Leading proxy advisory firm Institutional Shareholder Services has initiated its annual review of voting policies, a process that will seek out viewpoints from the global corporate governance community.

Each year, with its Benchmark Policy Consultation, ISS solicits commentary and opinions from institutional investors, issuers, and other market constituents in response to a global policy survey. The results of that survey were released in September, followed by the release of recommended policy changes, and the opening of a comment period, on Oct. 31.

Voting policy updates will be applied for shareholder meetings taking place on or after Feb 1, 2017. Comments are due by 6 p.m. EST on Nov. 10 and ISS will release final 2017 policies the week of Nov 14.

Unilateral board actions – multi-class capital structure at IPO

The solicitation for comments notes that US policy does not explicitly address director accountability with respect to a company's capital structure in place at the time of its initial public offering.

The proposed policy update is intended to clarify ISS policy in light of the fact there has been an increase in the number of companies completing IPOs with multi-class structures. Seventeen 17 companies holding their first annual meeting in 2016 (as of Aug. 30) were identified as having a multi-class share structure.

The proposed policy update generally allows for adverse director recommendations to be warranted when a company completes its public offering with a multi-class capital structure in which the classes do not have identical voting rights. Also, current policy references to putting adverse provisions to a shareholder vote as an evaluation factor for director recommendations have been removed. Instead, ISS will consider the inclusion of “a reasonable sunset provision” on the adverse capital structure or governance provisions.

Specific feedback is sought on the following matters:

What factors do you consider as an appropriate sunset provision?

Should a sunset provision always be based on duration, or is another factor such as ownership makeup considered appropriate?

What length of time do you consider appropriate for a sunset provision?

Should the terms of a sunset provision differ based on the feature being sunset (e.g., classified board vs. supermajority vote requirements vs. multi-class capital structure)? If so, how?

Restrictions on binding shareholder proposals

Shareholders' ability to amend bylaws is considered “a fundamental right,” ISS says. Under SEC Rule 14a-8, shareholders who have held shares valuing at least $2,000 for one year are permitted to submit shareholder proposals, both precatory and binding, to amend bylaws. Some states, however, allow for companies to restrict this right in their charters.


As for the policy survey that helped shape this year’s slate of policy recommendations, ISS received 439 responses, from 417 organizations. The largest number of respondents, 312, were from organizations based in the U.S., while 31 were from groups based in Canada, and 67 from groups based in Europe. Many respondents, however, have a focus that goes beyond their own home country or domicile.
U.S. survey respondents were asked whether the "overboarding" standard applying to an executive chairman who is not also the company's CEO should be the same standard as that applied to a sitting CEO (no more than three total boards) or the standard applied to a non-executive director (no more than five total boards).
Among investors, 64 percent of respondents favored the stricter overboarding standard applied to CEOs, while 36 percent favored the more lenient standard. Among non-investors, the percentages were nearly reversed, with 38 percent responding that the stricter standard should be applied, and 62 percent preferring the more lenient non-executive director standard.
Among non-investors, several commented that the executive chairman's role differs from company to company, and suggested that a chairman whose primary role is to aid in the CEO transition or foster client relationships would have more leeway to serve on outside boards than a chairman who plays a role in day-to-day management. Others rejected the idea that there should be any fixed limits on board service and indicated that all overboarding determinations should be case-by-case.
Post-IPO, post-bankruptcy
Respondents were asked whether ISS should consider recommending votes against directors at companies that go public, or emerge from bankruptcy, with a capital structure that includes multiple classes of stock with unequal voting rights given the potential for abuse and the extreme difficulty of abolishing such a structure once the company goes public.
Among investors, 57 percent supported negative recommendations, while 19 percent opposed them, and 24 percent opposed negative recommendations as long as there is a sunset provision on the unequal voting rights.
Among non-investors, 46 percent opposed negative recommendations on directors altogether, while a majority supported a negative recommendation when such provisions were put in place permanently.
Board refreshment
Investors are increasingly focusing on lengthy director tenure as a potential obstacle to adding new skill sets and diversity to boards, and as a potential risk to the independence of long-serving directors. Survey respondents were asked which tenure-related factors would give rise to concern about a board's nominating and refreshment processes; with multiple answers allowed.
Among investors, 53 percent identified an absence of newly-appointed independent directors in recent years as indicative of a problem, while slightly more than half flagged lengthy average tenure as problematic, and 68 percent responded that a high proportion of directors with long tenure is cause for concern.
In the comments, several investors identified other factors of concern, such as directors' ages, a high degree of overlap between the tenure of the CEO and the tenure of the non-executive directors, or lengthy average tenure coupled with underperformance.
Twenty-six percent of non-investors responded that the absence of newly-appointed independent directors would be cause for concern; nearly a third of non-investors stated that lengthy tenure by itself is not a concern, but conceded that a lack of board refreshment is problematic.
Say-on-pay frequency
In anticipation of the 2017 say-on-pay frequency votes mandated by the SEC, for U.S. companies that have been holding say-on-pay votes for the past six years, respondents were asked whether they favored annual, biennial, or triennial management say-on-pay proposals on ballots, or whether the frequency should depend on the company.
A large majority (66 percent) of investor respondents favored across-the-board annual say-on-pay votes, with one commenting that "an annual say on pay is just the governance norm." 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.
Annual say-on-pay votes were also favored by a plurality of non-investor respondents (42 percent).Thirty one percent of non-investors responded that the frequency should depend on company-specific factors, among them the level of shareholder support at past meetings and the presence or absence of recent problematic pay practices, were the factors most often cited by non-investors.
Several corporate respondents argued that annual votes focus too much attention on short-term results or short-term fluctuations in pay, and one senior corporate counsel commented that annual votes "may not allow enough time to adopt thoughtful changes to executive compensation," in light of the time it takes for shareholder outreach and compensation changes based on feedback from that shareholder outreach.
Executive pay assessments
A growing number of companies around the world are incorporated in one country but listed in a different country, and may be obligated to hold multiple compensation-related votes each year, such as the backward-looking advisory votes on executive compensation mandated by U.S. and U.K. law, and the forward-looking binding vote on remuneration policy required by U.K. law.
Survey respondents were asked whether, in these situations, the vote recommendations should be aligned so as not to produce inconsistent evaluations of a single pay structure.
Sixty-five percent of investors answered that the vote recommendations should be aligned, while 27 percent responded that differing recommendations would be acceptable. Eight percent favored another approach, such as aligning the recommendations to achieve the strictest evaluation, or evaluating compensation proposals using the policy of the market where the executives are based and where the company competes for talent.
Among non-investors, 59 percent responded that vote recommendations should be aligned, and 28 percent that differing recommendations would be acceptable.

Among its proposed U.S. changes, ISS will vote against or withhold from members of the governance committee if the company’s charter or articles of incorporation impose undue restrictions on shareholders’ ability to amend the bylaws. These restrictions include, but are not limited to, outright prohibition on the submission of binding shareholder proposals, share ownership requirements, and time holding requirements in excess of SEC Rule 14a-8.

Questions posed by ISS include:

Is the vote recommendation to withhold from members of the governance committee on an on-going basis sufficient?

Going forward, how would you consider boards should address this issue?

Would the introduction by a company of a super-majority vote requirement to approve binding shareholder proposals in place of a previous prohibition be viewed as sufficiently responsive?

General share issuance mandates for cross-market companies

Corporate laws in certain countries require shareholder approval for any share issuances. To avoid the need to call a special meeting every time new shares are issued, companies in these markets typically seek approval every year for a general mandate for share issuances in the coming year, up to a specified percentage of issued share capital.

A number of formerly U.S.-based companies, treated as U.S. domestic issuers by the Securities and Exchange Commission, have reincorporated to jurisdictions where such shareholder approval is required, but there is not currently a U.S. policy on general share issuance mandates. This is largely because companies incorporated in the U.S. are not required to seek approval for share issuances except in certain specified circumstances.

Where non-U.S.-incorporated, U.S.-listed companies seek approval for share issuance mandates, these are currently evaluated by ISS under the policy of the country of incorporation. Those policies are often driven by local listing rules and best practices, however, which do not generally apply to companies without a listing in that market. Meanwhile, U.S.-listed companies are subject to NYSE or Nasdaq rules on share issuances, which are not reflected in non-US policies.

ISS policy changes under consideration include recommending in favor of general share issuance authorities (those without a specified purpose) up to a maximum of 20 percent of currently issued capital, as long as the duration of the authority is clearly disclosed and reasonable. Share issuance mandates at dual-listed companies which are required to comply with listing rules in the country of incorporation will continue to be evaluated under the policy for that market.

As proposed, the new policy would effectively extend the NYSE/Nasdaq requirement for shareholder approval of issuances above 20 percent to scenarios in which the listing rules do not currently apply, such as public share issuances for cash.

Suggested questions for those submitting comments:

Do you believe that 20 percent is an appropriate threshold for such cross-market companies, or would it be more appropriate to grant a mandate for issuances up to a lower or higher level?

Should such companies seek annual approval for share issuance mandates, or would a longer mandate (2-3 years) be acceptable?

Should the same policy also apply to companies treated by the SEC as foreign private issuers?

Executive pay assessments

A growing number of companies are incorporated in one country but listed in a different country (often the U.S.) and may be required to include multiple compensation proposals on the same ballot relating to the same pay program. For example, a company incorporated in the U.K. but listed in the U.S. may have a “say on pay” advisory vote on executive compensation mandated by laws in both jurisdictions, as well as the forward-looking binding vote on remuneration policy required only by UK law.

Under ISS’ current approach, items that are on the ballot solely due to the requirements of another market (listing, incorporation, or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” market coverage. However, as the number and significance of cross-market companies have increased, both investors and non-investors have indicated a preference for aligning voting policy and recommendations for multiple proposals on the same compensation program.

Suggested policy changes would apply to U.S. domestic issuers only (foreign incorporated companies that have a majority of shareholders in the U.S., meet other criteria as determined by the SEC, and are subject to the same disclosure and listing standards as U.S. incorporated companies).

U.S. domestic issuers with multiple compensation proposals on ballot that pertain to the same pay program will be assessed on a case-by-case basis using the following guiding principle: align voting recommendations so as to not have inconsistent recommendations on the same pay program, and use the policy perspective of the country in which the company is listed (for example, U.S. say-on-pay policy for proposals relating to executive pay). If there is a compensation proposal on ballot under which there is no applicable U.S. policy, however, then the policy of the country that requires it to be on ballot would apply.

This is a limited carve out; for U.S.-listed companies. Most markets' say-on-pay proposals would be viewed from a U.S. say-on-pay policy perspective, aligned to the U.S. management say-on-pay vote recommendation.

A question posed to interested parties: How should companies that are dual-listed or have dual incorporations fit into this framework?