14 April 2020
Institutional Shareholder Services (ISS), the proxy advisory firm, has issued policy guidance clarifying how they will apply the ISS Benchmark and Specialty Proxy policies during the main 2020 AGM seasons. The guidance gives increased flexibility to companies in relation to certain topics and applies globally, but should be read in combination with the relevant market and region-specific voting guidelines and FAQs, which can be found here.
- Change in performance metrics for short-term compensation - where boards look to change performance metrics for short-term compensation in response to the drop in the markets and the possible recession in the wake of the crisis, the ISS encourages contemporaneous disclosure to shareholders of the rationale for such changes.
- Change in performance metrics for long-term compensation - the ISS is not generally supportive of changes for ‘in-flight’ awards as they cover multi-year periods, so will look at such changes on a case-by-case basis to see if directors exercised appropriate discretion and provided adequate explanation to shareholders of the rationale for changes. The ISS will assess any structural changes to long-term plans, which seek to account for the new economic environment, under the existing benchmark policy framework.
- Option repricing - given the fall in stock price, companies may seek to reprice, replace, exchange or cancel and re-grant “out-of-the-money” or “underwater” options. If boards seek to do this without asking shareholders to approve or ratify this in a timely fashion, directors will be scrutinised under the relevant ISS benchmark policy board accountability provisions. If boards seek shareholder approval or ratification of repricing at the 2020 meetings, the ISS will apply the relevant existing case-by-case policy approach. For example, in the U.S., the ISS will generally recommend any opposing repricing that occurs within one year of a precipitous drop in the company's stock price, but will take a range of factors into account before making a decision.
Selected other points
- AGMs - ISS supports a focus on health and safety and recognises that physical meetings may not be possible. Companies should use standard disclosure documents (e.g. proxies; accounts), press releases and websites to notify stakeholders of material developments, and electronic engagement with shareholders (e.g. via conference calls) is welcomed. The ISS will also not discourage or make adverse voting recommendations against companies holding “virtual-only” meetings until it is safe to hold in-person meetings, but if a “virtual-only” meeting is used, the ISS encourages disclosure of the rationale (e.g. due to COVID-19) and for shareholders to have a meaningful opportunity to participate.
- Changes to the Board or Senior Management - if vacancies need to be filled due to the disability or incapacity of a director or senior manager, or there is a need to urgently add critical expertise, the ISS will consider this on a case-by-case basis and will assess the company’s explanation. The ISS believes boards should have broad discretion during the crisis to ensure the right team is in place and will adjust the application of their policies as appropriate for the current exceptional circumstances.
- Dividends - the ISS recognises the ongoing market downturn and the need to manage cash has caused some boards to consider whether to continue to pay dividends, and further recognises that some government assistance programs prohibit (or may prohibit) dividend payments for companies benefitting from assistance. The ISS supports broad discretion for boards to set dividend pay-out ratios below historic levels or customary market practice but, when reviewing such proposals, will consider if the board discloses plans to use preserved cash from dividend reductions to support and protect the business and workforce.
- Share repurchases - boards may open themselves and their companies up to intense criticism and reputational damage by undertaking repurchases at this time, especially if the company’s workforce has suffered cutbacks. The ISS asks directors to consider the reputational, regulatory and business risks that exercising any existing authority to undertake a share buyback might create, even if shareholders approved that authority. That said, the ISS notes that, absent any barring regulation or serious concerns, they will generally continue to recommend in favour of repurchase authorities within customary limits for each market, but states that any repurchases in 2020 will be reviewed in advance of the next AGM to consider if directors managed risks responsibly for any share repurchases undertaken.
- Share issuances - the ISS generally provides for case-by-case recommendations on proposals to increase the number of shares of common or preferred stock authorised for issuance. The existing policy will be applied to general authorisation and share issuance requests but will be adapted to account for appropriate local market regulatory relaxations or new guidance as a result of the crisis.
The ISS understands the difficult position that boards and companies are currently in and the new policy guidance seeks to reduce the pressure by providing useful flexibility in a number of areas where the ISS would have normally challenged companies which failed to comply with the voting guidelines. Companies that have a shareholder-base influenced by the ISS should read the policy guidance in detail, alongside the existing applicable market and country specific voting guidelines.
It is notable, however, that there is not much additional flexibility with regard to remuneration. The ISS appears to be cautiously open to changes for short-term compensation but is clearly less open for changes to long-term compensation structures and to option repricing. If a company wishes to make changes to long-term compensation, or if they wish to reprice or exchange underwater options in any way, this should be approached with care. It is not guaranteed that the ISS will show any flexibility to these proposals.
Some of the other changes, such as in relation to AGM and board / senior management positions will help to reduce the operational burden for companies. It is important for companies that rely on this flexibility to note where the flexibility ends and take note of any expected enhanced disclosure and the prospect of enhanced scrutiny afterwards.
The ISS has noted that, as the situation develops, laws change, and issues are identified by investors or companies, the guidance will be updated as needed during the 2020 main proxy seasons. The ISS has also noted that, looking beyond the current short-term crisis, and in advance of the 2021 main proxy seasons, the ISS will consult with stakeholders to address whether further near- or long-term adjustments to their policies will be appropriate for 2021. We will keep you updated if we hear of any further changes.
If you would like to discuss the implications of this new guidance, or of COVID-19 on your incentives more generally, please do let us know.