Tuesday, November 04, 2014

ISS Issues Proxy Voting Policy Proposals for 2015

[This story previously appeared in Securities Regulation Daily.]

By Amy Leisinger, J.D.

Institutional Shareholder Services Inc. (ISS), provider of corporate governance solutions, has issued draft proxy-voting policies on select topics for 2015. To ensure that the policies consider the perspectives of all interested parties, ISS requested feedback on several policy changes to its guidelines: (1) independent chair shareholder proposals and equity plan scorecards (U.S.); (2) former CEO cooling-off periods and advance notice provisions (Canada); (3) board independence and factoring capital efficiency into director elections (Japan); (4) board independence (Portugal); (5) share issuance limits (Singapore); and (6) the impact of the Florange Act (France). In a press release, ISS stated that it expects to release final versions of the draft policies in early November.

U.S. changes. In terms of U.S. policy changes, ISS proposed to implement a broader methodology for evaluating new equity plans, to employ a balancing approach as opposed to a series of pass/fail tests concerning plan cost, stock option repricing, and change-in-control provisions. The “equity plan scorecard” would evaluate plan costs and features, as well as grant practices. Specifically, evaluations of shareholder value transfer relative to peers, vesting authority and requirements, liberal share recycling, burn rate, and plan duration would be required. Under the draft proposal, the weight of the factors would be based on unique company characteristics, and certain “egregious” features would automatically result in negative voting recommendations.

In addition, ISS proposed a change concerning evaluation of independent chair proposals to provide for a more holistic review process. The proposal would add new governance factors for consideration in recommendations, including the existence of an executive chair and leadership transitions and tenure, and no single factor would automatically result in a positive or negative voting recommendation. “[A] more holistic review of each company’s board leadership structure, governance practices, and financial performance will strengthen the application of this policy,” according to ISS.

Foreign changes. For Canada, ISS proposed to subject a former CEO to a five-year cooling off period after which the individual may be deemed independent for the purposes of board service, unless another relationship exists that could interfere with the exercise of independent judgment. This change is designed to reinforce that, over time, an individual may become sufficiently distant from corporate operations so as to qualify as independent. ISS also proposed to update current policy to identify certain advance-notice provisions as unsupportable by Canadian shareholders. The proposed policy would consider recommendations on proposals to change these provisions on a case-by-case basis, taking into consideration, among other things, deadlines for notice of shareholders' director nominations, filing requirements, and board inability to waive advance-notice provisions.

As to Japan, ISS proposed to implement a new policy to recommend voting against top executives for board seats if the board does not include multiple outside directors. ISS noted that Japan’s Corporate Governance Code, to be announced in 2015, is expected to require multiple independent directors on boards and that, for large companies, this policy change “is in line with this market development.” ISS also proposed a policy to recommend against top executives at companies that have exhibited returns on equity of less than 5 percent in each of the last five fiscal years. Leadership should be held responsible for poor capital efficiency and financial performance, and this amount and timeframe represents the minimum acceptable level, according to ISS.

In addition, ISS proposed to increase the independence threshold for Portuguese boards from 25 percent to 33 percent and will recommend a vote against a candidate if the board-independence level does not meet recommendation. To reduce the risk of dilution while providing flexibility to raise capital, ISS also proposed to alter the share-issuance limits for companies for proposals to increase share capital without preemptive rights in the Singapore market. ISS also proposed to address the Florange Act’s impact on French governance by principles by limiting its recommendations in relation to the granting of double voting rights and by limiting application of current anti-takeover measures.