The Advisors' Blog

– Lynn Jokela

Yesterday, ISS issued updated guidance about how it will apply its proxy voting policies this year in light of the challenges companies face.  Most of the guidance clarifies existing policies and says that it will review situations on a case-by-case basis – meaning a company’s disclosure is key.  Here’s an announcement from ISS listing the policies impacted by the updated guidance – which includes annual meeting considerations, dividends, share buybacks and others.  ISS compensation policies that are impacted include:

Boards are encouraged to provide contemporaneous disclosure to shareholders of their rationales for making changes to performance metrics, goals or targets used in short-term compensation plans in response to the drop in the markets and a possible recession.

For long-term compensation plans, ISS’s benchmark voting policies generally aren’t supportive of changes to midstream or in-flight awards since they cover multi-year periods.  Accordingly, ISS will look at any such in-flight changes made to long-term awards on a case-by-case basis to determine if directors exercised appropriate discretion, and provided adequate explanation to shareholders of the rationale for changes.

Going forward, it is also possible that some boards may consider altering the structures of their long-term plans to take the new economic environment into consideration. ISS will assess such structural changes under its existing benchmark policy frameworks.

Option repricing – If boards undertake repricing actions without asking shareholders to approve or ratify their actions in a timely fashion, the directors’ actions will remain subject to scrutiny under the U.S. benchmark policy board accountability provisions (and equivalents in other market policies where relevant). If boards seek shareholder approval/ratification of repricing actions at 2020 meetings, ISS will apply its existing case-by-case policy approach for the relevant market. Under this policy for the U.S. market, for example, ISS will generally recommend opposing any repricing that occurs within one year of a precipitous drop in the company’s stock price. Among other factors, ISS will also examine whether (1) the design is shareholder value neutral (a value-for-value exchange), (2) surrendered options are not added back to the plan reserve, (3) replacement awards do not vest immediately, and (4) executive officers and directors are excluded. ISS will consider this approach to continue to be appropriate during the circumstances of the COVID-19 pandemic.

Changes to directors and senior management – for boards needing to fill vacancies or add critical expertise to address pandemic-related concerns, ISS will apply case-by-case considerations and assess any explanation provided by the company and the same case-by-case considerations will be applied when the board needs to fill senior executive roles on an interim basis.

The announcement says that ISS will update its guidance and provide new information as needed throughout the remainder of the 2020 annual meeting season as additional issues and impacts from the pandemic develop.