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Global Governance Advisors

ISS Releases 2019 Proxy Voting Guidelines

Posted by Peter Landers on Dec 10, 2018 9:00:00 AM
Peter Landers
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ISS has recently published its 2019 proxy voting guidelines for the United States and Canada, along with additional clarification on some of its compensation policies. Typically, any changes will  apply for all meeting dates on or after February 1, 2019. While there are some differences observed between the two jurisdictions, ISS has provided clarity on updates in the following areas:

  • Corporate Governance Issues:
    • Board Gender Diversity (U.S. and Canada)
    • Board Member Attendance (U.S.)
    • Management Proposals to Ratify Existing Charter or Bylaw Provisions (U.S.)
    • Director Performance Evaluation (U.S.)
    • Ratification Proposals (U.S.)
    • Director Overboarding (Canada)
  • Executive & Director Compensation Issues:
    • Economic Value Added (EVA) in Financial Performance Assessment (U.S. and Canada)
    • Equity Plan Scorecard Methodology (U.S.)
    • Excessive Non-Employee Director (NED) Compensation Policy (U.S.)
  • Other Issues:
    • Social and Environmental Issues (U.S. and Canada)
    • Reverse Stock Splits (U.S.)

GGA has summarized the substance of these changes below:

Corporate Governance Issues:

  1. Board Gender Diversity (U.S. and Canada)

In Canada beginning in the 2019 proxy season, the ISS Board Gender Diversity policy will apply to “widely-held” companies, which ISS characterizes as not only S&P/TSX Composite Index companies, but also other companies ISS designates as such based on the number of ISS clients holding securities of the company.

Under the gender diversity policy, ISS will generally recommend voting “withhold” for the Chair of the nominating committee (or the Chair of the committee designated with the responsibility of a nominating committee, or the Chair of the board if no such committee or Chair has been identified), where:

  • the company has not disclosed a formal written gender diversity policy; and
  • there are zero female directors on the board.

The policy should include measurable goals and/or targets showing a company’s commitment to increasing board gender diversity within a reasonable amount of time. ISS will also consider a company’s commitment to gender diversity in executive officer positions and any programs and processes in place to advance women in executive officer roles as part of its review.

An exemption from the policy will continue to apply for newly listed, graduated companies from the TSX Venture in the past year as well as companies with four or fewer directors.

In the United States, ISS will highlight boards with no gender diversity, but will not provide adverse voting recommendations during 2019 due to a lack of gender diversity. However, for companies in the Russell 3000 or S&P 1500 indices, starting with meetings on or after February 1, 2020, ISS will generally recommend a vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies when there are no women on the company's board. Mitigating factors in its decision will include:

  • A firm commitment, as stated in the proxy statement, to appoint at least one female to the board in the near term;
  • The presence of a female on the board at the preceding annual meeting; or
  • Other relevant factors, as applicable.
  1. Board Member Attendance (U.S.)

ISS has added additional clarity around its existing attendance policy that states that in the case of chronic poor attendance (generally being below 75%) without reasonable justification, in addition to voting against the director(s) with poor attendance, they will generally recommend voting against or withhold from appropriate members of the nominating/governance committees or the full board.

  • Three years of poor attendance will generally lead to a withhold recommendation for the Nominating or Governance Committee Chair;
  • Four years of poor attendance will generally lead to a withhold recommendation for the full Nominating or Governance Committee; and
  • Five years of poor attendance will generally lead to a withhold recommendation for all director nominees.
  1. Management Proposals to Ratify Existing Charter or Bylaw Provisions (U.S.)

ISS has introduced a new policy where they will generally recommend voting against management proposals to ratify provisions of the company’s existing charter or bylaws, unless these provisions align with best practice. They may also recommend a vote against or withhold a vote from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions by considering the following factors:

  • The presence of a shareholder proposal addressing the same issue on the same ballot;
  • The board's rationale for seeking ratification;
  • Disclosure of actions to be taken by the board should the ratification proposal fail;
  • Disclosure of shareholder engagement regarding the board’s ratification request;
  • The level of impairment to shareholders' rights caused by the existing provision;
  • The history of management and shareholder proposals on the provision at the company’s past meetings;
  • Whether the current provision was adopted in response to the shareholder proposal;
  • The company's ownership structure; and
  • Previous use of ratification proposals to exclude shareholder proposals.

This has been done by ISS largely to avoid situations where they feel management has sponsored a “conflicting” proposal that attempts to block shareholder proposals that request more shareholder-friendly governance provisions from appearing on ballots.

  1. Director Performance Evaluation (U.S.)

ISS has updated its current director performance evaluation policy to specifically indicate that sustained poor performance for Russell 3000 companies will be measured by one, three and five-year total shareholder returns in the bottom half of a company’s four-digit GICS industry group. Operational metrics and other factors will also be considered, where warranted. In the past, five-year total shareholder returns were not specifically included in the evaluation of sustained poor performance, but included as another consideration after reviewing one and three-year returns.  

  1. Ratification Proposals (U.S.)

ISS has clarified its policy on ratification proposals by indicating that it will vote on a case-by-case on individual directors, committee members, or the entire board of directors, as appropriate if:

  • The board failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year.

This provision has been added in addition to any situation where the board failed to act on a shareholder proposal that received the majority of the shares cast in the previous year’s meeting.

ISS’ belief is that management and the board should be responsive to shareholder concerns and should act in situations where management proposals have failed or shareholder proposals have succeeded in the prior year to address shareholder concerns.

  1. Director Overboarding (Canada)

ISS is also moving forward with previously announced changes to its director overboarding policy. Under the amended policy, beginning in the upcoming 2019 proxy season, a director’s meeting attendance record will no longer be relevant and the number of public company boards a director can serve on before he or she is considered to be overboarded has increased. The changes are intended to harmonize ISS’s Canadian policy for TSX-listed companies with their U.S. guidelines.

Under the policy, ISS will generally vote “withhold” for individual director nominees who:

  1. are non-CEO directors and serve on more than five public company boards; or
  2. are CEOs of public companies who serve on the boards of more than two public companies besides their own.

Serving as a director of a parent or subsidiary public company will count in determining whether a CEO is overboarded. However, ISS will not recommend voting withhold at the CEO’s home company or any parent or subsidiary public company, even if the CEO is overboarded.

Executive & Director Compensation Issues:

  1. Economic Value Added (EVA) in Financial Performance Assessment (U.S. and Canada)

ISS has been assessing the potential use of EVA data in the Financial Performance Assessment screen of its pay-for-performance model over the past year to add insight into company performance beyond the current market performance (TSR) and accounting performance (GAAP) measures. However, ISS has announced that in 2019 they will continue to only use TSR and GAAP measures in the Financial Performance Assessment and will explore the use of EVA data for future use. They plan to feature EVA metrics within their ISS research reports on a phased-in basis over the 2019 proxy season.

  1. Equity Plan Scorecard Methodology (U.S.)

ISS is introducing a new negative overriding factor within its Equity Plan Scorecard methodology relating to excessive dilution for S&P 500 and Russell 3000 companies only. The new overriding factor will be triggered when the company's equity compensation program is estimated to dilute shareholders' holdings by more than 20% (for the S&P 500) or 25% (for the Russell 3000).

The Change in Control vesting factor, used within the Equity Plan Scorecard, will be updated to provide points based on the quality of disclosure of Change in Control vesting provisions as opposed to basing points on the actual vesting treatment of awards. Specifically, full points will be earned where the company's equity compensation plan discloses the specific Change in Control vesting treatment for both performance and time-based awards. If the plan does not disclose the Change in Control vesting treatment for either type of award or if the plan provides for only discretionary vesting for either type of award, then no points will be earned on this factor.

  1. Excessive Non-Employee Director (NED) Compensation Policy (U.S.)

In light of recent feedback received through policy survey and investor round-tables held by ISS, they have announced that they intend to revise their methodology for identifying Non-Employee Director pay outliers. Further, they will attempt to increase the transparency around the methodology they use for identifying pay outliers during 2019. For these reasons, ISS will not be issuing adverse director recommendations under this policy in 2019 with the first possible adverse vote recommendations under the policy delayed until 2020 when further clarity has been provided on its methodology.

Other Issues:

  1. Social & Environmental Issues (U.S. and Canada)

ISS has updated its existing policy on Social & Environmental Issues by indicating that they will examine primarily whether implementing the proposal up for a vote is likely to enhance or protect shareholder value. A new consideration added to its policy includes whether there are significant controversies, fines, penalties or litigation associated with the company’s environmental or social practices. This may impact the voting recommendation of ISS moving forward.  

  1. Reverse Stock Splits (U.S.)

ISS has made material updates to its voting policy on reverse stock splits. The new policy will see ISS recommend a vote for management proposals to implement a reverse stock split if:

  • The number of authorized shares will be proportionately reduced.; or
  • The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS' Common Stock Authorization policy.

They have also indicated that they will vote on a case-by-case basis on proposals that do not meet either of the above conditions, taking into consideration the following factors:

  • Stock exchange notification to the company of a potential delisting;
  • Disclosure of substantial doubt about the company's ability to continue as a going concern without additional financing;
  • The company's rationale; or
  • Other factors as applicable.

We at GGA continue to monitor the evolving proxy voting guidelines on a regular basis and will be reporting on any updates and clarity that come out of both ISS and Glass Lewis in the coming weeks. Companies should be reviewing their compensation and governance practices against the most up-to-date ISS and Glass Lewis guidelines to ensure that their current designs align appropriately as we move into the 2019 proxy season.

For access to the ISS 2019 proxy voting guideline updates for the United States and Canada, please click on the following link:

Further clarity on ISS compensation policies in the United States can be found using the following link:

Topics: GGA, Proxy Voting, ISS