The National Association of Corporate Directors (NACD) sent a letter to ISS commenting on their recent policy proposal: Board Response to Majority-Supported Shareholder Proposals.
In short, we observe that this policy change may (1) interfere with a director’s fiduciary duties, (2) not accurately reflect shareholder opinion, and (3) not clearly define the phrase “act on.” We request that the Policy Board review their proposed policy with the following issues in mind.
The automatic voting recommendations interfere with the board’s fiduciary duties. Under the current proposal, ISS would recommend a vote “against or withhold” from the entire board if they fail to act on a shareholder proposal that receives a majority of shares cast in the previous year.
This proposed rule may have a coercive effect on a board’s oversight responsibilities due to its potential interference with a director’s duty to diligently and independently consider any issues raised by shareholders. The duty to act in the best interest of the corporation is fundamental to board service. Directors are not solely agents of shareholders; they must exercise their independent judgment. A director should not, for example, implement a shareholder proposal he or she believes is detrimental to the company or its governance.
The majority of votes cast may not reflect overall shareholder opinion. The proposed changes represent a significant shift from previous ISS policy. The previous policy prompts ISS action if a board did not act on a shareholder proposal that was supported by a majority of outstanding shares the previous year or a majority of shares cast the last year and in one of the two previous years. The new policy only considers a majority of shares cast in the previous year. Under this new policy, minority opinions could gain approval without actual majority shareholder support. We are concerned that this shift lowers the threshold to trigger a negative ISS recommendation. We believe a policy capable of upsetting an entire board’s composition should at least require support by the majority of outstanding shares and after sufficient time for the board to consider the matter.
The definition of “act on” is unclear. As stated in the proposal, ISS will recommend negative votes against a board if it fails to “act on” a shareholder proposal. We believe ISS needs to clarify the definition for “act on” to address partial implementation and alternative approaches. The proposed policy does not make clear if partially implemented proposals or alternative approaches will satisfy this new ISS policy. In other words, must boards be completely compliant with the shareholder proposal, or may boards show acceptable action or progress on an issue? Boards often have very legitimate reasons to alter a shareholder proposal but the proposed ISS policy fails to consider this possibility. Here again, this issue encroaches upon directors’ fiduciary duties by substituting the views of certain investors for decisions which belong to the board.
My opinion: I don’t buy the argument that a majority of votes cast doesn’t reflect overall shareowner opinion. There is no excuse for not voting. If you don’t bother to vote, don’t complain. ISS should allow for some flexibility. However, in almost all but the most unusual circumstances, directors who defy the vote of a majority of shares voted should be turned out. One current example is Sempra Energy (SRE, $SRE). The board elected Chief Executive Debra L. Reed as its new chairman, even though shareowners approved a proposal from activist Ray T. Chevedden splitting the chair and CEO positions by a vote of 55%. (More CEOs Sharing Control at the Top, WSJ, 6/6/2012)