ISS is adjusting several corporate governance and executive compensation policies to account for the COVID-19 impacts. The adjustments are similar to those published by Glass Lewis on March 26.
For compensation and capital structure, the policy changes and clarifications for the US markets include:
- Compensation:
- Changes to annual incentives will be evaluated on a case-by-case basis and consider all the disclosed rationale and circumstances, but companies are encouraged to disclose changes as they are implemented.
- The same general guidance is applicable for long-term compensation, but the tone of the writing makes it clear the hurdle will be higher for changes to outstanding grants. Notably, ISS does not highlight “windfall” gains as a potential issue.
- Option repricing (or similar actions) without shareholder approval will continue to be viewed negatively. When evaluating proposals to reprice, ISS will consider the following to be mitigating provisions:
- The proposal is less than a year from the share price drop
- The exchange is shareholder value neutral
- Surrendered options are not added back to the plan
- Replacement awards do not vest immediately
- Executive officers and directors are excluded
- Payouts and Capital Raising:
- Dividends and share repurchases are generally favored by ISS policy. However, the policy will now consider reputational and regulatory risk when evaluating these actions by the board or related proposals.
- Capital raising proposals will continue to be evaluated on a case-by-case basis, but the economic impacts of the crisis will be a consideration.
The document also provides information on several other affected policies.
- Director attendance:
- Director attendance will have some flexibility due to the crisis. Disclosure is encouraged where it does not impact individual directors’ health privacy.
- Impacts to Annual General Meetings:
- ISS will not view changing the 2020 AGM to a virtual-only meeting negatively.
- Poison pills and shareholders’ rights plans:
- A severe stock price decline as a result of the COVID-19 pandemic is likely to be considered valid justification for pills lasting less than a year. For longer pills (see story below) ISS will review the full rationale and circumstances, including the active threats, on a case-by-case basis.
Overall, COVID-19 impacts will be considered within the framework of existing ISS policy. While that may buy companies moderate flexibility, it is also clear that actions ISS viewed negatively in the past will continue to be viewed negatively. Disclosures on rationale and shareholder engagement efforts will likely mitigate some concerns. It remains to be seen if the proposed SEC rules on proxy advisory firms will encourage ISS to provide meaningful engagement opportunities during the crisis.
