ISS Releases 2015 Proxy Voting Guideline Updates

Practical Law Legal Update 0-587-3285 (Approx. 6 pages)

ISS Releases 2015 Proxy Voting Guideline Updates

by Practical Law Corporate & Securities

Unilateral By-law and Charter Amendments

ISS has adopted a policy within its Board Accountability policy framework that addresses unilateral by-law and charter amendments. These amendments were previously evaluated under ISS' Material Governance Failures policy. The new policy codifies ISS' current approach to unilateral by-law and charter amendments.

ISS will generally recommend voting "against" or "withhold" for individual directors, committee members or the entire board (with the potential exception of new nominees) if the board amends the company's by-laws or charter without shareholder approval in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders. Factors considered include:

The board's rationale for adopting the amendment without shareholder ratification.
Company disclosure of any significant engagement with shareholders regarding the amendment.
The level of impairment of shareholders' rights.
The board's track record on unilateral board action on by-law amendments, charter amendments or other entrenchment provisions.
The company's ownership structure.
The company's existing governance provisions.
Whether the amendment was made before, or in connection with, the company's initial public offering.
The timing of the amendment in connection with a significant business development.
Any other factors that may be relevant to determining the impact of the amendment on shareholders.

Independent Chair Shareholder Proposals

ISS will generally recommend voting "for" shareholder proposals requiring that the chairman's position be filled by an independent director. Under the new policy, factors considered include:

The scope of the proposal. ISS will consider whether the proposal:
- is precatory or binding; and
- seeks an immediate change in the chairman role or can be implemented at the next CEO transition.
The company's current 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; or
- the departure from a structure with an independent chair.
ISS will also consider any recent transitions in board leadership and the effect the transitions may have on independent board leadership, as well as the designation of a lead director role.
The company's governance structure and practices. 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 relevant factors.
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.
Company performance. ISS will generally consider one, three and five-year total shareholder return (TSR) compared to the company's peers and the market as a whole. Poor performance will weigh in favor of the adoption of an independent chair policy, while strong performance over the long term will be considered a mitigating factor when determining whether the proposed leadership change warrants support.
Any other relevant factors.

Litigation Rights

ISS will recommend voting case-by-case on by-laws that impact shareholders' litigation rights. Under the new policy, factors considered include:

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

ISS will generally recommend a vote "against" by-laws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits. Unilateral adoption by the board of by-law provisions which affect shareholders' litigation rights will be evaluated under ISS' policy on unilateral by-law and charter amendments (see above).

Equity-based and Other Incentive Plans

ISS has adopted a new policy that uses a "scorecard" model to consider a range of positive and negative factors in equity plan proposals. Factors to be evaluated fall under three main categories:

Plan cost. The total estimated cost of the company's equity plans relative to industry/market cap peers, measured by the company's estimated shareholder value transfer (SVT) in relation to peers. SVT would be calculated for both:
- new shares plus shares remaining for future grants, plus outstanding unvested or unexercised grants; and
- only new shares requested plus shares remaining for future grants.
Plan features. Plan features such as:
- automatic single-trigger award vesting on a change in control;
- discretionary vesting authority;
- liberal share recycling on various award types; and
- minimum vesting period for grants made under the plan.
Grant practices. Grant practices such as:
- the company's three-year burn rate relative to its industry and market cap peers;
- vesting requirements in most recent CEO equity grants (three-year look-back);
- the estimated duration of the plan based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years;
- the proportion of the CEO's most recent equity grants and awards subject to performance conditions;
- whether the company maintains a clawback policy; and
- whether the company has established post-exercise/vesting share-holding requirements.

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

Awards may vest in connection with a liberal definition of change in control.
The plan would permit repricing or a cash buyout of underwater options without shareholder approval (either by expressly permitting it or by not prohibiting it).
The plan is a vehicle for problematic pay practices or a pay-for-performance disconnect.
ISS determines that any other plan feature would have a significant negative impact on shareholder interests.

Political Contributions and Greenhouse Gas Emissions

ISS has also updated and clarified its policies on proposals relating to political contributions and greenhouse gas emissions. Its voting recommendation for these proposals remains the same.

ISS Releases 2015 Proxy Voting Guideline Updates | Practical Law