Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

ISS has issued its 2015 policy updates.

Unilateral Bylaw/Charter Amendments

This policy is new stand-alone policy.  Previously these matters were evaluated under the ISS governance failure policy.  ISS maintains the policy codifies its current approach to unilateral bylaw/charter amendments.

Generally ISS will recommend a vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who will be considered case-by-case) if the board amends the company’s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders, considering the following factors, as applicable:

  • The board’s rationale for adopting the bylaw/charter amendment without shareholder ratification;
  • Disclosure by the company of any significant engagement with shareholders regarding the amendment;
  • The level of impairment of shareholders’ rights caused by the board’s unilateral amendment to the bylaws/charter;
  • The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;
  • The company’s ownership structure;
  • The company’s existing governance provisions;
  • Whether the amendment was made prior to or in connection with the company’s initial public offering;
  • The timing of the board’s amendment to the bylaws/charter in connection with a significant business development;
  • Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.

My recommendation is if you unilaterally amend your by-laws, that you carefully consider the reasons for the amendment and disclose the reasons in your proxy statement.  It’s unclear to me the range of issues that may be implicated by this policy.

Litigation Rights (Including Exclusive Venue and Fee-Shifting Bylaw Provisions)

Currently ISS does not have a policy on fee-shifting bylaws and considers exclusive venue provisions on a case-by-case basis.

The new policy is to make recommendations on a case-by-case on bylaws which impact shareholders’ litigation rights, taking into account factors such as:

  • The company’s stated rationale for adopting such a provision;
  • Disclosure of past harm from shareholder lawsuits in which plaintiffs were unsuccessful or shareholder lawsuits outside the jurisdiction of incorporation;
  • The breadth of application of the bylaw, including the types of lawsuits to which it would apply and the definition of key terms; and
  • Governance features such as shareholders’ ability to repeal the provision at a later date (including the vote standard applied when shareholders attempt to amend the bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections.

ISS will generally recommend a vote against bylaws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., in cases where the plaintiffs are partially successful).

My thought is this is generally the death knell of the fee shifting by-law.  Perhaps the approach may become to use a by-law which provides for fee shifting only when the plaintiff is wholly unsuccessful or to have it only apply in narrowly defined situations.  Companies which have classified boards, plurality director voting standards or require significant votes to amend the by-law will have a steeper battle.

Independent Chair (Separate Chair/CEO)

Currently ISS will generally recommend a vote for shareholder proposals requiring that the chairman’s position be filled by an independent director, unless the company satisfies all of specifically numerated criteria.

Under the new policy ISS will generally recommend a vote for shareholder proposals requiring that the chairman’s position be filled by an independent director, taking into consideration the following:

  • The scope of the proposal;
  • The company’s current board leadership structure;
  • The company’s governance structure and practices;
  • Company performance; and
  • Any other relevant factors that may be applicable.

Regarding the scope of the proposal, ISS will consider whether the proposal is precatory or binding and whether the proposal is seeking an immediate change in the chairman role or the policy can be implemented at the next CEO transition.

Under the review of the company’s board leadership structure, ISS may support the proposal under the following scenarios absent a compelling rationale: the presence of an executive or non-independent chair in addition to the CEO; a recent recombination of the role of CEO and chair; and/or departure from a structure with an independent chair.  ISS will also consider any recent transitions in board leadership and the effect such transitions may have on independent board leadership as well as the designation of a lead director role.

When considering the governance structure, ISS will consider the overall independence of the board, the independence of key committees, the establishment of governance guidelines, board tenure and its relationship to CEO tenure, and any other factors that may be relevant. Any concerns about a company’s governance structure will weigh in favor of support for the proposal.

The review of the company’s governance practices may include, but is not limited to poor compensation practices, material failures of governance and risk oversight, related-party transactions or other issues putting director independence at risk, corporate or management scandals, and actions by management or the board with potential or realized negative impact on shareholders. According to ISS any such practices may suggest a need for more independent oversight at the company thus warranting support of the proposal.

ISS’ performance assessment will generally consider one-, three, and five-year TSR compared to the company’s peers and the market as a whole. While poor performance will weigh in favor of the adoption of an independent chair policy, strong performance over the long-term will be considered a mitigating factor when determining whether the proposed leadership change warrants support.

Equity-Based and Other Incentive Plans

ISS is adopting a “scorecard” model which it calls the Equity Plan Scorecard, or EPSC, that considers a range of positive and negative factors, rather than a series of “pass” or “fail” tests, to evaluate equity incentive plan proposals. The total EPSC score will generally determine whether ISS recommends for or against the proposal.

EPSC factors will fall under three categories: Plan Cost, Plan Features, and Grant Practices. As part of the new approach, the updated policy will:

  • Utilize three index groups to determine burn-rate benchmarks (index/industry mean and 1 standard deviation above mean, along with a 2 percent de minimis benchmark) and factor weightings:
    •  S&P500
    • Russell 3000 (ex-S&P 500)
    • Non-Russell 3000.
  • Utilize individual scorecards for each index groups (S&P500, Russell3000, Non-Russell 3000, and IPOs).
  • Measure plan cost, or SVT, by both of the following:
    • The company’s total new and previously reserved equity plan shares plus outstanding grants and awards (“A+B+C shares”), and
    • Only the new request plus previously reserved but ungranted shares (“A+B shares”);
  • Eliminate option overhang carve-outs, in light of the additional SVT evaluation factor for only A+B shares; and
  • Eliminate consideration of “liberal share recycling” provisions from the SVT cost calculations; instead, share recycling will be scored as a negative plan feature.

ISS will generally recommend a vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders’ interests, or if any of the following apply:

  • Awards may vest in connection with a liberal change-of-control definition;
  • The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it – for NYSE and Nasdaq listed companies — or by not prohibiting it when the company has a history of repricing – for non-listed companies);
  • The plan is a vehicle for problematic pay practices or a pay-for-performance disconnect; or
  • Any other plan features are determined to have a significant negative impact on shareholder interests.

This policy is the one most frequently encountered by issuers and its impact likely will be difficult to evaluate near term.


ISS has also updated its policies on political contribution and greenhouse gas emissions.


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