This week, Institutional Shareholder Services Inc. ("ISS") released its annual update (the "Update") to its Proxy Voting Guidelines (the "Guidelines") outlining its changes for annual meetings beginning February 1, 2020. These changes follow ISS's recent annual policy survey of its institutional shareholder clients and other market participants. Although we disagree with some of the Guidelines, we continue to commend ISS for soliciting and considering the views of stakeholders each year. As always, in guiding a company's engagement with its shareholders and in determining the potential impact of ISS's recommendations, we urge each company to review (a) the voting policies of each of its major shareholders and (b) the extent to which each of those holders relies on ISS (and other proxy advisers).
The shareholders' right to amend the bylaws has been the issue of Maryland law that has received the most attention over the past three proxy seasons. As you know, pursuant to a controversial change to its Guidelines in November 2016, ISS began recommending, although with very little success thus far, against members of governance committees of boards of companies that do not permit the shareholders the right to amend the bylaws directly (i.e., without board approval). (Glass Lewis does not take a position on shareholders' power to amend bylaws in its proxy voting guidelines.)
This year, ISS announced two clarifications to its bylaws policy. First, ISS will recommend against governance committee members if a company maintains "subject matter restrictions" on the shareholders' power to amend the bylaws. The Update states that subject matter restrictions, such as a prohibition on the power of shareholders to amend bylaw provisions that "govern their ability to amend the bylaws (thus preventing shareholders from being able to remove the time or ownership restrictions)" are "considered undue restrictions on shareholders' rights." At least 23 companies that have amended their bylaws in response to ISS's 2016 policy change included a provision that shareholders may not amend bylaw provisions relating to (a) D&O indemnification and (b) bylaw amendment procedures. While "ringfencing" the bylaw amendment provision will no longer be acceptable to ISS going forward, the Update is silent on whether prohibiting shareholder amendments to the D&O indemnification provision would be an "undue restriction on shareholders' rights." Further, ISS does not say how it will recommend on governance committee members of the 23 or more companies that already have such provisions.
Second, going forward, ISS will start to recommend against governance committee members if a company maintains ownership requirements in excess of SEC Rule 14a-8, even if the ownership requirements were approved or ratified by the shareholders pursuant to a management proposal, as has been the case at several companies. ISS does not say whether it will grandfather governance committee members at the handful of companies that already received shareholder approval of these provisions.
We are disappointed that ISS has further complicated the bylaws issues. We fail to see the logic or any rationale in refusing to accept the results of shareholder ratification. ISS has been promoting shareholder power to directly amend bylaws for the past three years but now refuses to accept any limitations on this power, even if approved by the shareholders. ISS appears to place a greater value on its own view of the matter than on the expressed wishes of a company's shareholders.
Finally, ISS has recently sued the SEC to contest the validity of the SEC's guidance that ISS's voting recommendations are a "solicitation" under the federal proxy rules. The SEC's position could have serious ramifications for ISS given its history of inconsistently applying its own policies. Notably, ISS grandfathered hundreds of Delaware corporations with existing supermajority requirements to amend their bylaws but would not accept similar amendments for Maryland corporations after February 1, 2017. These inconsistencies have never been satisfactorily explained by ISS. ISS's two policy changes on bylaws, discussed above, could again result in companies being treated differently based on when they adopted identical policies.
Among other important changes to ISS's Guidelines are the following:
- Diversity. As announced last year, ISS will now begin recommending against the governance committee chair if there are no women on the board. However, if a "firm commitment" to appoint a woman within one year is made in the proxy statement, it will be a mitigating factor until February 1, 2021.
- Newly Public Companies. The Update expands ISS's policy regarding newly public companies (including those resulting from an IPO, bankruptcy, spin-off or direct listing) with a multi-class voting structure. ISS will generally recommend against the entire board unless the multi-class structure is subject to a sunset provision of no more than seven years.
- Independent Board Chair. ISS already says it will "generally" recommend voting for shareholder proposals requiring that the board chair be an independent director but now lists several factors that "will increase the likelihood of a 'for' recommendation," including "the presence of an executive or non-independent chair in addition to the CEO," the failure of the board "to oversee and address material risks" and "a material governance failure, particularly . . . if the board has materially diminished shareholder rights . . . ."
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As always, our colleagues and we are available at any time to discuss these or other matters of Maryland law.
Jim Hanks
Jeff Keehn
Michael Sheehan
Josh Gorsky