Client Alert: Updated ISS Proxy Voting Guidelines for Shareholder Meetings

Capital Markets Client Alerts

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By: Donald R. Reynolds and S. Halle Vakani

As public companies prepare for their upcoming shareholder meetings, they should consider how changes to proxy advisory firm policies, including particularly those of Institutional Shareholder Services (“ISS”), could impact their shareholder vote.  ISS has published updates to its proxy voting guidelines and FAQs that, while more limited in scope than in past years, represent a continuing focus on compensation, board governance and environmental matters.  Certain of these updates are summarized below.

CEO Pay Ratio.  ISS will include the company’s CEO pay ratio in its proxy research reports, but will not factor the ratio into its evaluation of, or voting recommendation on, the company’s say-on-pay proposal.

Say-on-Pay.  If a say-on-pay vote receives less than 70% approval, ISS will consider the current say-on-pay proposal and compensation committee members on a case-by-case basis, focusing on their response to the low vote.  ISS will review the timing and frequency of any shareholder engagement efforts and whether independent directors participated, whether the company discloses the specific concerns raised by shareholders that opposed say-on-pay as well as the company’s actions to address such concerns.

Pay-for-Performance.  ISS has added a fourth test, the Financial Performance Assessment (“FPA”), to its quantitative screening of pay-for-performance for 2018.  The FPA examines the rankings of CEO total pay and company financial performance relative to an applicable peer group over a three-year period.

Gender Pay Gap.  Pursuant to a new policy on gender pay gap, ISS will consider shareholder proposals requesting reports on the company’s pay data by gender or reports on the company’s policies to reduce gender pay gap.  Specifically, ISS will look at: (a) the company’s current policies and disclosure related to its diversity and inclusion policies and practices and its compensation philosophy and fair and equitable compensation practices; (b) whether the company has been the subject of recent gender pay gap controversies or actions; and (c) how the company’s reporting on these matters compares to its peers.

Poison Pills.  ISS will recommend against all board nominees, every year, at a company that maintains a long-term poison pill that has not been approved by shareholders.  Commitments to put a long-term pill to vote the following year will no longer be considered a mitigating factor and boards with 10-year pills currently grandfathered from 2009 are no longer exempt.

Equity Compensation Plans.  ISS released new FAQs on its assessment of equity compensation plans.  The FAQs address, among other things: (a) ISS’s burn rate calculation for restricted shares granted as consideration for an acquisition and new 2018 burn rate benchmarks; (b) the impact of plans that include liberal change in control provisions; (c) ISS’s evaluation of equity plan proposals seeking approval of one or more plan amendments; (d) factors considered in ISS’s subsequent qualitative review for director equity plans that exceed plan cost or burn rate benchmarks; and (e) changes in ISS’s Equity Plan Scorecard policy, including a higher passing score for S&P 500 companies (55 out of 100 possible points, rather than 53).

Pledging.  ISS codified its policy to recommend against members of the committee responsible for overseeing pledge-related risks, or the full board, where a significant level of executive or director pledging raises concerns.

Nonemployee Director Compensation.  In a new policy on nonemployee director compensation, ISS provides that, beginning in 2019, it will recommend voting against board and/or committee members who approve or set nonemployee director compensation when there is a pattern (two or more consecutive years) of “excessive” nonemployee director pay without a compelling rationale or other mitigating factors.  While ISS does not define “excessive” pay, it will look for outliers relative to a company’s peers and the broader market.

Boardroom Diversity.  ISS applies four “fundamental principles,” including board composition, when determining its recommendations on votes for director nominees.  ISS now provides that boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.  While ISS will not consider a lack of gender diversity in making voting recommendations, it will highlight in its reports those boards with no gender diversity.

Board attendance.  ISS revised its policy regarding director attendance to exempt from its analysis directors who joined the board less than a year ago, rather than analyzing their attendance on a case-by-case basis.

Categorization of Directors.  ISS’s three categories of directors now will be called Executive Director, Non-Independent Non-Executive Director and Independent Director (replacing Inside Director, Affiliated Outside Director and Outside Director).  This change is intended to standardize terminology across global markets and involves no substantive change to the underlying standards or ISS voting recommendations.

Climate Change.  ISS generally will recommend in favor of shareholder proposals seeking disclosure about the financial, physical or regulatory risks that the company faces related to climate change and proposals addressing how the company identifies, measures and manages climate change risks.

ISS Proxy Voting Guidelines and FAQs:


Donald R. Reynolds and S. Halle Vakani are members of the Capital Markets practice group of Wyrick Robbins, which represents clients across a broad range of industries in connection with their significant financing transactions and advises public companies on SEC and stock exchange rules, securities law compliance, disclosure and corporate governance matters.  The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.