January 16, 2014
Hedge Funds Launch Fight to Pay Directors: New ISS FAQs Foretell Negative Recommendations
– Broc Romanek, CompensationStandards.com
One of the big stories last year was Jana Partners’ attempt to pay directors that they were able to get voted onto a board of one of their portfolio companies. The corporate backlash was the adoption of bylaws that disqualified any directors that receive payments from outsiders. As noted in this Financial Times article, 33 companies have adopted such bylaws – and activists are fighting back. Prof. Bainbridge weighs in again on this topic.
To top this off, a few days ago, ISS issued FAQs explaining its views on director qualification/compensation bylaws. Here’s an excerpt from this Weil Gotshal memo:
ISS’ new FAQs discuss how it views a board’s adoption of a bylaw that disqualifies any director nominee who receives compensation from a third party (a “director qualification/compensation bylaw”), where such adoption was not approved or ratified by shareholders. According to the FAQs, ISS considers board adoption of director qualification/compensation bylaws without shareholder approval as a “material failure of governance because the ability to elect directors is a fundamental shareholder right…[and] [b]ylaws that preclude shareholders from voting on otherwise qualified candidates unnecessarily infringe on this core franchise right.”
Pursuant to its US proxy voting policy relating to “Governance Failures,” ISS may therefore issue a negative vote recommendation against directors individually, committee members or the entire board. In contrast, ISS stated in the FAQs that it will not recommend against directors at companies whose board has adopted bylaws precluding from board service those director nominees who fail to disclose third-party compensatory payments (for example, advance notice bylaws). According to ISS, such bylaws “may provide greater transparency for shareholders, and allow for better-informed voting decisions.”
In the event that a board seeks shareholder approval of a director qualification/compensation bylaw, ISS has stated that it will review the proposal “case-by-case…taking into consideration among other factors the board’s rationale for proposing the bylaw, whether the proposed bylaw materially impairs, and/or delivers any off-setting improvements in shareholder rights, and any market-specific practices or views on the underlying issue.” In the context of a proxy contest, ISS has stated that it considers compensation arrangements with director nominees as a factor in its case-by-case analysis.