ISS Updates Policies

ISS updated its proxy voting policies.  The most interesting to me is the “Board Response to Majority Supported Proposals.”

The marketplace has been evolving in the matter of board responsiveness to majority-supported shareholder proposals, both in terms of institutional investors’ expectations, and in terms of the actual responsiveness by issuers. ISS’ 2012-2013
Policy Survey results show that 86 percent of the institutional investor respondents expect that the board should implement a shareholder proposal that receives support from a majority of shares cast in the previous year.

Almost half (47 percent) of issuer respondents agreed with that view as well. Issuers have been increasingly responding to shareholder proposals that received only one year of a majority of votes cast: in 2010, 37 percent of the proposals that received only one year of a majority of votes cast in 2009 were implemented (an additional 18 percent received a partial response); in 2012 thus far, 50 percent have been implemented (an additional 6 percent have been partially implemented).

Under the current policy, ISS recommends a vote AGAINST or WITHHOLD from the entire board of directors (except new nominees, who should be considered CASE-BY-CASE) if the board failed to act on a shareholder proposal that received the support of a majority of the shares outstanding in the last year, or a majority of shares cast in the last year and one of the two previous years.

Specifically, the key changes are as follows:

• Include the flexibility to recommend against members of the board as deemed appropriate, not necessarily the full board; and
• Include more guidance on the case-by-case examination of the sufficiency of a company’s action in response to a majority-supported shareholder proposal.

In addition, a majority of shares cast at a single meeting will become the trigger to evaluate a company’s response to majority-supported shareholder proposals commencing with shareholder proposals appearing on companies’ ballots in 2013.

As a result, under this transition rule, the new policy is as follows:

For meetings in 2013, ISS will recommend a vote AGAINST or WITHHOLD from individual directors, committee members, or the entire board of directors as appropriate if:

• the board failed to act on a shareholder proposal that received the support of a majority of the shares outstanding the previous year;
• the board failed to act on a shareholder proposal that received the support of a majority of shares cast in the last year and one of the two previous years.

For meetings in 2014 and thereafter, ISS will recommend a vote AGAINST or WITHHOLD from individual directors, committee members, or the entire board of directors as appropriate if:

• the board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year.

In response to comments received during ISS’ 2012 comment period, ISS notes that the application of this policy will be determined on a case-by-case basis. Responding to the shareholder proposal will generally mean either full implementation of the proposal; or, if the matter requires a vote by shareholders, a management proposal on the next annual ballot to implement the proposal. Responses that involve less than full implementation will be considered on a case-by-case basis,
taking into account:

• The subject matter of the proposal;
• The level of support and opposition provided to the resolution in past meetings;
• Disclosed outreach efforts by the board to shareholders in the wake of the vote;
• Actions taken by the board in response to its engagement with shareholders;
• The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and
• Other factors as appropriate.

ISS will release a revised FAQ document in December 2012 that provides additional guidance related to this new policy.

The updates should have a positive impact on the degree to which shareowner proposals are implemented. We should see fewer boards defying the will of shareowners. (see Sempra Defies Shareowners) Pay for performance and pledging of company stock were other areas revised by the new policies. ISS also revised policies for voting in several countries outside the US.

theCorporateCounsel.net notes blogs summarizing the development from Towers Watson, Mike Melbinger, Davis Polk, Dodd-Frank.com Blog and Just Compensation.