Institutional Shareholder Services (ISS) is one of the leading proxy advisory firms that makes voting recommendations on public companies’ proxy resolutions. In Canada, ISS’ recommendations on transactions and governance issues can have a significant impact on many shareholders’ opinions, and particularly the opinions of institutional shareholders.

ISS publishes its proxy voting guidelines which explain the policies underlying its recommendations. For 2016, ISS updated certain items in guideline. The updates, as described below, are good indicators of investors’ views toward current issues in the corporate governance landscape.

Director Overboarding

In response to information about the average workload for directors (over 300 hours a year, on average), ISS has revised its overboarding policy to lower the number of boards a director should sit on.  For directors who:

  • are not CEOs, the number of board has been lowered from 6 boards to 4; and
  • do hold CEO roles, the number has been lowered from 2 other boards to 1.

ISS did not make negative recommendations based on this revised “overboarding” definition in the 2016 proxy year. However, for meetings held after February 1, 2017, this policy update will result in a “withhold” recommendation if the director (i) is overboarded and (ii) attends fewer than 75% of its board or committee meetings.

Externally Managed Issuers

ISS has updated its voting recommendation policy for externally-managed issuers (EMIs), being issuers that have management services provided by external management companies.

Where an EMI provides insufficient disclosure about management services agreements and how management is compensated, ISS will make case-by-case voting recommendations for say-on-pay resolutions and director nominations. Where an EMI does not propose a say-on-pay resolution, the updated policy allows ISS to evaluate other factors, including: the size and scope of the management services agreement; executive compensation in relation to similar issuers; related-party transactions and independence; and historical compensation concerns for the issuer.

In Canada, this policy update will likely affect ISS’ recommendations on the election of individual directors of EMIs.

Management and Director Equity Plans 

ISS has also updated its regime for evaluating equity plans. Whereas ISS’ former system was based on a series of standalone pass/fail tests, the new evaluation system uses an Equity Plan Scorecard (Scorecard) with a holistic approach to evaluating equity plans. The Scorecard considers equity plans’ strengths and weaknesses based on plan cost, plan features and historic grant practices. The Scorecard takes into account considerations such as: the viability of risk-mitigating measures; the strength of vesting provisions; and the use of performance-based equity.

Further information on this Scorecard is available here.

Issuers should be mindful of the updates to ISS’ guidelines and the ways such updates might affect the ISS’ voting recommendations on meeting proposals in 2017.

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