Proxy Voting

Proxy advisory firm ISS updated its proxy voting guidelines last fall to introduce a more detailed approach to the recommendations it makes on companies’ equity plans and shareholder proposals for an independent chairman. The changes could create uncertainty for companies during this year’s proxy season.

Up to a third of companies have an equity plan proposal on their proxy in any given year, notes Rajeev Kumar, senior managing director for corporate governance and research at proxy solicitation firm Georgeson. ISS used to consider a handful of points about an equity plan, and if the company failed on any one of them, it recommended a “no” vote. This year the proxy adviser will score companies on a number of factors related to the plan’s cost, features and grant practices and base its recommendation on the total score.

The new approach gives companies “more latitude to be able to structure a plan that can meet ISS requirements,” Kumar says. For example, a company whose plan previously would have failed on cost could get a low score on cost but make it up in other areas. But the new method also takes into account factors that ISS didn’t previously consider, Kumar adds, and they could pose a problem for some companies. For example, ISS views as negative a single trigger, such as automatic vesting upon a change in control.

The other big change involves shareholder proposals calling for an independent chair. Laura Richman, counsel in the Chicago office of law firm Mayer Brown, notes that such proposals were one of the types most frequently put forward by shareholders last year.

In the past, ISS would not have supported such proposals unless the company met various governance criteria, including having a well-respected lead director. Companies should look at the criteria to get a sense of whether ISS would support the proposal, Richman says. “ISS is now shifting to a more subjective approach. Factors that would have resulted in yes or no in the past can be mitigated,” Richman says. “That may mean that ISS is likely to support more of the shareholder-proposed independent chair resolutions this season.”