ISS Releases 2017 Proxy Voting Guideline Updates

Practical Law Legal Update w-004-6295 (Approx. 8 pages)

ISS Releases 2017 Proxy Voting Guideline Updates

by Practical Law Corporate & Securities

Restrictions on Binding Shareholder Proposals

ISS will generally recommend voting "against" or "withhold" for members of the governance committee if the company's charter imposes undue restrictions on the ability of shareholders to amend the company's by-laws. These restrictions include, but are not limited to:

Outright prohibition on the submission of binding shareholder proposals.
Share ownership requirements or time holding requirements in excess of Rule 14a-8 under the Exchange Act, which permits shareholders who have held shares valued at $2,000 or more for one year to submit shareholder proposals, both precatory and binding, to amend the company's by-laws. Some states permit companies to restrict Rule 14a-8 rights in their charters.

Unilateral By-law/Charter Amendments and Problematic Capital Structures

For newly-public companies, ISS will generally recommend voting "against" or "withhold" for individual directors, committee members, or the entire board (except new nominees, who will be considered on a case-by-case basis) if, before or in connection with the company's IPO, the company or its board either:

Adopted by-law or charter provisions that were materially adverse to shareholder rights.
Implemented a multi-class capital structure in which the classes have unequal voting rights.

The updated policy states that a vote by shareholders within three years will not be considered sufficient and, instead, a sunset provision will be necessary.

ISS will consider the following factors:

The level of impairment of shareholders' rights.
The disclosed rationale.
The ability to change the governance structure, such as:
- limitations on shareholders' right to amend the by-laws or charter; or
- supermajority vote requirements to amend the by-laws or charter.
The ability of shareholders to hold directors accountable through annual director elections.
Whether the company has a classified board structure.
Any reasonable sunset provision.
Other relevant factors.

Director Overboarding

ISS will generally recommend voting "against" or "withhold" for individual directors who either:

Sit on more than five public company boards.
Are CEOs of public companies who sit on the boards of more than two public companies besides their own. This recommendation will only apply at the director's outside boards.

In addition, although all of a CEO's subsidiary boards will be counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company or any of the controlled subsidiaries of that parent, but may do so at subsidiaries that are less than 50% controlled.

Stock Splits and Stock Dividends

ISS will generally recommend voting "for" management proposals to increase the common share authorization for a stock split or stock dividend, provided that the effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS's Common Stock Authorization policy.

Equity-Based and Other Incentive Plans

ISS will recommend voting on a case-by-case basis for certain equity-based compensation plans depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an "equity plan scorecard" approach with three pillars:

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 and considering both:
- SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested or unexercised grants; and
- SVT based only on new shares requested plus shares remaining for future grants.
Plan features. These include:
- automatic single-triggered award vesting on a change in control;
- discretionary vesting authority;
- liberal share recycling on various award types;
- lack of minimum vesting period for grants made under the plan; and
- dividends payable prior to award vesting. This is a new factor for 2017. From an incentive and retention perspective, dividends on unvested awards should be paid only after the underlying awards have been earned and not during the performance/service vesting period. Under the new factor, full points will be earned if the equity plan expressly prohibits, for all award types, the payment of dividends before the vesting of the underlying award (however, accrual of dividends payable upon vesting is acceptable). No points will be earned if this prohibition is absent or incomplete. A company's general practice of not paying dividends until vesting will not suffice.
Grant practices. These include:
- the company's three-year burn rate relative to its industry/market cap peers;
- vesting requirements in most 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/awards subject to performance conditions;
- whether the company maintains a claw-back policy; and
- whether the company has established post-exercise/vesting share-holding requirements.

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

Awards may vest in connection with a liberal change in 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 significant pay-for-performance disconnect under certain circumstances.
Any other plan features are determined to have a significant negative impact on shareholder interests.

Amending Cash and Equity Plans

ISS will generally recommend voting "for" proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal either:

Addresses only administrative features.
Seeks approval only for purposes of Section 162(m) of the Internal Revenue Code, and the plan administering committee consists entirely of independent outsiders, per ISS's Categorization of Directors. However, if the company is presenting the plan to shareholders for the first time after the company's IPO, or if the proposal is bundled with other material plan amendments, then the recommendation will be case-by-case.

ISS will generally recommend voting "against" proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of independent outsiders, per ISS's Categorization of Directors.

In addition, ISS will recommend voting on a case-by-case basis for:

All other proposals to amend cash incentive plans. This includes plans presented to shareholders for the first time after the company's IPO and proposals that bundle material amendments other than those for Section 162(m) purposes.
All other proposals to amend equity incentive plans, considering the following:
- if the proposal requests additional shares or the amendments may potentially increase the transfer of shareholder value to employees, the recommendation will be based on the Equity Plan Scorecard evaluation as well as on an analysis of the overall impact of the amendments;
- if the plan is being presented to shareholders for the first time after the company's IPO, whether or not additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as on an analysis of the overall impact of any amendments; and
- if there is no request for additional shares and the amendments are not deemed to potentially increase the transfer of shareholder value to employees, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the Equity Plan Scorecard evaluation will be shown for informational purposes.

Shareholder Ratification of Director Pay Programs

ISS will recommend voting on a case-by-case basis for management proposals seeking ratification of non-employee director compensation, based on the following factors:

If the equity plan under which non-employee director grants are made is on the ballot, or whether or not it warrants support.
An assessment of the following qualitative factors:
- the relative magnitude of director compensation as compared to companies of a similar profile;
- the presence of problematic pay practices relating to director compensation;
- director stock ownership guidelines and holding requirements;
- equity award vesting schedules;
- the mix of cash and equity-based compensation;
- meaningful limits on director compensation;
- the availability of retirement benefits or perquisites; and
- the quality of disclosure surrounding director compensation.

Equity Plans for Non-Employee Directors

ISS will recommend voting on a case-by-case basis for compensation plans for non-employee directors, based on:

The total estimated cost of the company's equity plans relative to industry/market cap peers, measured by the company's estimated SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested or unexercised grants.
The company's three-year burn rate relative to its industry/market cap peers.
The presence of any egregious plan features, such as an option repricing provision or liberal change in control vesting risk.

In cases where director stock plans exceed the plan cost or burn rate benchmarks when combined with employee or executive stock plans, the ISS will recommend voting on a case-by-case basis for the plan and will take into consideration the following qualitative factors:

The relative magnitude of director compensation as compared to companies of a similar profile.
The presence of problematic pay practices relating to director compensation.
Director stock ownership guidelines and holding requirements.
Equity award vesting schedules.
The mix of cash and equity-based compensation.
Meaningful limits on director compensation.
The availability of retirement benefits or perquisites.
The quality of disclosure surrounding director compensation.

ISS Releases 2017 Proxy Voting Guideline Updates | Practical Law