ISS Provides Voting Policy Guidance for COVID-19 Impacts

April 17, 2020
by Andrew Maletz

ISS is adjusting several corporate governance and executive compensation policies, including some additional flexibility in how it evaluates changes to annual and long-term incentives.

For compensation and capital structure, the policy changes and clarifications for the U.S. markets, which are similar to those published by Glass Lewis on March 26, include:

• Compensation:
  
  
  • Changes to annual incentives will be evaluated on a case-by-case basis considering the disclosed rationale and circumstances, but companies are encouraged to disclose changes as they are implemented.
    
    
  • The same broad 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. 
    
    
  • 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, and
    • 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 reputation 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 corporate governance policies.  Director attendance will have some flexibility due to the crisis and switching to a virtual-only shareholder meeting will not be viewed in a negative light.  A severe stock price decline as a result of the COVID-19 pandemic is likely to be considered valid justification for implementing poison pills lasting less than a year.  For longer pills, ISS will review the full rationale and circumstances, including the active threats, on a case-by-case basis. 

Why this matters:  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 whether the Center-supported proposed SEC rules on proxy advisory firms will encourage ISS to provide meaningful engagement opportunities during the crisis.