Institutional Shareholder Services, a leading proxy advisor, has launched of its 2016 benchmark voting policy consultation period. The open comment period, to solicit views from governance stakeholders globally on proposed voting policies for 2016, runs through Nov. 9. Comments will be taken into consideration as ISS formulates updates to its voting policies for shareholder meetings taking place on or after Feb. 1, 2016. Final 2016 policies will be released on Nov. 18.
The annual consultation follows the release last month of ISS’ 2016 policy survey results. What follows are topics and proposed policy changes, specific to the United States, that ISS is seeking comment on.
Unilateral Board Actions
There has been a continued increase in the number of unilateral amendments made by boards to U.S. company charters and bylaws without shareholder approval or ratification that diminish shareholder rights or otherwise negatively impact shareholders, ISS says.
The proposed policy update will explicitly state that when a board unilaterally amends the company bylaws or charter to either classify the board or establish super-majority vote requirements in any period after completion of a company's initial public offering, ISS will generally issue adverse vote recommendations for director nominees until such time as the unilateral action is either reversed or is ratified by a shareholder vote.
ISS is also considering a policy providing that, when a board amends the bylaws or charter prior to or in connection with the company's initial public offering to classify the board and establish super-majority vote requirements to amend the bylaws or charter, it will generally issue adverse vote recommendations for director nominees at subsequent annual meetings following completion of the initial public offering.
According to a 2014-2015 Public Company Governance Survey conducted by the National Association of Corporate Directors, directors of public companies committed an annual average of 278 hours to board-related matters in 2014. A review of NACD's annual surveys reveals the average director time commitment has grown by 46 percent, from 190 hours in 2005 to 278 hours in 2014.
“There is a need to balance the additional insight gained by directors' participation on different boards with the need to limit the number of commitments so as to allow directors sufficient time for the preparation, attendance and participation at board and committee meetings,” ISS says. Directors are considered overboarded if they sit on a number of boards which could result in excessive time commitments and an inability to fulfill their duties. Increasingly, companies consider concerns about over-committed directors and some have adopted policies limiting the number of boards on which their directors may serve.
ISS' current policy calls for a vote against or withhold from individual directors who sit on more than six public company boards, or are CEOs of public companies who sit on the boards of more than two public companies besides their own.
Proposed revisions would lower the acceptable numbers of board positions. For CEOs with outside directorships, there would be a limit of one outside public company directorship besides their own. For directors who are not the CEO, ISS is evaluating two options, including lowering the acceptable number of total public boards from the current six (the board under consideration plus five others) to a total of either five (the board under consideration plus four others), or four (the board under consideration plus three others).
There would be a proposed one-year grace period until 2017 during which time ISS would include cautionary language in our research reports but would not issue a negative vote recommendation solely because a director was considered overboarded under the revised policy.
Compensation at Externally-Managed Issuers
Like most U.S. public companies, externally-managed issuers (EMIs) are required to hold periodic say-on-pay votes. However, unlike most other companies, an EMI typically does not directly compensate its executives. Instead, executives are compensated by the external manager, which is reimbursed by the EMI through a management fee.
“EMIs typically do not disclose with sufficient detail the compensation arrangements and payments made to executives on behalf of the external manager,” ISS says. “When executive compensation information is disclosed, the extent of such disclosure varies by company, but is usually limited to the aggregate management fees paid by the EMI to the manager. Without sufficient disclosure regarding the structure of executive compensation arrangements and payments made to the executives, it is impossible for shareholders to assess pay programs and their linkage to company performance.”
Policy changes under consideration would mean that ISS generally recommends "against" the say-on-pay proposal (or compensation committee members, the compensation committee chair, or the entire board in the absence of a say-on-pay proposal on ballot) in cases where a comprehensive pay analysis is impossible because the EMI provides insufficient disclosure about compensation practices and payments made to executives on the part of the external manager.
The complete draft policies can be downloaded here.