August 15, 2022

Volume XII, Number 227


August 15, 2022

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ISS (Institutional Shareholder Services) Seeks Comments on Proposed Changes to Proxy Voting Guidelines

On October 15, 2014, Institutional Shareholder Services ("ISS") announced that it is soliciting public feedback on proposed changes to its 2015 proxy voting guidelines. Two of the proposed changes are applicable to U.S. companies — one to revise the methodology used when evaluating shareholder proposals to require an independent board chair, and one to implement an "Equity Plan Scorecard" for evaluating equity plans. The comment period is open until 6 p.m. EDT on October 29, 2014. Information about submitting comments to ISS via email and the full text of the proposals are available here.

Independent Chair Shareholder Proposals

ISS proposes to expand the criteria evaluated when considering independent chair shareholder proposals (i.e., proposals to separate the roles of chairman of the board of directors and chief executive officer of the company) and adopt a more "holistic" approach to its evaluation.

Currently, ISS will generally recommend a vote "For" an independent chair shareholder proposal unless a company satisfies all of six specific corporate governance and performance requirements. These requirements include the presence of a lead independent director with clearly delineated and comprehensive duties, fully independent board committees, the absence of "problematic" governance practices, and the absence of poor total shareholder returns ("TSR") and underperformance in the past one- and three-year periods.

ISS proposes to adopt a more holistic approach to its review, allowing positive factors to mitigate negative factors and vice versa. ISS also proposes to expand the criteria that it considers in determining whether to recommend votes "For" an independent chair shareholder proposal to include the following factors:

  • The absence/presence of an executive chairman;

  • Recent board and executive leadership transitions;

  • Director/CEO tenure; and

  • A five-year TSR performance period (replacing the current three-year period).

ISS reports that backtesting indicates that the proposed new methodology would have resulted in a higher level of support for independent chair shareholder proposals during the 2014 proxy season.

Equity Plan Scorecard

ISS proposes to replace its current practice of evaluating equity incentive plan proposals using a series of "pass/fail" tests with an "Equity Plan Scorecard" that would evaluate a broader range of factors than ISS currently uses.

Currently, ISS recommends votes "Against" an equity plan if any of six specific factors exist. These factors include the total cost of the company's equity plans being "unreasonable," the plan being a vehicle for "problematic pay practices," and an excessive three-year burn rate.

The Equity Plan Scorecard would evaluate equity plans using a broad range of factors in three categories: cost, plan features and grant practices.

  • Cost: The Equity Plan Scorecard would continue to evaluate plan cost on the basis of the company's shareholder value transfer ("SVT") in relation to its peers, as measured by ISS, but the SVT evaluation would be expanded to measure the SVT two ways: (1) on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants, and (2) only on new shares requested plus shares remaining for future grants.

  • Features: The Equity Plan Scorecard would consider various plan features, including automatic single-triggered award vesting upon a change in control, discretionary vesting authority, liberal share recycling on various award types, and minimum vesting periods for grants made under the plan.

  • Grant Practices: The Equity Plan Scorecard would evaluate the company's three-year burn rate relative to peers, vesting requirements in CEO equity grants, the existence of a claw-back policy, and the estimated duration of the plan.

ISS intends to key scorecard factors and weightings to company size and status, applying different weightings to companies depending on whether they are S&P 500, Russell 3000 (excluding S&P 500), Non-Russell 3000, Recent IPOs or Bankruptcy Emergent.

ISS stated that the proposed policy is not designed to either increase or decrease recommendations "Against" equity plans.

ISS expects to release its proxy voting guidelines for the 2015 proxy season on or about November 7, 2014. The 2015 policy guidelines will apply to shareholder meetings taking place on or after February 1, 2015.

© 2022 ArentFox Schiff LLPNational Law Review, Volume IV, Number 300

About this Author

Ralph DeMartino Schiff Hardin Corporate Lawyer

For more than 30 years, Ralph V. De Martino has devoted his practice to the representation of public and private companies, the officers and directors who serve them, and financial institutions, broker-dealers and associated members. Mr. De Martino is distinguished among his peers in matters involving public and private company capital formation, securities offerings, regulatory inquiries and enforcement proceedings, internal investigations, and corporate finance and governance matters. He regularly appears before the U.S. Securities and Exchange Commission, FINRA and securities...

Stuart Goodman, corporate, mergers, acquisitions, attorney, Schiff Hardin, law

Stuart L. Goodman has broad experience in all aspects of representing both privately and publicly owned corporations. His practice emphasizes:

  • Mergers and acquisitions

  • Takeovers

  • Public and private financing

  • Disclosure issues

  • Other 1933 Act and 1934 Act matters

  • Crisis counseling for directors and senior executives

He also performs internal investigations and general counseling of corporate management and special board committees regarding the complex...

Allan Horwich, Corporate Attorney, Schiff Hardin Law Firm

Allan Horwich has practiced for more than 40 years in corporate counseling and litigation.

He has advised corporations, financial institutions, investors, securities professionals and boards of directors on a wide range of questions, including disclosure, corporate governance, corporate compliance, fiduciary duty and insider trading.