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ISS Issues Guidance Regarding the Impact of COVID-19 Pandemic

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On April 8, 2020, ISS released Impacts of the COVID-19 Pandemic, which offers guidance on how this crisis may impact and interact with ISS’ existing policies. ISS intends that this guidance be read in conjunction with ISS’ market and region-specific ISS Benchmark and Specialty Voting Guidelines and related FAQs.

Overall, the guidance offered falls into four categories:

  • Annual General Meeting Issues
  • Poison Pills, Shareholder Rights and Boards/Directors
  • Compensation Issues, and
  • Capital Structure and Payouts

Annual General Meetings Issues
The guidance addresses meeting postponements and virtual-only meetings.

Poison Pills, Shareholder Rights and Boards/Directors
The guidance addresses the use of poison pills and other defensive measures (ISS indicates that a stock price drop brought on by the COVID-19 pandemic generally would be sufficient justification to adopt a pill of less than one year in duration.

As for director attendance, ISS indicates that in countries where telephonic/electronic attendance is not counted, companies should provide adequate disclosure indicating if directors attended telephonically/electronically .

Compensation Issues
With respect to changing metrics or shifting goals or targets, noting that many companies may not be obligated to provide disclosure of such events until the 2021 proxy is filed, ISS encouraged boards to provide contemporaneous disclosure to shareholders of their rationales for making such changes. With respect to long-term compensation plans, ISS noted that its general policies generally are not supportive of changes to midstream or in-flight awards since they cover multi-year periods. ISS also indicated that if companies make structural changes to their long-term plans to take account of the new economic environment, it will assess such changes under its existing policies.

ISS also reminds companies of its policies with respect to option repricing, which it found still to be appropriate during the circumstances of the COVID-19 pandemic. Basically, ISS is looking for any option exchange to comply with the following four requirements:

  1. The design is shareholder value neutral, i.e., a value-for-value exchange
  2. Surrendered options are not added back to the share pool
  3. Replacement awards do not immediately vest
  4. Executive officers and directors are excluded.

Capital Structure and Payouts
ISS states that where its market-specific policies look for dividend payout ratios to be within a certain range, it will support Board discretion this year that seek to set payout ratios that may fall below historic levels or customary market practice. In considering such proposal, ISS will look at whether a company discloses plans to use any preserved cash from dividend reductions to support and protect its business and workforce.

With respect to share repurchases, ISS simply states that, in effect, it will review what companies do with respect to any share repurchase authority when the 20201 annual meetings come up in deciding whether directors managed risks in a responsible fashion with respect to such authority.

ISS generally evaluates capital raising proposals on a case-by-case basis.

Glass Lewis Will Include Company Feedback In Proxy Reports

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On April 2, 2020, Glass Lewis announced a significant change to the manner in which it conducts its business. It will now include company feedback in its proxy reports without any rebuttals or other statements made about such company statement. The full text of the Glass Lewis announcement is at https://www.glasslewis.com/report-feedback-statement-included-with-research/

Companies will now have 7 days after Glass Lewis publishes its report to provide feedback. Feedback can be provide using Glass Lewis’ Report Feedback Statement webpage (https://www.glasslewis.com/report-feedback-statement/). Glass Lewis will then republish its proxy report and include the statement from the company.

Given that Glass Lewis has changed its peer group methodology for the 2020 proxy season, we may see more companies provide feedback this year as the change in peer groups may be dramatic and could have implications for the letter grades Glass Lewis assigns companies under its pay-for-performance analysis as part of its Say-on-Pay vote recommendation process.

I applaud Glass Lewis for taking this step and hope their subscribers will take company feedback provided seriously. At the same time, companies should provide feedback only where warranted and where specific issues have been identified. If both do so, it should help ensure that company feedback becomes a meaningful part of the Glass Lewis proxy reports.

Exequity Is Tracking Pay Changes Due to COVID-19

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On April 2, 2020, Exequity issues a new Client Alert, How COVID-19 Is Impacting Pay (available at https://www.exqty.com/newsroom/how-covid-19-is-impacting-pay), which looks at the disclosures from companies that have changed their pay programs through April 1, 2020, because of the COVID-19 crisis. Exequity will also update the statistics included in that Client Alert. Exequity will post updated statistics regarding such changes to its website at https://www.exqty.com/newsroom/covid-19-impact-on-pay-summary-statistics.

The CARES Act Would Place Limits on Compensation

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On the evening of March 25, 2020, the U.S. Senate passed H.R. 748, the CARES Act (Coronavirus Air, Relief, and Economic Security Act). Among helping folks with direct payments of cash and increase both the amount and length of time unemployment will be paid to folks out of work, the Act also provides the Secretary of the Treasury the authority to make loans and guarantee loans for certain businesses in distressed industries including air carriers and U.S. businesses that have not otherwise received adequate economic relief in the form of loans or loan guarantees under the Act.

Section 4004 places limitations on the compensation of certain employees of businesses that receive loans or loan guarantees under the Act. Specifically, the Act makes two separate limits for employees:

  1. General limit applies to officers and employees whose total compensation exceeded $450,000 in calendar year 2019 (except for pay pursuant to certain collective bargaining agreements in place prior to March 1, 2020).
    • Cannot receive total compensation which exceeds, during any 12 consecutive month period, the total compensation received in 2019.
    • Cannot receive severance pay or other benefits upon termination that exceeds twice the maximum total compensation received in 2019.
  2. Special limit applies to officers and employees whose total compensation exceeded $3 million in calendar year 2019.
    • Cannot receive total compensation during any 12 consecutive month period that exceeds the sum of:
      1. $3 million, and
      2. 50% of the excess over $3 million of the total compensation received in 2019

Total compensation includes salary, bonuses, awards of stock, and other financial benefits provided by a business.

UPDATE: These limits on compensation continue until 12 months after a company pays back any loan. During the time that a company has a loan with the federal government, it must also agree not to repurchase any of its equity securities listed on a national securities exchange (no share buybacks), except in accordance with a contractual obligation in place when the Act becomes effective, through 12 months after the company pays back the loan. Additionally, companies taking loans cannot pay dividends or make other capital distributions (no dividends) until 12 months after the loan is repaid. See Section 4003, Emergency Relief and Taxpayer Protections.

The House is expected to take up this Act today, March 26, 2020.

I was able to find the text of this Act on the website of the Tax Foundation. The text of the Act is not yet available on Congress’ website, Congress.gov. Here is the link to the text of the Act on which this post was based:

https://files.taxfoundation.org/20200325223111/FINAL-FINAL-CARES-ACT.pdf