proxy disclosure.

On November 20, 2014 at 11:00 a.m. EST, ISS will hold a one-hour webcast to discuss its 2015 policy updates. To register for this webcast you may click here and use passcode "2015."

Equity Plan Proposals

Perhaps of greatest importance for the broad group of issuers covered by ISS is the updated policy for voting recommendations on issuer proposals seeking shareholder approval of Equity Plans. Equity compensation of management remains a focus of many institutional investors and shareholder activists, and not just in the context of say-on-pay votes. Investors and activists focus on the awards of equity compensation to senior management and the potential dilutive effect of those awards and the Equity Plans under which those awards will be made.

Current policy. ISS determines its recommendations as to whether to vote "for" or "against" approval of Equity Plans on a case-by-case basis, but will recommend an "against" vote if any one of the following factors applies: (1) ISS concludes that the total cost of the issuer's Equity Plans is unreasonable; (2) the Equity Plan subject to approval is a vehicle for problematic pay practices, permits repricing or contains a liberal change-of-control definition; (3) the issuer's three-year burn rate for shares awarded under its Equity Plans exceed the burn rate cap of the issuer's industry group; or (4) in ISS's judgment, a misalignment of executive pay and issuer performance exists.

Updated policy. The updated policy significantly revamps the current policy by introducing a new "Equity Plan Scorecard" (EPSC). Instead of recommending a vote "against" the proposal if any one of the factors triggering an "against" vote recommendation under the current policy (which are focused on cost and certain practices) applies with respect to the Equity Plan, the EPSC approach takes into account multiple positive and negative factors related to Equity Plan features and an issuer's historical grant practices. ISS will use the EPSC to score each issuer seeking approval of an Equity Plan or a revision to a previously approved Equity Plan and the proposed Equity Plan on multiple factors, and will generally recommend an "against" vote if the combination of those factors indicates that the Equity Plan is not, overall, in the shareholders' interest.

The EPSC will evaluate the issuer and the Equity Plan or revision in three respects (which ISS refers to as "EPSC pillars"):

  • Plan Cost: the total estimated cost of the issuer's Equity Plans (presumably including the proposed Equity Plan) relative to the issuer's industry/market capitalization peers. ISS will measure the total estimated cost of an issuer's Equity Plans using ISS's Shareholder Value Transfer (SVT) model, but will apply it somewhat differently than in the past. In the SVT model, an Equity Plan's cost is measured by using a binomial option pricing model that assesses the amount of shareholders' equity flowing out of the issuer to employees and directors, expressed as both a dollar amount and as a percentage of the issuer's market value. Under the updated policy, the SVT for an Equity Plan will be calculated for both (1) all new shares proposed, all shares remaining available for grant under existing Equity Plan authorizations and all shares that could be issued under outstanding unvested or unexercised grants and awards and (2) all new shares proposed and all shares remaining available for grant under existing Equity Plan authorizations.2 For purposes of scoring the cost of an Equity Plan, the Equity Plans' SVT will be compared to the SVTs for the issuer's industry and market capitalization peer companies;
  • Plan Features: the presence or absence of provisions in the Equity Plan providing for: (1) automatic single-trigger vesting of awards if a change-in-control occurs; (2) discretionary vesting authority with respect to outstanding awards; (3) liberal share recycling on various award types; and (4) minimum vesting periods for grants made under the Equity Plan; and
  • Grant Practices: the issuer's recent grant practices under the proposed Equity Plan and all other Equity Plans of the issuer, including: (1) its three-year burn rate (i.e., the rate at which the issuer uses the shares authorized under the issuer's Equity Plans by granting awards that may be settled in such shares) relative to its industry/market capitalization peers; (2) vesting requirements in the most recent chief executive officer (CEO) grants (based on a three-year lookback); (3) the estimated duration of the Equity Plan based on the shares available for issuance under existing Equity Plans and the shares for which approval is being sought, divided by the average annual shares covered by grants and awards made in the prior three years; (4) the proportion of the most recent equity awards to the CEO subject to performance conditions; (5) whether the issuer has a clawback policy; and (6) whether the issuer has post-exercise/vesting shareholding requirements.

The weighting in an issuer's total EPSC score for each pillar will be keyed to an issuer's size and status, including whether it is a part of the S&P 500 Index, Russell 3000 Index (other than the S&P 500) or the non-Russell 3000 "universe" or recently completed an IPO or emerged from bankruptcy. The weightings for S&P 500 and Russell 3000 issuers will be: Plan Cost—45%; Plan Features—20%; and Grant Practices—35%. ISS has not yet indicated the EPSC score or scores that will result in ISS considering an Equity Plan to not, overall, be in the shareholders' interests.

Notwithstanding the adoption of the EPSC, the updated policy provides that the presence of certain "highly egregious" features in an Equity Plan will continue to result in a recommendation to vote against the proposal regardless of the presence of other positive factors. Those features are:

  • awards may vest in connection with a liberal change-of-control definition;
  • the Equity Plan would permit repricing or a cash buyout of underwater options without shareholder approval either by, in the case of NYSE- or NASDAQ-listed issuers, expressly permitting either of those practices or, for non-listed issuers, by not prohibiting the practices when the issuer has a history of repricing;
  • the Equity Plan is a vehicle for problematic pay practices or a pay-for-performance disconnect; and
  • any other features of the Equity Plan are determined to have a significant negative impact on shareholder interests.

ISS will provide additional details regarding the EPSC and its weightings in its updated U.S. compensation frequently asked questions to be published in December 2014.

Implications for issuers.  Although ISS's new approach may appear to represent an improvement over ISS's current policy, the updated policy has a few features that are not issuer-friendly.

  • The updated policy eliminates the feature in the SVT calculation that allowed the cost of any option overhang to be ignored in the calculation so long as the dilution attributable to the new share request in the proposal was reasonable and ISS believed the issuer exhibited sound compensation practices. This change potentially increases the average amount of the SVT for an issuer and, therefore, increases the probability of an ISS recommendation to vote against approval of the Equity Plan.
  • An issuer's burn rate will be considered based on a range relative to the issuer's peers, thus eliminating any potential for an issuer to commit to adhere to a specific future burn rate cap to avoid a recommendation to vote against approval of the proposal.3
  • Unlike in the current policy under which liberal share recycling provisions in an Equity Plan are only a factor in the SVT calculation, the presence of such provisions in an Equity Plan will be scored as a negative plan feature on the EPSC.
  • Minimum vesting requirements for awards made under an Equity Plan, which are not considered in the current policy, will be a factor scored on the EPSC.

ISS characterizes the updated policy as being adopted to provide "a more nuanced consideration" of Equity Plan proposals. The updated policy may appear to do so and also eliminate some of the subjectivity present in the current policy, which gives ISS the ability to assess whether the cost of the issuer's Equity Plans is unreasonable and whether performance and pay are misaligned. However, unless ISS ultimately sets relatively objective standards for assigning EPSC scores to particular factors and sets a specific threshold for the EPSC score that is the threshold for ISS recommending a vote against approval of an Equity Plan, the updated policy will allow ISS to engage in more of the same subjective analysis, informed by ISS's shareholder-centric perspective, in which ISS may indulge under the current policy. This conclusion follows from ISS's indication that, in determining its voting recommendation regarding approval of an Equity Plan not containing a feature ISS considers "highly egregious," ISS will look at the EPSC score and determine if the combination of factors in the EPSC indicate the Equity Plan is not, overall, in the shareholders' interests.

It remains to be seen whether ISS will provide issuers and investors with the transparency regarding the calculation of SVTs, determination of peer groups and the assignment of scores on the factors to be scored in the EPSC that are necessary to assess the fairness of the ISS voting recommendation, assuming that ISS will report an issuer's total EPSC score or its scores on the individual pillars or factors. Without that transparency, it may be difficult to determine whether the score attributed to the issuer in its EPSC is based on correct information and is reasonable.

Unilateral Bylaw/Charter Amendments

According to ISS's 2014-2015 Policy Survey, with regard to evaluating board accountability, 72% of investors indicated the board should never adopt amendments that negatively affect investors' rights without shareholder approval. ISS notes that it has updated this policy, which will be within its Board Accountability Policy framework, to address a substantial increase in Unilateral Amendments, including ones adopted shortly before or on the date of issuers' initial public offerings (IPOs), and to "codify" its current policy application related to Unilateral Amendments. As will be apparent, the updated policy is not particularly a codification of specific principles to which ISS will adhere in formulating a voting recommendation on directors who have adopted a Unilateral Amendment. However, with the updated policy, issuers may have a better understanding of the factors ISS will consider in formulating its recommendations.

Current policy. ISS evaluates Unilateral Amendments under its "Governance Failures policy." Those evaluations can result in ISS's recommending an "against" or "withhold" vote as to a director individually, the members of a board committee or the entire board if a Unilateral Amendment was adopted by the board and: (1) material failures in corporate governance, stewardship, risk oversight or fiduciary responsibilities have occurred at the issuer, (2) the board has failed to replace management as appropriate or (3) egregious actions relating to a director's service on other boards have occurred that raise substantial doubt as to the director's ability to oversee management effectively and to serve the shareholders' best interests at any company.

Updated policy. The updated policy significantly alters the current policy. Under the updated policy, if the board adopts a Unilateral Amendment, ISS will generally make a recommendation for an "against" or withhold vote on a director individually, the members of a board committee or the entire board (other than new nominees, who ISS will consider on a case-by-case basis), after considering the following nine factors, as applicable:

  • the board's rationale for adopting the Unilateral Amendment;
  • disclosure by the issuer of any significant engagement with shareholders regarding the Unilateral Amendment;
  • the level of impairment of shareholders' rights caused by the Unilateral Amendment;
  • the board's track record with regard to unilateral board action on bylaw and charter amendments and other entrenchment provisions;
  • the issuer's ownership structure;
  • the issuer's existing governance provisions;
  • whether the Unilateral Amendment was made prior to or in connection with the issuer's IPO;
  • the timing of the Unilateral Amendment in connection with a significant business development; and
  • other factors, as deemed appropriate, that may be relevant to the determination of the impact of the Unilateral Amendment on shareholders.

Implications for issuers.  The updated policy continues to involve significant subjectivity on the part of ISS as it formulates its voting recommendations as to directors who are on boards that adopt Unilateral Amendments. While it will appear that the new policy is free of any consideration of failures to replace management when ISS or activist shareholders thought such a replacement should have occurred and of alleged bad actions by directors taken as directors of other companies, ISS, in effect, has enhanced its ability to consider such matters as the policy gives ISS the ability to look at any other factors it deems relevant, without naming or limiting the factors or the categories of factors it will consider under this element of the policy. Although issuers may order their governance to address those factors listed in the updated policy, ISS now will have issuers guessing as to the other factors ISS may consider in this newly "codified" approach to its director voting recommendations after Unilateral Amendments are adopted.

Furthermore, if an issuer adopts any Unilateral Amendment in advance of or on the date of the issuer's IPO that is unfriendly to the post-IPO shareholders, the issuer's board may now be targeted by ISS in connection with post-IPO shareholder meetings. ISS is not clear if the updated policy applies to a Unilateral Amendment adopted, approved or ratified by the pre-IPO shareholders, but issuers should assume that it does until ISS explicitly indicates otherwise. As a result, issuers adopting pre-IPO Unilateral Amendments may want to consider carefully seeking ratification of such amendments by their post-IPO shareholders at their first post-IPO annual shareholders' meeting.

Independent Chair Proposals

Shareholder proposals seeking to have issuers adopt bylaw amendments requiring that the chair of the board of directors be an independent director continue to increase in number. According to ISS, requests for independent board chairs were the most prevalent type of shareholder proposal submitted for consideration at U.S. companies' 2014 annual shareholders' meetings, with the number of such proposals more than doubling over the past five years. These proposals seek to eliminate an issuer's practice of having its CEO or another non-independent director (as determined by the proponent's stated independence standard) serve as the board chair. Some proponents of these proposals appear to have concluded that the role of board chair has an importance to the governance of some issuers that the role, in fact, does not have. Some of these proposals appear to have been made without consideration of the actual role that a board chairman plays or of the value a particular person in the role of board chair has for a particular issuer and its shareholders. Moreover, proponents of independent chair proposals often ignore the very real alignment of the interests of a board chair who is technically not an independent director with the interests of the shareholders as a whole and not with the interests of management. Finally, some of those proponents target particular persons who serve as board chairs and often appear to take no cognizance of the fact that by virtue of the respect and deference accorded to such person for reasons other than the title held, that person will likely have the same influence over a board's decisions whether he or she served in the role of chair or solely as a director.

Current policy.  ISS generally recommends a vote "for" an independent chair proposal unless the issuer meets each of six criteria, including: (1) having a lead director that is independent and has clearly delineated and comprehensive duties; (2) the board is composed of at least two-thirds independent directors; (3) all key board committees are fully independent; (4) the issuer has established governance guidelines; (5) the issuer has not sustained poor total shareholder return (TSR) performance over the most recent one- and three-year periods;5 and (6) the issuer has no problematic governance or management issues.6

Updated policy. The updated policy calls for generally voting "for" an independent chair proposal after considering in a "holistic manner" the following factors:

  • the proposal's scope;
  • the issuer's current board leadership structure;
  • the issuer's governance structure and practices;
  • the issuer's performance; and
  • any other relevant factors that may be applicable.

Under the updated policy, any single factor that may have previously resulted in a "for" or "against" voting recommendation may be mitigated by other positive or negative aspects, respectively.

When considering the scope of a proposal, ISS will consider whether the proposal is binding or merely urges the board to adopt an independent chair requirement and whether the proposal seeks an immediate change in practice or merely seeks implementation at the next CEO transition.

When considering the board leadership structure, ISS may support the proposal if there is an executive or non-independent chair in addition to the CEO, the roles of chair and CEO were recently combined or an independent chair structure was recently abandoned, absent a compelling rationale for any such situation's existence. Moreover, ISS will consider in this regard any recent transitions in board leadership and their potential effect on independent board leadership and the designation of a lead director role.

In its consideration of the issuer's governance structure, ISS will look at the board's overall independence, whether the members of key committees are all independent, the existence of governance guidelines, board tenure and its relationship to CEO tenure and other potentially relevant factors. The existence of concerns about the issuer's governance structure will weigh in favor of ISS's support for the proposal. The factors for consideration relating to governance practices will include, among other matters, poor compensation practices, material governance and risk oversight failures, related-party transactions or other issues putting director independence at risk, corporate or management scandals and actions by management or the board with a potential or realized negative impact on shareholders. ISS sees any of these practices as possibly suggesting a need for more independent oversight and warranting support for the proposal.

In considering issuer performance, ISS's assessment will generally review the one-, three- and five-year TSR compared to the issuer's peers and the market as a whole. While poor performance will weigh in favor of support for the proposal, ISS indicates that strong long-term performance may be a mitigating factor.

Implications for issuers.  Although this updated policy appears to be an improvement over the current policy, which leaves little room for boards to make certain governance choices without ensuring ISS will recommend voting "for" the proposal, the updated policy increases the subjectivity of ISS's determinations with respect to these proposals. As a result, an issuer may find that, in spite of having an exemplary governance situation, it faces a recommendation that is opaque and does not reflect either the issuer's circumstances or the real value to shareholders of a chair who, under ISS's standards, is not independent of management. The updated policy will make it more difficult for issuers to adapt their governance practices in ways to avoid a voting recommendation in favor of an independent chair proposal.

Proposals Affecting Shareholders' Litigation Rights

In recent years, numerous issuers incorporated in Delaware, and perhaps elsewhere, have adopted bylaw provisions, called forum selection or exclusive venue provisions, requiring shareholders wanting to institute a lawsuit against the issuer to file such lawsuits in the jurisdiction in which the issuer was incorporated.7 Most recently, some issuers have adopted bylaw provisions, called fee-shifting provisions, that require shareholders who are unsuccessful in lawsuits they institute against the issuer to pay the issuer's litigation expenses. As can be expected, the class action bar and others have vociferously opposed such bylaw provisions, which are meant to curb at least some of the abuses of class actions and shareholder lawsuits.8

Current policy. ISS's current policy focuses solely on exclusive venue bylaw provisions. Under this policy, ISS determines its voting recommendation on a case-by-case basis after considering whether the issuer has been materially harmed by shareholder litigation outside of its jurisdiction of incorporation, which consideration is based on the issuer's proxy statement disclosure, and whether the issuer has an annually elected board, a majority vote standard in uncontested director elections and a poison pill that was not shareholder approved.

Updated policy. ISS has modified its exclusive venue policy to cover other bylaw provisions that materially affect shareholders' litigation rights, including fee-shifting provisions and provisions requiring arbitration of shareholder disputes. ISS will determine its voting recommendations on such provisions on a case-by-case basis, taking into account:

  • the issuer's stated rationale for adopting the bylaw provision;
  • disclosure of past harm from shareholder lawsuits in which the plaintiffs were unsuccessful or that were brought in jurisdictions other than that of the issuer's incorporation;
  • the breadth of the bylaw provision's application, including the types of lawsuits to which it would apply and the definitions of key terms; and
  • the issuer's governance features such as the shareholders' ability to repeal the bylaw provision in the future, the vote standard for amending the bylaws and the presence of annual director elections and a majority vote standard in uncontested elections.

The updated policy also provides that ISS will generally recommend a vote against a bylaw provision requiring plaintiffs to pay the issuer's litigation expenses if the plaintiffs are not completely successful on the merits in a lawsuit against the issuer. Where a board has unilaterally amended an issuer's bylaws in a manner affecting shareholders' litigation rights, such action will be subject to the ISS policy regarding Unilateral Amendments discussed above.

Implications for issuers.  ISS's update appears to rationalize somewhat ISS's policy by eliminating consideration of whether the issuer has adopted a non-shareholder approved poison pill, a consideration that seems to have, at best, a tenuous relationship to the question of whether an exclusive venue or fee-shifting bylaw provision compromises shareholder litigation rights. However, in spite of considering matters more likely to inform a responsible assessment of whether a bylaw provision will have a salutary effect in curbing abusive litigation, the updated policy remains subjective and one as to which an issuer may encounter a lack of transparency. An issuer wishing to propose such a bylaw provision to its shareholders should make the proposal only if it has a sound and defensible rationale for doing so that can be persuasively articulated in the issuer's proxy statement.

Political Contributions Proposals

In recent years, many issuers have received shareholder proposals seeking reports or other disclosure regarding political contributions and trade association spending policies and activities, including lobbying and political activities. Political contribution proposals often seek reports that will include information about dues or other membership payments to trade associations and industry groups, while the proponent's related statements in support of such proposals focus on the issuer's involvement in pro-business associations and groups. This aspect of such proposals is included to glean information about political contributions that some proponents of these proposals fear issuers are making or about the support an issuer gives to particular initiatives, in each case indirectly through such trade associations and other groups.

Current policy.  ISS will generally recommend that shareholders vote to approve such proposals, considering, in the case of a particular proposal, (1) the issuer's existing disclosure of its policies and oversight mechanisms relating to its direct political contributions and payments to trade associations or other groups that may be used for political purposes, including information on the types of organizations supported and the business rationale for supporting such organizations, and (2) any recent significant controversies, fines or litigation relating to the issuer's political contributions or political activities.

Updated policy. Under the updated policy, ISS will generally recommend a vote to approve such proposals after considering:

  • the issuer's policies, and management and board oversight relating to the issuer's direct political contributions and payments to trade associations or other groups that may be used for political purposes;
  • the issuer's disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and
  • any recent significant controversies, fines or litigation relating to the issuer's political contributions or political activities.

Implications for issuers. The updated policy puts a brighter spotlight on the dues, other membership payments and contributions issuers make to trade associations and industry groups that defend and advocate for businesses, such as the United States Chamber of Commerce and National Association of Manufacturers. Moreover, the updated policy seems to make clear that to garner an ISS recommendation to vote "against" such a proposal, an issuer will have to have made significant disclosure of the type sought by the proponents of these proposals. Although the prior disclosure of such information will not ensure that such proposals will not be submitted to an issuer, such proposals are certainly less likely to be submitted if an issuer is already making the type of disclosures ISS will consider adequate for ISS to recommend a vote "against" the proposal.

GHG Emissions Proposals

Numerous proposals have been submitted in recent proxy seasons urging boards to adopt goals for reducing the GHGs emitted by issuers' products and operations. Some of the shareholders who submit such proposals are ill-informed about particular issuers' circumstances and their proposals request the adoption of emission reduction goals to be met that are unrealistic or that, if met, would do significant harm to overall shareholder value.

Current policy.  ISS makes case-by-case determinations of its voting recommendations on such proposals, considering: (1) whether a particular proposal contains overly prescriptive requests for reductions in emissions by specific amounts or within a specific time frame; (2) whether an issuer's disclosure lags that of its industry peers; (3) whether the issuer has been the subject of recent and significant violations, fines, litigation or controversy related to GHG emissions; (4) the feasibility of reduction of GHGs in light of the issuer's product line and current technology; and (5) whether the issuer already provides meaningful disclosure on GHG emissions from its products and operations.

Updated policy. ISS will continue making case-by-case determinations of voting recommendations regarding such proposals, but will now take into account the following factors in making those determinations:

  • whether the issuer provides disclosure of year-over-year GHG emissions performance data;
  • whether the issuer's disclosure lags behind that of its industry peers;
  • the issuer's actual GHG emissions performance;
  • the issuer's current GHG emissions policies, oversight mechanisms and related initiatives; and
  • whether the issuer had been the subject of recent, significant violations, fines, litigation or controversy related to GHG emissions.

Implications for issuers. The updated policy will result in ISS eliminating from its consideration of such a proposal whether the proposal is too prescriptive as to the amount of emissions reductions or the time frame for reduction goals to be achieved or whether it proposes emissions reductions that are not feasible for issuers to achieve in light of the nature of the issuer's products and current technology. Moreover, ISS will now determine its voting recommendation on a GHG emissions reduction proposal without considering whether the requests fail to provide boards with reasonable discretion in setting emissions reduction goals or whether it is possible, much less practicable, to meet the reduction goals. In addition, the updated policy injects additional ISS subjectivity into the determination of its recommendations on these proposals as ISS will now assess issuers' actual GHG emissions performance and acceptability of the issuer's GHG emissions policies, oversight mechanisms and related initiatives. Finally, the changes in the policy place a premium on issuers having specific policies and procedures relating to the emissions reductions, and disclosing detailed information about their emissions and those policies and procedures.

Practical Considerations

Issuers should review and understand the pertinent updated policies, especially those issuers planning to place a proposal covered by one of the updated ISS proxy voting policies on the agenda for a shareholders' meeting to occur on or after February 1, 2015 or concerned that a shareholder may submit such a proposal and that the proposal will have to be voted on at such a meeting. Any such issuer may want to determine whether its current corporate governance, executive compensation or other policies and practices include ones of the types that ISS indicates will weigh, or the issuer concludes may weigh, in favor of or against ISS making the voting recommendation as to the proposal that the issuer wants. Depending on the importance to the issuer of its shareholders approving a particular board proposal or rejecting a particular shareholder proposal, the issuer may want to consider adopting new policies or practices that would weigh in favor of the issuer receiving a voting recommendation favorable to the issuer (for example, a clawback policy if an issuer will seek shareholder approval of an Equity Plan) or modifying or eliminating any existing policy or practice that would, or might, weigh against ISS making a voting recommendation favorable to the issuer (for example, permitting non-independent directors to sit on a key board committee when the issuer may receive an independent chair proposal). But the board and management should not do so without considering whether any proposed adoption, modification or elimination of a policy or practice would be consistent with their respective fiduciary duties and in the shareholders' overall interests. Any such action with respect to an issuer's policies and practices should be taken in time for the action to be disclosed in the proxy statement for the pertinent shareholders' meeting. In addition, issuers may wish to consider the updated Equity Plan policy when designing a new Equity Plan for which shareholder approval will be sought.

Issuers should also consider disclosing, to the extent consistent with overall corporate policy, the issuers' circumstances and the facts, the type of information about the issuer and its corporate governance, executive compensation and other policies and practices that ISS indicates it will, or it is likely ISS will, consider when determining its voting recommendation on a particular type of proposal. Obviously, with respect to proposals such as political contributions proposals, issuers may decide not to disclose information of a type that promises to roil the activist shareholder waters, such as direct political contributions to candidates or groups or uses of amounts paid to trade associations and other groups. In such instances, the better course for an issuer may be to oppose adoption of those proposals on a principled basis.

If an issuer decides to make any such disclosure to improve the odds of an ISS voting recommendation favoring the issuer, those disclosures do not necessarily need to be in a proxy statement, except in those instances in which ISS specifies in the policy that it will look at proxy statement disclosure to obtain particular information. Rather, the information may be published in a separate report or document, such as, in the case of information about GHG emissions, a corporate sustainability report published by the issuer, including by posting the report on its corporate website, or in a press release. Issuers that publish such separate reports or make such press releases should ensure that ISS is aware of and has obtained a copy of those reports or press releases or knows where copies of the reports or press releases can be obtained prior to the time ISS starts formulating its voting recommendations to which the information is pertinent. In this regard, issuers publishing separate reports may want to include in their proxy statements information regarding how interested parties may access or receive a copy of such report.

As has always been the case with ISS's recommendations, immediately after ISS issues its proxy voting recommendations for an issuer, the issuer should carefully review ISS's recommendations to determine, if possible, whether those recommendations appear to be consistent with ISS's proxy voting policies and the facts. Issuers determining that an ISS recommendation is based on inaccurate information or a flawed understanding of the issuer and its corporate governance, executive compensation or other policies or practices should consider engaging ISS with respect to that recommendation and its underlying problems. For ISS to base its determinations on incomplete or incorrect information is not unheard of. And while convincing ISS to reverse a published voting recommendation is certain to be a task of quite considerable difficulty, that too is an event not unheard of.

Upcoming Milestones

In addition to releasing its U.S. policy updates, public companies should stay tuned for the following ISS actions:

  • the release of a complete set of updated ISS voting policies in full and/or summary form in December 2014;
  • the release of updated frequently asked questions on certain U.S. policies in December 2014; and
  • updates to U.S. summary proxy voting guidelines in January 2015 based on ISS' evaluation of new U.S. shareholder proposals anticipated for 2015.


1. See ISS United States Proxy Voting Guideline Updates - 2015 Benchmark Policy Recommendations (Nov. 6, 2014), available at http://www.issgovernance.com/file/policy/2015USPolicyUpdates.pdf. See also ISS Executive Summary Proxy Voting Guideline Updates and Process - 2015 Benchmark Policy Recommendations (Nov. 6, 2014), available at . http://www.issgovernance.com/file/policy/2015ExecutiveSummary.pdf. ISS will publish in December 2014 its U.S. proxy voting summary guidelines document that provides a comprehensive description of all of ISS's proxy voting guidelines for U.S. issuers.

2. ISS views this dual cost measurement approach as eliminating its policy of considering whether to carveout a portion of the cost of any option overhang. If, when calculating plan cost, ISS continues the practices for calculating an issuer's SVT that it follows under the current policy relating to Equity Plan approvals and the Equity Plan subject to approval is an omnibus plan, unless the Equity Plan places limitations on the most expensive types of awards (for example, full value awards), the SVT model will assume that all awards granted will be the most expensive types of awards.

3. ISS will calculate three burn rate benchmarks for the S&P 500, Russell 3000 (excluding the S&P 500) and non-Russell 3000 issuers, which will be (1) an index/industry mean benchmark, (2) a 1 standard deviation above mean benchmark and (3) a 2 percent de minimis benchmark, and use relevant GICS industry classifications within each index group in making those calculations.

4. These duties include presiding at all board meetings at which the chair is not present, presiding at executive sessions of the independent directors, serving as liaison between the chair and the independent directors, approving information sent to the board, agendas for board meetings and meeting schedules (to assure, with respect to such schedules, sufficient time is provided for discussion of all agenda items), and making himself or herself available for consultation and direct communication with major shareholders if those shareholders request such. In addition, the lead director should have the authority to call meetings of the independent directors.

5. For Russell 3000 issuers, poor performance is defined as one- and three-year TSR performance in the bottom half of the issuer's four-digit GICS industry group, unless there has been a change in the chairman/CEO position within that time. For issuers not in the Russell 3000 "universe," the issuer must not have underperformed both its peers and its index on the basis of both one-year and three-year TSR, unless there has been a change in the chairman/CEO within that time. Whether ISS will sometimes or always give an issuer a pass on meeting the applicable criterion described above if the issuer enjoys excellent TSRs for those periods, but still has "poor performance" under the standards in the applicable criterion, remains to be seen.

6. Examples of such issues include "egregious" compensation practices, multiple related-party transactions or other issues putting director independence at risk, corporate or management scandals, excessive problematic corporate governance practices and flagrant actions by management or the board with potential or realized negative impacts on shareholders.

7. Please see our client alert dated September 18, 2014, Delaware Chancery Court Provides Further Support for Forum Selection Bylaws.

8. Please see our client alert dated June 24, 2014, Delaware Delays Consideration of Proposed Prohibition on Fee-Shifting Bylaws for Delaware Stock Corporations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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