ISS has published two FAQs that supplement its 2016 Proxy Voting Guidelines Updates for the Americas that we summarized in our client alert, "ISS Policy Changes for the 2016 Proxy Season" (December 8, 2015). The new FAQs provide guidance on voting recommendations that ISS is likely to issue for shareholder meetings held on or after February 1, 2016 based on ISS evaluation of (1) a board’s implementation of a proxy access policy and (2) proxy access nominees. Companies that have adopted proxy access policies in response to a majority-supported shareholder proposal, or are considering submitting a management proposal to shareholders for approval, may be especially interested in the policy provisions that ISS considers problematic.
Board Implementation of Proxy Access – Problematic Provisions
Where a board of directors has adopted a proxy access policy in response to a majority-supported shareholder proposal, ISS will examine whether the board of directors has implemented the major points of the shareholder proposal. ISS will also examine whether additional provisions that were not included in the shareholder proposal “unnecessarily restrict the use of a proxy access right” by shareholders. Evaluation of these points by ISS may affect ISS voting recommendations on individual directors, nominating/corporate governance committee members, or the entire board of directors.
ISS may issue an adverse recommendation if the board of directors has adopted, or management has proposed, a proxy access policy that contains material restrictions that are more stringent than those included in a majority-supported proxy access shareholder proposal with respect to the following, at a minimum:
- ownership thresholds above 3%;
- ownership duration longer than three years;
- aggregation limits below 20 shareholders;
- a cap on nominees below 20% of the board.
If the board has adopted a cap or aggregation limit that differs from what was specifically stated in the shareholder proposal, the FAQ indicates that lack of disclosure by the company regarding shareholder outreach efforts and engagement may result in negative voting recommendations by ISS.
If the board has implemented a proxy access policy, or if management has proposed a proxy access proposal, that contains restrictions or conditions on proxy access nominees, ISS will review the proxy access policy and restrictions on a case-by-case basis. ISS will view certain restrictions as potentially problematic, especially when used in combination. These restrictions include, but are not limited to:
- prohibitions on resubmission of failed nominees in subsequent years;
- restrictions on third-party compensation of proxy access nominees;
- restrictions on the use of proxy access and proxy contest procedures for the same meeting;
- how long and under what terms an elected shareholder nominee will count towards the maximum number of proxy access nominees; and
- when the right will be fully implemented and accessible to qualifying shareholders.
ISS consider two types of restrictions “especially problematic” because ISS regards them as so restrictive as to effectively nullify the proxy access right:
- counting individual funds within a mutual fund family as separate shareholders for purposes of an aggregation limit; and
- the imposition of post-meeting shareholding requirements for nominating shareholders.
Evaluation of Proxy Access Nominees
ISS has an existing policy for evaluating director nominees in contested elections. ISS has applied this policy to both proxy access nominations and proxy contests. Because the circumstances and motivation of a proxy contest may differ significantly from a proxy access nomination, ISS has modified its analytical framework to provide additional latitude for evaluation of board candidates nominated through proxy access policies. When evaluating candidates nominated pursuant to proxy access, ISS will take into account relevant factors including, but not limited to, the following:
- Nominee/Nominator-specific factors:
- nominators' rationale;
- nominators' critique of management/incumbent directors; and
- nominee's qualifications, independence, and overall fitness for directorship.
- Company-specific factors:
- company performance relative to its peers;
- background to the contested situation (if applicable);
- board's track record and responsiveness;
- independence of directors/nominees;
- governance profile of the company;
- evidence of board entrenchment;
- current board composition (skill sets, tenure, diversity, etc.); and
- ongoing controversies, if any.
- Election-specific factors:
- whether the number of nominees exceeds the number of board seats; and
- vote standard for the election of directors.