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20 November 2015 • Articles


Proxy Update – ISS 2016 Policy Updates


Proxy Updates

In late November, ISS released its policy updates for meetings on or after February 1, 2016.  You can review the ISS Executive Summary and the Policy Updates by clicking on the appropriate link.

In our view, the overall changes that ISS made to its voting policy are modest in nature.  You will find a summary of these changes below.  On the following pages we describe the updates in greater detail and the potential implications these changes may have on ISS’ recommendations.


Overboarding – Similar to Glass Lewis, ISS has updated its policy regarding director overboarding; reducing the threshold for overboarding from six boards to five boards.  The new policy will be effective starting February 1, 2017; therefore companies with directors in conflict with the new policy will have the coming year to determine how to address these potential situations.  ISS has not changed its policy for overboarding of CEOs, the threshold will remain at three boards.

Unilateral Governance Changes – ISS has changed how it will handle pre-IPO companies which adopt charter provisions that are, in ISS’ opinion, adverse to shareholder rights prior to the IPO.  ISS clarified its policy and will generally recommend against directors if adverse provisions were adopted, however, they will consider some potentially mitigating factors.

Voting for Directors – Proxy Access – ISS has added to its contested director election policy to include Proxy Access nominees.  For Proxy Access nominees, ISS will look at additional relevant factors that it believes may be important in determining its recommendation on the Proxy Access nominees.

Problematic Pay Practices – For Externally Managed Issuers (EMIs), which are commonly REITs, ISS has changed its policy and will now generally recommend against Say-on-Pay when the company provides insufficient disclosure in the proxy statement. ISS believes that the lack of sufficient disclosure does not allow for a reasonable assessment of the compensation programs and practices for EMI executives.

Hold Shares Through Retirement – ISS has clarified the factors it will use in its evaluation of these types of shareholder proposals and has consolidated the policy to eliminate a separate policy pertaining to proposals seeking retention of 75% of net shares.

Environmental and Social Issues – ISS made fairly minor updates to three of its policies relating to shareholder proposals concerning animal welfare, drug pricing and access to medicine, and climate change.

Detailed Review


ISS has changed its policy on non-CEO directors and, starting on February 1, 2017, will recommend against non-CEO directors that sit on more than a total of five public company boards; the current threshold is six.  2016 will provide a transition period before ISS will actually issue an against recommendation.  For that period of time, issuers and board members can determine how to handle the circumstance if a director sits on more than a total of five Boards.  ISS reports will only contain admonitory language throughout 2016 regarding overboarded nominees.

Unlike Glass Lewis, which changed their policy on executive directors, limiting them to a total of two boards, ISS has kept its policy for CEOs of public companies intact, allowing them to sit on a total of three public company boards.

Unilateral Governance Changes

ISS separated its policy regarding unilateral governance changes and created a new policy accounting for changes made pre-IPO.  The new policy will cause ISS to generally vote against directors if a pre-IPO company adopts a provision that is unfavorable to shareholder rights in consideration of the following:

  • The level of impairment of shareholders’ rights caused by the provision;
  • The company’s or board’s rationale for adopting the provision;
  • The provision’s impact on the ability to change the governance structure in the future (e., limitations on shareholder right to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter);
  • The ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure; and,
  • A public commitment to put the provision to a shareholder vote within three years of the date of the initial public offering.

ISS also changed the policy to explicitly state they will review directors under this policy, and the current policy relating to current public companies adopting an adverse provision, until that provision is removed or put to a shareholder vote.

Proxy Access Nominated Directors

In anticipation of Proxy Access director nominees, ISS has changed its contested director election policy to include Proxy Access directors.  In addition to the applicable factors that they consider for a contested election, ISS will also consider any additional factors which they believe may be relevant, including those specific to the company, the nominee, and whether there are more candidates than available board seats.

Included in the additional factors will be the nominating shareholder(s) reason for the nomination, whether the nominating shareholder(s) is opposed to the existing board’s outlook, or is making the nomination to address a specific concern, such as board diversity or to fill a an expertise gap on the board.

Externally Managed Issuers (EMIs)

ISS has added to its problematic pay practice policy to include insufficient compensation disclosure by EMIs.  ISS believes that without sufficient disclosure of how executives of EMIs are compensated, that ISS and shareholders cannot make a reasonable assessment as it relates to Say-on-Pay.

Hold Shares through Retirement

ISS has broadened its policy on shareholder proposals asking companies to adopt policies requiring senior executives to retain shares acquired through compensation plans through retirement.  As a result, ISS was able to eliminate its policy regarding proposals seeking retention of 75% of net shares.

ISS has clarified the policy to note that retention ratio and required retention duration are two of several factors that will be reviewed in making its recommendation.  The factors below will be taken into consideration when ISS makes its recommendation.

  • The percentage/ratio of net shares required to be retained;
  • The time period required to retain the shares;
  • Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness of such requirements;
  • Whether the company has any other policies aimed at mitigating risk taking by executives;
  • Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding period/retention ratio or the company’s existing requirements; and
  • Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus.

Environmental and Social Issues

ISS has made minor updates to the following shareholder proposal policies:  animal welfare, drug pricing and availability and climate change.

ISS updated the animal welfare policy to include requests for reports on animal welfare related risks, not just animal welfare standard.  ISS also included language regarding the company’s supplier’s treatment of animals including significant controversies, fines or litigation factors as part of its policy.  ISS added this supply chain risk criteria because in 2014 proponents started to add reporting on inhumane practices within the company’s supply chain to their proposals.

For the drug pricing and availability policy, ISS codified its current practice of evaluating a company’s potential for regulatory risks and exposure to controversies, litigation or fines.

ISS tweaked its climate change policy to clarify some of the risks that would be factored into its recommendation include financial, physical and regulatory.  ISS notes that 2015 brought new shareholder proposals relating to a company’s capital expenditures as they relate to fossil fuel and stranded carbon asset risk.  The change is meant to clarify the types of risks ISS reviews and to note that these new capital expenditure strategy and stranded carbon risk proposals will be evaluated under this policy.


Overall, the 2016 policy changes were light and pointed at specific issues; therefore only a small segment of issuers will be affected by each of the new policies.  The overboarding policy is perhaps the most critical.  Each issuer should be certain how many boards each director sits on and if any director sits on more than five public company boards, the board and that director need to be made aware of this new policy so that a decision can be made during the next year as to how to best handle the situation.

For externally managed issuers, the new policy regarding compensation disclosure should be reviewed and, as appropriate, additional information should be added to the proxy statement that discusses executive compensation in more detail than in the past or those companies may face a negative recommendation on Say-on-Pay.

We will continue to monitor these changes and let you know if we get any additional information that we believe you might find useful.  In the meantime, if you have any questions about the new policies please contact your Morrow representative or call 203-658-9400.


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