ISS recently issued guidance on how it will apply its Benchmark and Specialty Proxy Voting during the 2020 annual meeting season in light of the COVID-19 pandemic. The ISS guidance generally provides some flexibility and supports the discretion of boards as they address certain corporate governance matters during this time of significant challenges and uncertainty and stresses shareholder disclosure of such decision-making and the supporting rationale. The full text of the guidance can be found here.

Annual Shareholder Meetings, Director Attendance and Leadership Changes

• Meeting Postponements:
  • Many annual meetings have been postponed due to COVID-19, especially in jurisdictions that do not allow virtual meetings. Companies must follow applicable regulatory guidance and hold physical meetings only when it is safe to do so.
  • Because meetings may be delayed for weeks or even months, companies should continue to keep shareholders and all other constituencies informed about material events and developments. A company’s use of webcasts, conference calls and other modes of electronic communication to engage with its shareholders and investors will be positively noted by ISS.
• Virtual Meetings:
  • ISS does not have a policy to recommend votes against director nominees of U.S. companies that hold “virtual-only” meetings, and ISS has confirmed it will not recommend votes against companies that hold virtual-only meetings.
  • ISS has tended to favor “hybrid” meetings (physical meetings combined with virtual participation). However, due to COVID-19, ISS recognizes that virtual-only meetings may be necessary and desirable (if permitted under applicable local laws).
  • ISS recommends that boards choosing to hold virtual-only meetings should (i) clearly state the reasons for the decision, including if it is in response to COVID-19; (ii) provide shareholders with a “meaningful opportunity” (subject to applicable law) to participate “as fully as possible” (e.g., Q&As and/or dialogue with directors and senior management); and (iii) return to in-person meetings or hybrid meetings as soon as it is safe to do so, or allow shareholders to vote on the format of future meetings.
  • For more information, see BakerHostetler’s discussion about virtual-only meetings during the COVID-19 pandemic.
• Director Attendance:
  • In the U.S., telephonic/electronic participation is considered full participation in board and committee meetings, both for state law purposes and for disclosure purposes. ISS suggests that company disclosures related to director attendance should be sensitive to privacy concerns, but they should provide shareholders with adequate information to allow them to make informed decisions about director attendance.
• Changes to the Board of Directors or Senior Management:
  • Existing ISS policies provide “flexibility” for board members to fill senior executive roles on an interim basis due to the disability or incapacity of members of the management team.
  • ISS acknowledges that COVID-19 may create the need for boards to fill vacancies due to the disability or incapacity of directors or to add directors with expertise to address concerns created by COVID-19. ISS will review such board changes on a case-by-case basis by considering the company’s explanation for such change.

Poison Pills and other Defensive Measures

• ISS’ existing policy acknowledges that shareholder rights plans (poison pills) may be adopted “in the face of genuine, short-term potential threat situations.” ISS notes that a “severe stock price decline” resulting from COVID-19 will likely be considered a “valid justification” for the adoption of a poison pill of less than one year in duration (provided that such poison pill is accompanied by a detailed disclosure). ISS will continue to review poison pills with durations of less than one year on a case-by-case basis by considering the company’s disclosed rationale for its actions, including any imminent threats and specific plan provisions.

Compensation

• Change in Metrics or Targets:
  • While ISS acknowledges that modifications to 2020 compensation plan performance metrics or targets will be evaluated in connection with 2021 annual meetings, ISS encourages boards to provide contemporaneous disclosure to shareholders of the rationale for changes.
  • ISS generally disfavors changes to compensation plans covering multiyear periods. ISS will consider any changes to existing long-term plans on a case-by-case basis to determine whether directors exercised appropriate discretion and provided an adequate explanation to shareholders. Going forward, ISS will assess new compensation plans which take the new economic environment into consideration under ISS’ existing benchmark policy frameworks.
• Options Repricing: Boards seeking to reprice existing stock options without shareholder approval or ratification will be subject to ISS scrutiny under its existing board accountability provisions. In general, ISS will recommend opposing any repricing that occurs within one year of a precipitous drop in the company’s stock price. For those boards seeking approval/ratification or repricing at 2020 meetings, ISS will apply a case-by-case approach for the relevant market. In the U.S., factors include 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.

Capital Structure and Payouts

• Dividends: This year, ISS will alter its approach and support broad discretion for boards seeking to set payout ratios that fall below historic levels or customary market practice. If a company does reduce its dividend, ISS will look to whether the board discloses plans to use the preserved cash to support and protect the business and workforce.
• Share Repurchases: While ISS will continue to generally recommend in favor of repurchase authority within customary limits, the board’s actions concerning repurchases throughout 2020 will be reviewed to consider whether the directors managed risks in a responsible fashion for any repurchases undertaken under the authority. Boards should consider the reputational, regulatory and business risks in exercising any share buybacks, particularly if the company’s workforce has been reduced or suffered other setbacks.
• Capital Raisings:
  • ISS considers the COVID-19 pandemic an “exceptional circumstance” with regard to share authorization and issuance requests. As a result, a case-by-case analysis regarding share authorization proposals that exceed any normal limitations on size and potential dilution may apply if the board can provide clear and compelling justification of the company’s underlying need in the current economic environment.
  • ISS’ current voting policies already provide for a case-by-case analysis of private placement issuances considering (1) rationale, (2) potential dilution to existing shareholders, (3) any potential discount or premium in issuance price to the share price prior to the announcement of the private placement, (4) conflicts of interest, (5) consideration of alternatives and (6) the market’s reaction to the private placement since announcement. ISS will also consider exceptional circumstances such as going-concern issues or an expected bankruptcy filing if the transaction is not approved.

Authorship Credit: Suzanne K. Hanselman, Robert W. Cordiak and Claudia Cash