ISS Issues New Voting Policy Guidance in Light of COVID-19 Pandemic
Date: April 13, 2020
On April 8, 2020, Institutional Shareholder Services Inc. (ISS) issued new guidance regarding the application of its voting policies in light of the novel coronavirus disease (COVID-19) pandemic. The new guidance addresses updates to ISS’s approach regarding the following topics.
Annual Meeting and Director-Related Matters
Given the risks created by the COVID-19 pandemic, many companies have recently announced their intention to hold “virtual-only” shareholder meetings, which are permitted in more than half of the states. In many jurisdictions, including the United States, ISS does not recommend voting against companies holding virtual-only meetings, and this position has not changed. For the limited markets where ISS policy discourages virtual-only meetings, ISS’s updated guidance states that it will, in specific circumstances, revise its policy and not recommend adverse votes against such companies “until such time that it is safe to hold in-person meetings again.”
ISS encourages companies holding virtual-only meetings to clearly indicate that the reason for doing so is due to the impact of COVID-19 and to ensure that shareholders have a “meaningful opportunity” to participate in the meeting. In addition, ISS encourages boards to commit to return to in‑person or “hybrid” shareholder meetings as soon as practicable.
Several companies have opted to postpone their annual meetings (i.e., to change the date of the meeting prior to it being convened), which, depending on the state law and the timing of the postponement, may require companies to set a new record date for the meeting, provide timely notice to shareholders, and potentially re-mail proxy materials.
In the updated guidance, ISS recognizes that such postponements may be necessary in light of “health and safety concerns” and encourages companies to keep shareholders informed (such as through SEC filings or other public disclosures and press releases) and to engage with shareholders and investors through webcasts, conference calls, and other electronic modes of communication.
In the updated guidance, ISS acknowledged ongoing health and safety concerns related to attending in-person shareholder meetings and indicated that it will be open to alternative forms of director attendance, such as telephonic or electronic participation, where accompanied by disclosures explaining the alternative method of attendance. Such disclosures should provide shareholders with enough information to enable them to make “informed judgments and considered voting decisions” about directors’ attendance or absence from meetings.
Changes to the Board of Directors or Senior Management
ISS believes that boards should have “broad discretion” to ensure that they have “the right team in place” to address the crisis. As such, pursuant to the updated guidance, ISS will be flexible in applying policies and guidelines relating to director independence, potential “overboarding,” diversity and other attributes, as well as in cases where directors serve as senior executives on an interim basis. ISS stressed that its existing guidelines grant its analysts “discretion and flexibility” when evaluating COVID-19-related changes to the board of directors (such as filling vacancies due to disability or incapacity of directors or adding members that provide “critical expertise”), and that such changes will be assessed on a case-by-case basis in light of the rationale for the change.
Poison Pills and Other Defensive Measures
According to the April 8, 2020 guidance, ISS’s approach to evaluating poison pills remains unchanged, as its existing approach is “already appropriately flexible to take account for the adoption of poison pills in the face of genuine, short‑term potential threat situations such as during the current pandemic.”
In the past, ISS has recommended that shareholders vote against pills with triggers lower than 20%. However, in recent weeks, a large number of corporations have adopted poison pills, the majority of which have triggers of 10% or less. Corporations should be sure to have a compelling rationale for whatever trigger they choose. The lower the threshold, the more scrutiny that is expected and the more compelling the rationale should be. Boards should also consider whether they want to adopt two-tier poison pills, which set higher triggers for passive investors.
Boards should likewise be sure that any pill they adopt to address the current crisis has an appropriately short-term duration. In light of the nature of the current crisis, boards may want to consider pills with a duration of six to nine months.
Finally, boards should be aware that ISS’s pre-existing policy is to recommend voting against or withhold from all incumbent nominees if a company has a poison pill with a term of more than one year that was not approved by shareholders. However, if the term of the poison pill is one year or less, ISS will evaluate “on a case-by-case basis considering the disclosed rationale for adopting the plan and other relevant factors (such as a commitment to put any future renewal of the pill to a shareholder vote).”
As always, companies should expect that ISS will continue to watch for abusive or opportunistic pills designed to entrench corporate officers rather than protect the company in a volatile market.
Changes in Metrics/Shifts in Goals or Targets
Many boards are considering whether to modify performance goals or targets under short-term incentive plans to reflect the financial crisis. Even though shareholders will not be asked to consider any such changes until future shareholder meetings, ISS encourages boards to provide contemporaneous disclosure to shareholders of the rationale for such changes. For long-term plans, ISS’s policies generally do not support changes to midstream or in-flight awards. Accordingly, ISS will review any such in‑flight changes to long-term awards on a case-by-case basis to determine whether directors exercised appropriate discretion and provided adequate explanations of the rationale for any such changes. ISS also will review any structural changes to long-term plans designed “to take the new economic environment into consideration” under its existing policies.
The financial crisis resulting from the impact of COVID-19 has not softened ISS’s position on stock option repricing. ISS confirmed that it will apply its existing case-by-case policy approach to boards seeking shareholder approval of repricing actions at 2020 meetings. Under this policy for the U.S. market, ISS generally will recommend opposing any repricing that occurs within one year of a precipitous drop in the company's stock price.
Capital Structure and Payouts
Many boards are assessing whether to continue paying customary dividends in light of the pandemic-related market downturn, as well as prohibitions on dividend payments under certain government-assistance programs. Although certain market-specific policies favor dividend payout ratios within a certain range, for 2020, ISS “will support broad discretion for boards that seek to set payout ratios that may fall below historic levels or customary market practice.”
As a practical matter, companies desiring to change their dividend practices should review applicable state law and assess whether any issues may arise under their governing documents, federal securities laws, and applicable stock exchange rules.
Companies are also assessing whether to continue share buybacks and many have already put such programs on hold. In the updated guidance, ISS warned that, in light of “the economic uncertainty facing many companies and industries, boards may open themselves and their companies up to intense criticism and reputational damage by undertaking repurchases at the current time, especially (although not only) if the company’s workforce has been reduced or has suffered other kinds of cutbacks.” While ISS will generally continue to recommend in favor of repurchase authorities within customary limits, it indicated that it will review repurchase actions during 2020 prior to the next annual shareholders’ meeting to determine whether “directors managed risks in a responsible fashion for any repurchases” made pursuant to the repurchase authority.
The economic repercussions of the COVID-19 pandemic will likely require many companies to engage in capital-raising transactions. Existing ISS policies generally provide for a case-by-case assessment of requests to increase authorized common or preferred stock, share issuances, private placements and other related proposals.
For share authorization and issuance proposals, ISS will also take into account any appropriate local market regulatory relaxations or new guidance as a result of the crisis. In addition, in light of the pandemic, and if a board gives a “clear and compelling justification,” ISS may recommend voting for proposals that exceed normal market-specific limits and dilution.
For private placements, ISS will also consider any “exceptional circumstances,” such as going concern issues or the possibility of the company going out of business or filing for bankruptcy protection if the transaction is not approved.
FOR MORE INFORMATION
For more information, please contact:
Jennifer A. Val
J. Shane Starkey
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