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By Michael Greene
Nov. 20 — In preparation for the 2015 proxy season, Institutional Shareholder Services, Inc. held a Nov. 20 webinar to discuss some of its recently updated benchmark voting policies changes.
The webinar covered how ISS will evaluate independent chair proposals, its “scorecard” approach to evaluating equity plans, the adoption of a standalone policy related to unilateral bylaw/charter amendments and a new policy on bylaws that impact shareholders' litigation rights, such as fee-shifting bylaws.
In order to address a growing trend among boards to adopt unilateral bylaw/charter amendments, ISS has adopted a standalone policy related to these types of provisions, said Carol Bowie, ISS's Head of Americas Research.
ISS's new recommendation regarding unilateral bylaw/charter amendments states that the firm will “[g]enerally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if the board amends the company's bylaws or charter without shareholder approval in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders.”
Bowie said that ISS's recent roundtable discussion and its policy survey confirm that investors are “quite wary” of unilateral bylaw adoption that could diminish their rights.
According to ISS's 2014-15 policy survey, “72 percent of investors indicate the board should never adopt amendments that negatively impact investors' rights without shareholder approval.” The study also found, in contrast, almost half of the issuer that responded to the survey indicated that “the board should be free to unilaterally adopt any bylaw charter amendment(s) subject to applicable law”.
“We definitely saw a disconnect in perspective on this issue,” she said.
Bowie noted that ISS's new standalone policy does not necessarily mean that all unilateral bylaw changes will automatically draw a negative recommendation. Investors are comfortable when boards make unilateral “bona fide housekeeping bylaw amendments.”
ISS does not have categories that automatically draw a negative recommendation, she added. It is going depend on the nature of the bylaw and company's circumstances. “Certainly the board's rationale [for adopting the bylaw]” and “the overall impact of the bylaw” will always be key issues to consider.
When asked whether ISS will hold directors accountable for their pre-initial public offering actions after their company's IPO, Bowie stated that ISS will consider these situations on a case-by-case basis.
Directors responsible for establishing shareholder unfriendly bylaws who then continue to serve on the public company's board may very well be held accountable if their actions are determined to be egregious, she said. ISS usually gives “extra scrutiny” to companies that adopt unfriendly shareholder bylaws close to their IPOs, she added.
“More and more of these IPOs are quickly making their way into investment indexes” and shareholders might not be able to apply the “buyer beware rule,” she said.
ISS also expanded its policy on shareholder litigation rights and will now “vote case-by-case on bylaws which impact shareholders' litigation right.”
These evaluations are going to depend on several factors, including the breadth of the bylaw and how much of an impediment the bylaw is “to meritorious lawsuits that can benefit shareholders,” Bowie said.
The new recommendation also includes a general policy to “vote against bylaws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., in cases where the plaintiffs are partially successful).”
Fee-shifting, or “loser pays,” bylaws have been a lightning rod since the Delaware Supreme Court, responding to a certified question, in May found that fee-shifting provisions in the bylaws of a Delaware non-stock corporation can be enforceable.
In the aftermath of this decision, both plaintiffs' firms and academics have raised concerns regarding the impact of such bylaws. Experts have estimated that at least 24 companies have adopted one-way bylaws. A legal challenge to one such bylaw is ongoing in the Delaware Chancery Court and the Delaware General Assembly is scheduled to take up a bill in January that would prohibit all “loser pays” bylaws.
Bowie noted that in cases of fee-shifting “loser pays” bylaws the boards rationale for adopting such a provision should include disclosures regarding past harm. “If a board is concerned about frivolous shareholder litigation, [it] should be able to cite examples to demonstrate the severity of the problem.”
Despite opposition, ISS updated its policy for evaluating independent chair proposals “by adding new governance, board leadership, and performance factors to the analytical framework and to look at all of the factors in a holistic manner.”
A growing number of companies are reverting back to combining the role of CEO and chairman after originally separating the roles, said Bowie.
In an Oct. 29 letter, the Business Roundtable, an association of chief executive officers of leading U.S. companies, expressed its opposition to ISS's new holistic approach to independent chair proposals (12 CARE 1431, 10/31/14). The group claims that public company boards, not ISS, are in the best position to make the judgments ISS plans to make and that the changes will “result in a one-size-fits-all voting policy.”
ISS is not moving towards a stance that always supports independent chair shareholder proposals, said Bowie. Generally, an independent chair is beneficial, but there may be specific circumstances that warrant otherwise and companies should be able to make coherent argument for why that is the case, she added. ISS is “taking into account the company's rationale for opposing the proposals and the facts and circumstance that support it.”
Bowie also discussed ISS's new scorecard approach for evaluating equity plans. The new approach will incorporate a model including a range of factors related to “plan features and historical grant practices,” rather than “applying a series of standalone pass/fail tests” to determine whether ISS recommends the proposal. The scorecard approach will be based on a combination of factors related to costs, plan features and grant practices.
The primary reason for the new policy is to allow “a more nuanced consideration” for these programs, said Bowie. Equity incentive plans have evolved quite a bit and the new policy acknowledges that by considering more factors in a balanced way, she added.
The vast majority plans do pass but they tend to get broader and deeper opposition than other types of proposals, which indicates that some investors are not satisfied with these plans, she said.
Excessive costs will remain a critical factor but under the new policy a number of positive plan features or grant practices may help allay these concerns about costs, she said. However, she added, what may have been viewed as a reasonable cost may not ultimately compensate for insufficient practices under the new approach.
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The complete U.S. proxy voting guideline updates are available at http://www.issgovernance.com/file/policy/2015USPolicyUpdates.pdf.
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