Are Tighter “Overboarding” Standards Coming in Revised ISS Policies?

C-SuiteNearly two-thirds of investors say executive chairs who aren’t also CEOs should face the same limits on the number of boards they can serve on as chief executives, according to a survey conducted by a leading proxy advisory firm.

The investor preference for tighter overboarding standards for executive chairs is among the most interesting findings in Institutional Shareholder Services Inc.’s annual Global Benchmark Voting Policy Survey. The results are likely to inform any changes that ISS makes to its voting policies later this year.

The 2016 survey, which solicited feedback on a variety of corporate governance and executive compensation-related issues, reflects 439 total responses, “of which 120 were from institutional investors, one-third of whom each own or manage assets in excess of $100 billion,” according to an ISS press release.  In addition, ISS received responses from 270 members of the corporate community.

Some of the key findings include:

Overboarding – Addressing the issue of an executive chair who is not also the CEO, ISS asked, “Should executive chairs be evaluated for overboarding purposes under the same standard as a CEO (no more than three total boards) or under the same standard as the non-executive directors (no more than five total boards)?”

  • Results: Among investors, 64 percent favored the tighter overboarding standard, while 36 percent favored the more permissive standard. For non-investors, it was switched—38 percent indicated that the stricter standard should be applied, and 62 percent want the more lenient non-executive director standard.

Multi-Class Structure for IPO Companies – ISS asked whether they should vote “against the directors if the company, when it goes public or emerges from bankruptcy, has a structure that includes multiple classes of stock with unequal voting rights?”

  • Results: According to ISS, “Among investor respondents, 57 percent supported negative recommendations against such post-IPO board members, while 19 percent opposed them, and 24 percent opposed negative recommendations when sunset provisions would eliminate the unequal voting rights at some point in the future. Among non-investors, 46 percent opposed negative recommendations on directors altogether, while a majority either supported such recommendations (24 percent), or opposed such recommendations as long as the unequal voting rights are subject to sunset (31 percent).

Board Refreshment – The survey inquired as to which board tenure factors would cause concern regarding “a board's nominating and refreshment processes.”

  • Results: According to ISS, “Among investors, 68 percent responded that a high proportion of directors with long tenure is cause for concern. More than one-half of the investors identified an absence of newly-appointed independent directors in recent years (53 percent) and lengthy average tenure (51 percent) as problematic. Just 11 percent of investors said that tenure is generally not a concern, although several of these investors also indicated that an absence of newly-appointed directors is a concern.”

Say-on-Pay Frequency – Next year marks the second “say-on-pay” frequency votes for many companies on the minimally required six-year voting cycle.  As such, ISS sought feedback on the frequency of the vote and factors that should impact that frequency.

  • Results: According to ISS, “A large majority (66 percent) of investor respondents favored across-the-board annual say-on-pay votes. Eleven percent and 7 percent favored biennial and triennial votes, respectively. The remaining 17 percent of investors believe that the frequency should depend on company-specific factors, of which financial performance and the presence or absence of recent problematic pay practices were flagged by the greatest number of investors. Annual say-on-pay votes were also favored by a plurality of non-investor respondents (42 percent), while 7 percent and 19 percent preferred biennial and triennial votes, respectively. Thirty-one percent of non-investors responded that the frequency should depend on company-specific factors, and the level of shareholder support for say-on-pay at past meetings, as well as the presence or absence of recent problematic pay practices, were the factors most often cited by non-investors.”

In late October, ISS will release and seek public comment on a draft of its revised voting policies.  The final policies will be released in mid-November and be applicable to annual meetings occurring on or after Feb. 1, 2017.

The full survey results are available here.