United States: Institutional Shareholder Services Announces 2019 Proxy Voting Guidelines Updates

Last Updated: November 29 2018
Article by Justin W. Chairman and Jose Robles Jr

Updates for the 2019 proxy voting guidelines by Institutional Shareholder Services include guidance on board gender diversity and attendance, board-sponsored proposals, and director performance evaluations.

Proxy advisory firm Institutional Shareholder Services Inc. (ISS) announced its 2019 proxy voting guidelines updates for boards of directors on November 19. The updates largely highlight ISS's continued commitment to identifying social and governance risks and keeping in line with its institutional investors' corporate governance goals. The ISS policy updates relate to board gender diversity, board attendance, board-sponsored proposals, and director performance evaluations.

Board Composition

Diversity

In line with efforts by institutional investors to achieve greater gender diversity in boards of directors, ISS has announced adverse voting recommendations against chairs of committees (or other directors on a case-by-case basis) at companies with no female board members. These general recommendations to vote against or withhold votes from such nominees will take effect for meetings on or after February 1, 2020, effectively granting companies a grace period in which to address gender diversity recruitment. A company may, however, avoid an adverse voting recommendation by demonstrating a firm commitment, as reported in proxy statements, to appoint a woman to its board of directors in the near term; proving a woman was a board member at the preceding annual meeting; or showing other relevant mitigating factors. This board composition diversity policy will apply to companies in the Russell 3000 and S&P 1500 indices.

Although this policy update will not apply to meetings held in 2019, it is a pronounced step toward achieving greater gender diversity and builds upon the current policy, where ISS highlights boards with no gender diversity. There is a growing trend among investors to push for gender diversity in an effort to promote corporate governance best practices, foster greater company performance, and heed calls for equality. Not surprisingly, ISS will continue to take a stronger stance on equality issues to best identify governance risks.

Attendance

The existing ISS attendance policy on board and committee meetings provides for a recommendation against directors who attend less than 75% of their total board and committee meetings for the period for which they served, without disclosing an acceptable reason for their absences. Acceptable explanations for absences include medical issues/illness, family emergencies, and missing only one out of three or fewer meetings. Moreover, in the event that a proxy disclosure does not clarify whether a director has attended less than 75% of his/her aggregate board meetings, ISS recommends an adverse action against such director.

ISS has updated this policy to address "chronic poor attendance," which ISS defines as "three or more consecutive years of poor attendance without reasonable explanation." In the case of chronic poor attendance, ISS will recommend both an adverse action against directors with poor attendance and a vote against, or withheld from, members of the nominating or governance committee or the full board, as follows:

  • After three years of poor attendance by a director, recommend withhold from the chair of the nominating or governance committee
  • After four years, recommend withhold from the full nominating or governance committee
  • After five years, recommend withhold from all director nominees

Board Accountability

Shareholder Rights and Defenses – Management Proposals to Ratify Existing Charter or Bylaw Provisions

ISS announced its adoption of a new board accountability policy and the modification of an existing policy relating to management proposals to ratify existing charter or bylaw provisions. Both developments come in the wake of board-sponsored proposals increasingly being used to exclude shareholder proposals from the ballot during the 2018 proxy season. Under the new policy, ISS will recommend against directors, members of the governance committee, or the full board should a board propose that shareholders ratify existing charters or bylaw provisions. In such an instance, ISS will consider certain factors, including the presence of a shareholder proposal addressing the same issue on the same ballot, the board's rationale for seeking ratification, the level of impairment of shareholders' rights caused by the existing provisions as to which ratification is sought, and previous use of management proposals to exclude shareholder proposals.

ISS also modified an existing policy under which it already made recommendations on a case-by-case basis on individual directors, committee members, or the entire board where the board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year. ISS will now also consider in its recommendations whether a board failed to act on a management proposal in the previous year seeking to ratify an existing charter/bylaw provision that was opposed by a majority of the shares cast in the previous year.

The new and modified policies seek to protect shareholder rights and represent a vote of confidence by ISS as to shareholders' sophistication and ability to vote on competing management and shareholder proposals.

Director Performance Evaluation

The existing director performance evaluation policy is designed to identify companies that lack mechanisms to promote accountability and oversight and that are consistently underperforming relative to their peers. Previously, the policy deemed underperformance to occur where, as an initial matter, the company's one- and three-year total shareholder returns were in the bottom half of the company's four-digit GICS industry group; the company's five-year total shareholder return and operational metrics were also taken into consideration. As modified, the initial determination of underperformance will be based on whether the company's one-, three-, and five-year total shareholder returns were in the bottom half of its GICS industry group, and then the company's operational metrics and other factors as warranted will also be taken into consideration.

With the five-year return added to the initial screening, this new policy will decrease the number of companies that undergo scrutiny as to underperformance and board entrenchment issues.

Other Updates

ISS also announced changes to its policies regarding recommendations as to reverse stock splits and certain social and environmental proposals.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

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