Institutional Shareholder Services Inc. (ISS), the most influential proxy adviser in the US, has issued updates to its proxy voting policies for shareholder meetings held on or after February 1, 2011. The update highlights some hot issues that will appear in proxies over the the 2011 proxy season, and ISS's reactions to them. This lengthy update is summarized by ISS in "2011 Corporate Governance Policy Updates and Process: Executive Summary," a 14 page document describing the issues, the changes in ISS recommendations, and, to some extent the process by which ISS developed its proxy voting policy.
Holly Gregory of Weil, Gotshal & Manges LLP has done the hard work of going through the executive summary, as well as the policies themselves, to give us an analysis of the proxy issues, and some of the implications of ISS's related revised proxy policy. In particular, Ms. Gregory looks at:
- New Policy on Say-on-Pay Frequency. Under a new policy, ISS will recommend that shareholders vote in favor of companies presenting a say-on-pay vote opportunity annually rather than every two or three years.
- New Policy on Golden Parachute Advisory Votes. A new policy outlines the factors that ISS will consider in evaluating golden parachute compensation arrangements in merger and acquisition transactions.
- Revised Policy on "Problematic Pay Practices:" Applies to Say-on-Pay Advisory Vote. Under its revised policy, ISS has shortened the list of what it considers the “most egregious” pay practices, but will no longer accept future commitments to remedy problematic pay practices to prevent or reverse a negative vote recommendation.
- Revised Policy on Directors with Attendance Below 75%. ISS has revised its attendance policy by narrowing the reasons that will excuse director failures to achieve a 75% attendance record so as to avoid a negative vote recommendation. The revised policy also removes the private disclosure option for explaining absences.
- Revised Policy on Boards that Fail to Act on Majority-Supported Shareholder Proposals. Under its revised policy, ISS will recommend that shareholders vote against or withhold votes for an entire board when the board fails to act on a shareholder proposal that received approval by a majority of votes cast twice within three years.
- Revised Application of Benchmark Policies for "Redomesticated" Domestic Issuers. ISS will now apply its US benchmark policies to companies that are incorporated outside the US but file proxy statements, 10-K annual reports, and 10-Q quarterly reports, and thus are considered domestic issuers by the SEC.
- Revised Policy on Increasing Authorized Stock. ISS has revised its policy to clarify the circumstances in which proposals to increase the number of authorized shares will be supported or rejected, and has revised the factors that will be considered when proposals are evaluated on a case-by-case basis.
- Revised Policy on Reverse Stock Splits. Under the revised policy, ISS will no longer support all management proposals to implement a reverse stock split to avoid delisting.
- Revised Policy on Proposals Seeking Shareholder Ability to Act by Written Consent. ISS’ policy to generally recommend in favor of proposals that provide shareholders with the ability to act by written consent has been revised to consider such proposals on a case-by-case basis if the company has certain recommended governance practices and takeover defenses in place
- Revised Policy on Voting against Certain Amendments and Poison Pills to Protect NOLs. The revised policy recommends against management proposals to adopt a protective charter or bylaw amendment or poison pill for the purpose of protecting NOLs if the effective term of the protective amendment or pill would exceed three years or the exhaustion of the NOL. ISS believes that given the low ownership thresholds typically involved, shareholders want to ensure that such an amendment or pill does not remain in effect permanently.
- Revised Policy on Voting against Equity Compensation Plans when Company Exceeds Burn Rates. The policy to vote against equity plans that exceed certain burn rates was revised to minimize the year-to-year changes possible in burn rate caps in order to compensate for recent market volatility. The year-over-year burn rate cap changes will be limited to a maximum of +/-2% of the prior year's burn rate cap. ISS will publish an updated burn rate calculation table in its 2011 Summary Guidelines, to be released in December 2010.
For those interested in proxy voting issues, Ms. Gregory's memorandum will provide some much-needed insight into the policy changes promulgated by ISS, a proxy advisory firm with great influence on proxy voting practices and outcomes.
Ms. Gregory's memorandum is available at: http://www.weil.com/files/upload/Weil_Alert_SEC_CG_December_2010.pdf