ISS Guidelines for 2015 Proxy Season – More Holistic Review of Board Leadership Structure

On November 6, 2014, ISS released its 2015 proxy voting guidelines which update its benchmark policy recommendations. The updated policies will be effective for shareholder meetings held on or after February 1, 2015. Benchmark policy changes include ISS’ adoption of a more holistic approach to shareholder proposals calling for independent board chairs. ISS has focused on board leadership because shareholder proposals related to this issue have become quite frequent. ISS also cited a recent study finding that “retention of a former CEO in the role of chair may prevent new CEOs from making performance gains by dampening their ability to make strategic changes at the company” as one of the reasons for the policy update.

ISS has updated its “Generally For” policy with respect to such proposals to add new governance, board leadership, and performance factors to the analytical framework and to look at all of the factors in a holistic manner. Factors, which are not explicitly considered under the current policy, include the “absence/presence of an executive chair, recent board and executive leadership transitions at the company, director/CEO tenure, and a longer (five-year) total shareholder return (TSR) performance period.”

Under the new policy, ISS would recommend to generally vote “FOR” shareholder proposals requiring that the chairman’s position be filled by an independent director, taking into consideration the following:

  • The scope of the proposal (i.e., whether the proposal is precatory or binding and whether the proposal is seeking an immediate change in the chairman role or the policy can be implemented at the next CEO transition);
  • The company’s current board leadership structure (ISS may support the proposal under the following scenarios: the presence of an executive or non-independent chair in addition to the CEO; a recent recombination of the role of CEO and chair; and/or departure from a structure with an independent chair);
  • The company’s governance structure and practices (ISS will consider the overall independence of the board, the independence of key committees, the establishment of governance guidelines, board tenure and its relationship to CEO tenure; the review of the company’s governance practices may include, but is not limited to, poor compensation practices, material failures of governance and risk oversight, related-party transactions or other issues putting director independence at risk, corporate or management scandals, and actions by management or the board with potential or realized negative impact on shareholders);
  • Company performance (ISS’ performance assessment will generally consider one-, three, and five-year TSR compared to the company’s peers and the market as a whole); and
  • Any other relevant factors that may be applicable.

Board Diversity and Political Contributions Disclosure Continue to Get ISS Support

On December 19, 2013, ISS published its U.S. Proxy Voting Summary Guidelines that are effective for meetings of stockholders held on or after February 1, 2014.  This blog post highlights ISS’ position on two social issues: board diversity and political contributions.  

Board Diversity

Consistent with its guidelines last year, ISS continues to recommend voting for stockholder requests for reports on a company’s efforts to diversify the board unless:

  • the gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and
  • the board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company.

ISS will make recommendations on a case-by-case basis on proposals asking a company to increase the gender and racial minority representation on its board.  In providing its recommendation, ISS will take into account the following factors:

  • the degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
  • the level of gender and racial minority representation that exists at the company’s industry peers;
  • the company’s established process for addressing gender and racial minority board representation;
  • whether the proposal includes an overly prescriptive request to amend nominating committee charter language;
  • the independence of the company’s nominating committee;
  • whether the company uses an outside search firm to identify potential director nominees; and
  • whether the company has had recent controversies, fines, or litigation regarding equal employment practices.

Political Contributions

In connection with proposals related to political contributions, ISS continues to generally recommend voting for proposals requesting greater disclosure of a company’s political contributions and trade association spending policies and activities, considering:

  • the company’s current disclosure of policies and oversight mechanisms related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes, including information on the types of organizations supported and the business rationale for supporting these organizations; and
  • recent significant controversies, fines, or litigation related to the company’s political contributions or political activities.

However, recognizing that businesses are affected by legislation at the federal, state and local level, ISS recommends voting against proposals barring a company from making political contributions. ISS is being practical and concedes that barring political contributions can put the company at a competitive disadvantage.