& Securities

ISS has released its proposed proxy voting policy changes for the 2020 proxy season and is seeking comments by 5:00 p.m. EDT on October 18, 2019. ISS’s proposed policy changes, questions for comment and details about how to participate in the comment process are available here. ISS’s final 2020 policies are expected to be released during the first half of November and will apply to meetings held on or after February 1, 2020. The proposed policy changes generally clarify or codify existing ISS practices.

As we discussed here, in its Annual Policy Survey, ISS sought feedback on topics such as director overboarding, director diversity, economic value added (EVA) framework for analyzing compensation and climate change. None of these topics is addressed in the proposed 2020 U.S. policy changes. Rather the proposed policy changes for the U.S. focus on the following:

Multi-Class Structure and Other Problematic Governance Practices for Newly Public Companies – REVISED / NEW

Citing an increasing number of newly listed companies that have multi-class capital structures providing disparate voting rights and to provide clarity on policy application to newly public companies, ISS is proposing a stand-alone policy on “Problematic Capital Structures.” At the same time, ISS is proposing to revise its current “Problematic Governance Structure” policy for newly public companies to remove factors specific to multi-class capital structures. These policies generally apply to companies that complete traditional initial public offerings, direct listings, spin-offs or that emerge from bankruptcy.

Under the new Problematic Capital Structure policy, ISS would recommend against or to withhold votes from the full board (other than new nominees, who would be considered case by case) if, prior to or in connection with the company’s public offering, the company or its board adopted a multi-class capital structure with unequal voting rights and without a reasonable time-based sunset. In assessing the reasonableness of a sunset provision, ISS would consider:

• the company’s lifespan;
• the company’s post-IPO ownership structure; and
• the board’s disclosed rationale for the sunset period selected (note, however, that no sunset period of more than seven years will be considered reasonable).

Under the revised Problematic Governance Structure policy, ISS would recommend against or to withhold votes from the full board (other than new nominees, who would be considered case by case) if, prior to or in connection with the company’s public offering, the company or its board adopted provisions in its organizational documents that are considered materially adverse to shareholder rights, including:

• supermajority vote requirements to amend charter or bylaws;
• a classified board structure; or
• “other egregious provisions.”

ISS would consider a reasonable sunset provision on these provisions as a mitigating factor.

Independent Board Chair Shareholder Proposals – REVISED

Citing that calls for independent board chairs remain among the most common shareholder proposals, ISS is not changing its policy of generally recommending in favor of an independent board chair proposal. It is proposing a policy update to clarify the factors that would hold the most weight with ISS when determining whether to support a shareholder proposal requiring an independent chair. ISS is also seeking feedback on any other factors that should be taken into account.

The following proposed factors would improve the likelihood of a “for” recommendation:

• 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 recombination 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;
• A material governance failure, such as failure to respond to shareholder concerns or materially diminishing shareholder rights; or
• Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’ interests.

ISS plans to update its Policy FAQ document to include an overview of its proposed analysis of independent chair proposals.

Share Repurchase Program Proposals– REVISED

A shareholder vote is required for certain U.S. financial institutions and U.S.-listed foreign companies to implement share buybacks. Citing that U.S. shareholders are generally supportive of share buybacks when there is no specific cause for concern, ISS is asking for feedback on a modified policy relating to management proposals on share buyback programs that require shareholder approval. The proposed policy would apply to all companies listed solely in the U.S. regardless of where incorporated.

Currently the policy provides that ISS will generally recommend in favor of management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms. Under the revised policy, ISS would also generally recommend in favor of management proposals seeking authority for the board to conduct open-market share repurchases. In each case, ISS’s recommendation would depend upon there being company-specific concerns about greenmail, inappropriate manipulation of incentive compensation metrics, the company’s long-term viability, or other specific factors. The revised policy would also clarify that ISS would evaluate management proposals to repurchase shares from specific shareholders on a case by case basis, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.

ISS expects that the proposed changes may result in an increase of recommendations in favor of share repurchase proposals of companies incorporated outside, but listed in, the U.S.

What to Do Now

• Consider providing comments to ISS on the proposed policy changes before the deadline on October 18, 2019 via email to policy@issgovernance.com.
• Any company that will be going public, whether by traditional IPO, direct listing, spin-off or emergence from bankruptcy, should carefully consider its proposed governance profile and capital structure in light of the potential implications of ISS recommendations regarding future director elections.
• Companies that have received an independent chair proposal in the past, or could expect such a proposal, should consider whether any of the identified factors exist at the company and whether to address them ahead of proxy season.
• Companies that are listed in the U.S. but incorporated elsewhere and are required to obtain shareholder approval for share repurchases under local law should consider supporting the new policy, which could result in increased ISS support for share repurchase program proposals.