SEC Issues Final Rules on Proxy Voting Advice

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On July 22, 2020, the U.S. Securities and Exchange Commission met and adopted final rules, Exemptions from the Proxy Rules for Proxy Voting Advice, SEC. Rel. 34-89732, in a 3-1 vote. These final rules will become effective 60 days after publication in the Federal Register. Of course, that presumes that a lawsuit isn’t filed against the SEC and these final rules by an interested party (such as ISS which filed such a lawsuit with the SEC’s earlier guidance affecting proxy voting advisory firms).

The final rules codify the SEC’s view that proxy voting advice generally constitutes a solicitation under the proxy rules. The SEC Press Release clarifies that the availability of two exemptions often used by proxy voting advice businesses to the proxy rules depends on compliance with tailored and comprehensive conflicts of interest disclosure requirements. The exemptions also require compliance with two principles-based requirements designed to ensure that:

(1) companies that are the subject of proxy voting advice have such advice made available to them in a timely manner, and

(2) clients of proxy voting advice businesses are provided with an efficient and timely means of becoming aware of any written responses by companies to such proxy voting advice.

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.

ISS Issues Updated FAQs and Methodology Documents

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ISS has released updated versions of its FAQs and methodology documents for the 2020 proxy season.

Equity Compensation Plans Frequently Asked Questions

This updated set of FAQs was issued December 6, 2019 and is available at:
https://www.issgovernance.com/file/policy/latest/americas/US-Equity-Compensation-Plans-FAQ.pdf

Notable changes include:

  • ISS will include limited partnership units in Common Shares Outstanding for Shareholder Value Transfer (SVT) and burn rate calculations if they are equivalent to common stock on a 1:1 basis and can be exchanged into common stock at any time at no cost to the holder.
  • How ISS will evaluate an equity plan proposal seeking approval of one or more plan amendments—usually by using its Equity Plan Scorecard (EPSC) model.
  • Confirming that evergreen features are now an overriding factor that will cause ISS to recommend against an equity plan proposal.
  • Confirming that ISS changed some EPSC factor scores in the EPSC model, but kept the weights of the three pillars (plan cost, plan features, and grant practices) the same.
  • Included the 2020 Burn Rate Benchmarks for the S&P 500, Russell 3000 (non-S&P 500) and Non-Russell 3000 groups in the Appendix.

Compensation Policies Frequently Asked Questions

ISS released this updated set of FAQs on December 6, 2019, available at:
https://www.issgovernance.com/file/policy/latest/americas/US-Compensation-Policies-FAQ.pdf

Notable changes include:

  • Confirming that the Financial Performance Assessment (FPA) will rely on four ISS-defined EVA metrics (EVA Margin, EVA Spread, EVA Momentum vs. Sales, and EVA Momentum vs. Capital), but confirming that the GAAP metrics which previously were used in the FPA will still be reported on ISS Proxy Reports.
  • ISS will now report a 3-year Multiple of Median, but it will not be factored into the ISS Quantitative Pay-for-Performance (P4P) analysis.
  • With respect to disclosure around termination and severance payments, ISS wants companies to clearly describe the type of termination (e.g., termination without cause, resignation for good reason, termination with cause, etc.) and the provision(s) by which severance payments were made under any agreement to avoid confusion and enable shareholders to assess such payments.

Pay-for-Performance Mechanics, ISS’ Qualitative and Qualitative Approach

ISS released this updated document on December 11, 2019, available at:
https://www.issgovernance.com/file/policy/latest/americas/Pay-for-Performance-Mechanics.pdf

Provides some information on how EVA measures will be used in the FPA. Note that FPA only comes into account if a company’s initial quantitative P4P score level comes in at the low bordering medium or medium concern levels.

The other change of significance is that this document details the updated thresholds for the various concern levels under the Quantitative P4P tests. For example, High Concern under the Relative Degree of Alignment (RDA) test now starts at -60 whereas before it started at -50. This change should cause fewer companies to end up with a High Concern under the RDA test.

Peer Group Selection Methodology and Issuer Submission Process, Frequently Asked Questions

This updated set of FAQs was released December 6, 2019, and is available at: https://www.issgovernance.com/file/policy/latest/americas/US-Peer-Group-FAQ.pdf

No significant changes are noted in this set of FAQs.