On April 8, 2020, Institutional Shareholder Services Inc. (“ISS”) issued new policy guidance on a range of corporate governance matters in light of the effect of the current COVID-19 pandemic. This guidance sheds some light on how ISS plans to apply its benchmark and voting policies during the coming months of the 2020 annual shareholder meeting season. The full text of the policy guidance can be found here.
Annual Meeting Issues
Noting that it is increasingly unlikely that it may be safe to hold physical meetings in certain areas over the coming weeks or even months, ISS stated that companies should continue to use their standard disclosure documents (proxies, reports, etc.), press releases and websites to inform shareholders about material events and developments, including postponements of annual meetings. ISS emphasized that “it will be positively noted when companies and boards use webcasts, conference calls and other mediums of electronic communications to engage with their shareholders and investors, even if meetings have necessarily been postponed.”
With respect to “virtual-only” meetings, ISS noted that such meetings may be both necessary and desirable in light of the risks created by the pandemic and the critical need for social distancing and other measures that prevent a physical or even a “hybrid” (both in-person and virtual) meeting. Specifically with respect to U.S. companies, ISS affirmed that it does not have a policy to recommend votes against companies who hold virtual-only meetings, and there will be no change to that approach at the moment. If boards choose to hold a virtual-only meeting, ISS encourages them to “disclose clearly the reason for their decision (i.e., that it is related to the COVID-19 pandemic) and to strive to provide shareholders with a meaningful opportunity (subject to local laws) to participate as fully as possible, including being able to ask questions of directors and senior management and to engage in dialogue if they wish.” In addition, ISS encourages boards to commit to return to in-person or hybrid meetings, or to put that matter to shareholders to decide, as soon as practicable.
Please see here for our most recent thought leadership on ISS’s policy guidance relating to poison pills. In addition, please see here for our prior corporate update on poison pill defenses in the current corporate environment.
ISS acknowledged that many boards are likely to announce plans to materially change their performance metrics, goals or targets used in their short-term compensation plans in response to the drop in the markets and other economic uncertainties. While noting that such decisions would likely be analyzed and addressed at next year’s annual shareholder meetings (i.e., in 2021), ISS encourages boards to provide contemporaneous disclosure now of their rationales for making any such changes.
With respect to long-term compensation matters, ISS made clear that it generally does not support changes to midstream or in-flight awards since they cover multi-year periods. Accordingly, ISS stated that it “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 such changes.” Going forward, if boards alter the structure of their long-term incentive plans and related future awards to take the new economic environment into consideration, ISS stated that it would assess such structural changes under its existing benchmark policy framework.
If boards choose to reprice (or replace, exchange, cancel or regrant) existing stock option awards that are currently considered to be “out of the money” and they do not ask shareholders to approve or ratify the action in a timely manner, the board’s action would remain subject to scrutiny under ISS’s benchmark policy board accountability provisions. For U.S. companies, ISS generally recommends opposing any repricing that occurs within one year of a precipitous drop in a company’s stock price. ISS noted that it will maintain its case-by-case approach to such matters, including weighing a number of factors set forth in its existing benchmark policy framework.
Other Capital Related Matters
ISS admonished against continued share buybacks in the current economic environment, especially (although not only) if the company has made workforce reductions or other cutbacks, noting that while “boards may consider it prudent to maintain some flexibility for the future by seeking buyback authority at this time, directors will naturally need to consider the reputational, regulatory and business risks that exercising such authority might create before going ahead with any repurchases under the authority, even if approved by shareholders.” ISS stated that any actions related to repurchases during 2020 would be reviewed in connection with the 2021 annual shareholder meeting to consider if the board managed risks in a responsible fashion.
With respect to capital-raising matters, including proposals to increase the number of shares of common or preferred stock authorized for issuance, ISS noted that it will continue to apply its existing policy framework when analyzing such proposals. However, ISS affirmed that the current pandemic “clearly constitutes… exceptional circumstances” that, when taken together with other factors and determined on a case-by-case basis, could support a “FOR” recommendation on such a proposal, particularly if there is disclosure of a clear and compelling justification with respect to the company’s need.
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