United States: ISS Issues 2017 Summary Proxy Voting Guidelines

On December 22, 2016, ISS published its 2017 Summary Proxy Voting Guidelines, which will be effective for shareholder meetings on or after February 1, 2017. This Commentary provides an overview and summary of the changes made from the proxy advisory firm's 2016 Guidelines.

Problematic Takeover Defenses

ISS now recommends a vote against or withhold from members of the governance committee if the company's charter unduly restricts shareholders' ability to amend the bylaws. ISS includes the following in a nonexclusive list of undue restrictions:

  • Outright prohibitions on the submission of binding shareholder proposals, and
  • Share ownership requirements or time holding requirements in excess of SEC Rule 14a-8.

Under Rule 14a-8, shareholders may include proposals in the company's proxy statement as long as they meet certain eligibility and procedural requirements. The shareholder must own at least $2,000 in market value, or 1 percent, of securities entitled to vote on the proposal for at least one year before the date the proposal is submitted to the company, and he or she must hold the securities through the date of the annual meeting.

Problematic Capital Structures

ISS has also added guidelines addressing what it considers to be problematic capital structures in newly public companies. ISS will recommend a vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be evaluated on a case-by-case basis) if, prior to or in connection with the company's public offering, the company or its board implemented a multi-class capital structure in which the classes have unequal voting rights. This determination is based on a consideration of multiple factors:

  • The level of impairment of shareholders' rights,
  • The disclosed rationale,
  • The ability to change the governance structure,
  • The ability of shareholders to hold directors accountable through annual director elections or whether the company has a classified board structure,
  • Any reasonable sunset provision, and
  • Other relevant factors.


As was the case in its 2016 Guidelines, the foregoing analysis and recommendation also applies to a company or board that has adopted bylaw or charter provisions materially adverse to shareholder rights.

Overboarded Directors

Starting in 2017, ISS will issue a negative recommendation for directors who sit on more than five public company boards. Historically, ISS has advised a vote against or withhold from directors who sit on more than six public company boards, but last year it announced that, starting in February of 2017, the threshold number of boards would be reduced to five. ISS will continue to vote against or withhold from an individual director who is the CEO of a public company who sits on the board of more than two public companies besides his or her own.

Share Issuance Mandates

Also new in 2017 is a recommendation to vote in favor of general share issuance authorities (without a specified purpose) without preemptive rights to a maximum of 20 percent of current issued capital, as long as the company clearly discloses the duration of the authority and such authority is reasonable. ISS suggests that companies should seek renewal of the issuance authority at each annual meeting.

Equity-Based and Other Incentive Plans

ISS generally has recommended, and will continue to recommend, voting case-by-case on certain equity-based compensation plans as evaluated using its equity plan scorecard ("EPSC") approach, which evaluates (i) plan cost, (ii) plan features, and (iii) grant practices. For 2017, ISS added to its list of problematic plan features dividends becoming payable before the award vests. Other plan features ISS continues to view as being problematic are:

  • Automatic single-triggered award vesting on a change in control,
  • Discretionary vesting authority,
  • Liberal share recycling on various award types, and
  • Lack of minimum vesting period for grants made under the plan.


The plan cost and grant practices analyses under ISS's EPSC approach remain unchanged from 2016, except for updates to its burn-rate benchmarks. The updated 2017 burn-rate benchmark tables are included at the end of this update.

ISS will continue its historical practice of voting against an equity plan proposal if, according to ISS's analysis, the combination of plan cost, plan features, or grant practices indicates that the plan is not in the shareholders' interests or if any of the following factors apply:

  • Awards may vest in connection with a liberal change in control definition,
  • The plan would permit repricing or cash buyout of underwater options without shareholder approval,
  • The plan is a vehicle for problematic pay practices or significant pay-for-performance disconnect (as evaluated by ISS), or
  • Any other plan features are determined by ISS to have a significant negative impact on shareholder interests.

Amending Cash and Equity Plans

ISS's new general recommendation is to vote case-by-case on amendments to cash and equity incentive plans. ISS generally recommends voting for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:

  • Addresses administrative features only, or
  • Seeks approval for section 162(m) purposes only, and the plan administering committee consists entirely of independent outsiders (as determined by ISS).


ISS recommends a vote against proposals to amend cash, stock, or cash and stock incentive plans if the proposal seeks approval for Internal Revenue Code section 162(m) purposes only and the plan administering committee does not consist entirely of independent outsiders (as determined by ISS).

ISS recommends voting case-by-case on all other proposals to amend cash incentive plans, including plans presented to shareholders for the first time after the company's IPO or proposals that bundle material amendments other than those for section 162(m) purposes.

ISS recommends voting case-by-case on all other proposals to amend equity incentive plans. It will consider the following in making this determination:

  • If the proposal requests additional shares or the amendments may potentially increase the transfer of shareholder value to employees, the recommendation will be based on the EPSC evaluation as well as an analysis of the overall impact of the amendments (with heavier emphasis on the EPSC evaluation),
  • If the plan is being presented to shareholders for the first time after the company's IPO, whether or not additional shares are being requested, the recommendation will be based on the EPSC evaluation as well as an analysis of the overall impact of any amendments (with heavier emphasis on the EPSC evaluation), and
  • If there is no request for additional shares and the amendments are not deemed to potentially increase the transfer of shareholder value to employees, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown for informational purposes.


In the 2016 proxy season, ISS made some surprising voting recommendations when it recommended voting against an amended plan, but would have recommended voting for the same exact plan if it had been in the form of a new plan rather than an amended plan. Although not addressed by ISS in its 2017 Guidelines or other written policies, in certain instances ISS conducts a "qualitative override" to plan amendments, which "qualitative override" does not apply to new plans.  The "qualitative override" allows ISS to recommend voting against an amended plan that contains a change disfavored by ISS, such as a reduction in minimum vesting requirements, even if such change, when evaluated in the context of the entire amended plan under ISS's EPSC approach, would otherwise result in a recommendation to vote for such plan. Despite the potential to receive an arbitrary vote recommendation, a company should carefully consider the long-term implications of modifying its intended equity or incentive plan decisions to meet changing expectations imposed by ISS.

Shareholder Ratification of Director Pay Programs

ISS will generally recommend voting case-by-case on management proposals seeking ratification of non-employee director compensation. ISS lists the following factors to consider when making this determination:

 

  • If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support, and
  • An assessment of the following qualitative factors:
    • the relative magnitude of director compensation as compared to companies of a similar profile,
    • the presence of problematic pay practices relating to director compensation,
    • director stock ownership guidelines and holding requirements,
    • equity award vesting schedules,
    • the mix of cash and equity-based compensation,
    • meaningful limits on director compensation,
    • the availability of retirement benefits or prerequisites, and
    • the quality of disclosure surrounding director compensation.

Equity Plans for Non-Employee Directors

ISS has recommended, and will in 2017 continue to recommend, voting case-by-case on compensation plans for non-employee directors. For 2017, ISS added to its list of factors considered when making the determination the presence of any egregious plan features (such as an option repricing provision or liberal change in control vesting risk). The following factors remain unchanged from 2016:

  • The total estimated cost of the company's equity plans relative to industry/market cap peers, measured by the company's estimated Shareholder Value Transfer (which is measured using a model that assesses the amount of shareholders' equity flowing out of the company to employees and directors) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants, and
  • The company's three-year burn rate relative to its industry/market cap peers.

ISS also changed its voting recommendation for director stock plans that exceed the plan cost or burn-rate benchmarks when combined with employee or executive stock plans. In 2016, ISS recommended voting for such plans as long as the plan set aside a relatively small number of shares and met certain qualitative factors. For 2017, however, ISS recommends voting case-by-case on director stock plans exceeding the plan cost or burn-rate benchmark when combined with employee or executive stock plans. ISS indicates that the following qualitative factors should be considered when making this determination:

  • The relative magnitude of director compensation as compared to companies of a similar profile,
  • The presence of problematic pay practices relating to director compensation,
  • Director stock ownership guidelines and holding requirements,
  • Equity award vesting schedules,
  • The mix of cash and equity-based compensation,
  • Meaningful limits on director compensation,
  • The availability of retirement benefits or prerequisites, and
  • The quality of disclosure surrounding director compensation.

What to Do

ISS's new voting guidelines should not change any company's practices or plans; however, companies may want to reconsider their approach to the shareholder engagement process and certain other things, such as how they disclose their executive and director incentive and equity plans and the messaging that is conveyed through their proxy statements.

Download - ISS Issues 2017 Summary Proxy Voting Guidelines

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Robert A. Profusek
Lizanne Thomas
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions