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

ISS has announced its 2020 policy updates.  The summary below is largely extracted from ISS’ executive summary or the commentary in the updated policies.

US – Problematic Governance Structure – Newly Public Companies

ISS seeks to provide clarity on policy application at newly-public companies by creating two distinct policies that address (1) problematic governance provisions and (2) multi-class capital structures with unequal voting rights. Specifically, the changes create a policy to address problematic capital structures at newly-public companies and provide a framework for addressing acceptable sunset requirements. In assessing the reasonableness of a time-based sunset requirement, consideration will be given to the company’s lifespan, its post-IPO ownership structure and the board’s disclosed rationale for the specific duration selected. No sunset period of more than seven years from the date of the IPO will be considered to be reasonable.

In line with the current implementation of the policy, the update also clarifies and narrows the focus of the policy to certain highly problematic governance structures.

US – Independent Board Chair Shareholder Proposals

The policy update largely codifies the existing ISS policy application with respect to independent chair proposals. While ISS will maintain a holistic approach to evaluating these proposals, the policy now explicitly identifies the factors that will generally result in recommending support for these proposals. In line with the feedback received from investors in the policy survey and roundtables, support for a well crafted proposal will be likely at companies where boards rely on a weak lead independent director role or there is evidence that directors failed to oversee material risks facing the company or did not adequately respond to shareholders’ concerns. The language in the existing policy that provided an overview of how ISS will analyze the scope and rationale of the proposal, the company’s current board leadership structure, the company’s governance structure and practices, company performance, and the overriding factors will be updated and subsequently relocated to the relevant ISS Policy FAQ document.

US – Share Repurchase Program Proposals

While most US companies can (and often do) implement share buyback programs through board resolutions without shareholder votes, there are exceptions to this general rule. Certain financial institutions, for example, are required by their regulators to receive shareholder approval for buyback programs. In addition, certain US-listed cross-market companies are required by the law of their country of incorporation to receive shareholder approval to grant the board the authority to repurchase shares.

The policy update codifies the existing ISS approach, particularly with respect to the rare cases in which an “against” recommendation may be warranted. It is intended that this policy will apply to US Domestic Issuers (DEF 14 filers) listed solely in the US, regardless of their country of incorporation.

The updated policy provides safeguards against (1) the use of targeted share buybacks as greenmail or to reward company insiders by purchasing their shares at a price higher than they could receive in an open market sale, (2) the use of buybacks to boost EPS or other compensation metrics to increase payouts to executives or other insiders, and (3) repurchases that threaten a company’s long-term viability (or a bank’s capitalization level). In the absence of these abusive practices, support will generally be warranted for a grant of authority to the board to engage in a buyback.

Other modestly revised ISS policies include the following:

  • Board of Directors – Voting on Director Nominees in Uncontested Elections: When making recommendations on nominees, ISS takes into consideration if a director has limited tenure; whether he/she should be held responsible for an action taken by the board before he/she joined. But this case-by-case consideration only occurs if the director has been on the board for less than one year. While this is the current policy application, the current footnote under Board Accountability on new nominees is being clarified such that only the subset of new nominees who have served on board for less than one year will be considered on a case-by-case basis.
  • Board Composition – Attendance: The term “new nominee” is being removed from the attendance policy, because the issue for recently-added directors under this policy is whether they served the entire fiscal year under review, not whether they have been previously elected by shareholders.
  • Board Composition – Diversity: The one-year transition period for the U.S. gender diversity policy has now passed, and absent a firm commitment from the company to achieve gender diversity within a year, ISS will recommend against the chair of the nominating committee (or other directors as appropriate), if the board lacks a female director. In addition, ISS is clarifying that such a commitment from a board with no women on it previously will only be a mitigating factor for 2020, not beyond.
  • Board Accountability – Restrictions on Shareholders’ Rights: ISS has seen a general increase in the number of companies submitting proposals to shareholders seeking ratification or approval of requirements in excess of SEC Rule 14a-8 regarding submission of binding bylaw amendments. The update provides guidance on how ISS will apply the policy and will ensure consistency in recommendations. Specifically, ISS will generally recommend that shareholders vote against or withhold from members of the governance committee until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
  • Equity-Based and Other Incentive Plans – Evergreen Provision: Prior to the Tax Cuts and Jobs Act in late 2017, Internal Revenue Code Section 162(m) required companies to seek approval of their incentive plan metrics at least every five years for qualification of the performance-based pay exemption. However, the tax reform repealed the performance-based pay exemption, thereby eliminating the need for companies to obtain shareholder regular reapproval of plans. As a result of the tax reform, there has been a significant drop in the number of equity plans brought to shareholder vote (a 27 percent year-over-year drop from 2017 to 2018), and the number of such proposals in 2018 and 2019 has remained significantly below levels seen before the tax reform. The new environment post-tax reform renews concerns around evergreen provisions that automatically replenish plan reserves and circumvent regular shareholder reapproval of such plans within reasonable time intervals. Further, the presence of an evergreen provision may perpetuate plans with shareholder-unfriendly features. Therefore, ISS will include a plan’s containing an evergreen feature as an overriding factor in the U.S. Equity Plan Scorecard analysis.
  • Diversity – Gender Pay Gap: This is an update of current policy to better align it with the requests of all the types of shareholder proposals filed. The updated language will better capture and be more inclusive of the types of requests on this issue, which include reporting on race or ethnicity-based pay inequities.

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