ISS’s 2015-2016 global voting policy survey indicate investors are prepared to vote against directors at companies that ignore shareholders wishes and adopt proxy access mechanisms with overly burdensome ownership requirements.
An overwhelming majority of investors said ISS should issue negative director recommendations if a shareholder proposal to provide proxy access receives majority support and a board adopts proxy access with material restrictions not contained in the shareholder proposal. 90% said an against or withhold vote in a director election would be warranted if a provision had an ownership threshold in excess of 5% or an ownership duration in excess of three years. From the ISS press release:
Survey respondents were asked, in the event that a shareholder proposal to provide proxy access receives majority support, and the board adopts proxy access with material restrictions not contained in the shareholder proposal, what types of restrictions should be viewed as sufficiently problematic to call into question the board’s responsiveness and potentially warrant negative votes on directors. Most investor respondents effectively endorsed proxy access on the terms proposed by the SEC in its proposed Rule 14(a)-11, as large majorities of investor respondents stated that an ownership threshold in excess of 3 percent or an ownership duration of greater than three years could warrant negative votes on directors. Ninety percent of investor respondents indicated that a required ownership duration of greater than three years, or an ownership threshold requirement in excess of 5 percent, could be grounds for negative votes.
Large majorities of investors (ranging from 68 percent to 80 percent) also stated that the following factors could all potentially justify negative votes on boards that imposed such restrictions:
- a cap on nominees set at less than 20 percent of the existing board;
- an aggregation limit of less than 20 shareholders;
- re-nomination restrictions in the event a proxy access nominee fails to receive a stipulated level of support;
- restrictive advance notice requirements or information disclosure requirements more extensive than those required of the company’s own nominees; and
- restrictions on compensation of access nominees by nominating shareholders.
Company respondents generally did not agree that directors should be penalized for imposing restrictions on proxy access after shareholders had approved a shareholder proposal on the topic, citing the non-binding nature of such proposals and the desirability of a company-specific approach to the issue. However, a slight majority of company respondents agreed that negative votes on directors could be warranted if the company established an ownership threshold greater than 5 percent, and 40 percent of companies stated that negative votes could be warranted for an ownership duration requirement in excess of three years.
Expect Vote Against Directors Opting for 5% Threshold
I hope ISS goes into greater detail in next year’s survey. It is unfortunate that CII’s Best Practices came out after the survey was issued. CII is tracking exactly the types of access provisions companies are adopting with the help of data compiled for the Council by the law firm of Covington & Burling. 1/3 of the U.S. companies that have adopted proxy access by private ordering have opted for a 5% threshold. They can expect votes against directors during the 2016 proxy season and proposals to amend their bylaws from proxy access proponents.