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Article | Executive Pay Matters

ISS launches comment period for draft 2020 policy changes

Governance Advisory Services |Executive Compensation
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By Laura Elmore and Brian Myers | October 10, 2019

Institutional Shareholder Services recently released for comment details of draft policy proposals for 2020. The comment period will remain open through October 18. 

On October 7, Institutional Shareholder Services (ISS) released details of draft policy proposal changes for 2020 and are soliciting feedback from the governance community through October 18. As it relates to the U.S. market, the focus falls outside of executive compensation-related topics, with minor updates proposed to existing policies for 2020. Proposed policy changes are targeted around the governance structure of newly public companies, independent board chair shareholder proposals, and share repurchase program proposals. While use of Economic Value Added (EVA) measures in pay-for-performance assessments was not included for public comment, it appears likely that this policy change is forthcoming.

Draft policy change #1: Problematic governance structure – newly public companies (U.S.)

The update seeks to provide clarity on policy application for newly public companies, primarily by bifurcating the policy into two distinct categories: problematic governance structure and problematic capital structure. Currently, ISS generally focuses negative vote recommendations on directors of public companies that adopted changes to bylaws or charter provisions that negatively impacted shareholder rights, or that have / have previously had a multi-class capital structure where the classes have unequal voting rights. Under the proposed changes, ISS would review problematic governance provisions or unequal voting rights structures, with consideration of “a reasonable time-based sunset” provision as a mitigating factor. The factors considered when determining if a sunset provision is reasonable include company lifespan, ownership structure post-IPO, the length of the sunset period selected (no greater than seven years) and any rationale behind why that period was selected.

Note that this policy, if updated, is expected by ISS to have minimal impact on directors.

Draft policy change #2: Independent board chair – shareholder proposals (U.S.)

Given the prevalence of shareholder proposals for independent board chairs, ISS has codified its existing policy by listing specific circumstances that make receiving a “For” recommendation more likely. According to ISS, these factors were being considered in their current assessment process.

The factors include:

  • “A weak or poorly defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role;
  • The presence of an executive or non-independent chair in addition to the CEO; a recent combination of the role of CEO and chair; and/or departure from a structure with an independent chair.
  • Evidence that the board has failed to oversee and address material risks facing the company;
  • A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or
  • Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’ interests.”

Question posed by ISS for public comment:

“What other factors would your organization consider, if any, that should be taken into account and may increase the likelihood of supporting a shareholder proposal calling for an independent chair?”

Draft policy change #3: Share repurchase program proposals (U.S.)

ISS generally supports management proposals for open-market share buybacks. With the proposed changes, ISS would codify the existing approach and also vote in favor of granting authority for open-market share repurchase plans to the board unless there are any problematic concerns specific to the company. Aggravating circumstances include greenmail (anti-takeover measure), manipulation of incentive plan metrics for increased payout, concerns around the long-term health of the company, or other factors as warranted. In addition, ISS will consider any proposals to repurchase shares from specific shareholders on a case-by-case basis.

Question posed by ISS for public comment:

“For companies solely listed in the U.S., would your organization consider other factors in determining whether or not to support a share buyback proposal (for example, the potential magnitude of the buyback as a percentage of outstanding shares, the duration of the authority, or maximum purchase price)? If yes, please specify.”

ISS is accepting comments on its draft policy updates until October 18 (5:00 p.m. ET). Comments can be submitted by emailing policy@issgovernance.com. The draft policies can be found here. Final policy updates, which may include changes beyond those in the draft release, are typically released in the second half of November, and unless otherwise noted are effective February 1, 2020.

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