Institutional Shareholder Services and Glass, Lewis & Co. released revised proxy voting guidelines in light of the Coronavirus (COVID-19) pandemic. This On the Subject details key implications for the 2020 proxy season.

IN DEPTH

Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co., LLC (Glass Lewis) recently updated their respective proxy voting guidelines in response to the Coronavirus (COVID-19) pandemic. As revised, these guidelines have important implications for the 2020 proxy season.

ISS Policy Updates

Annual Meeting Issues

Meeting Postponements: ISS announced that it will take a positive view of companies and boards that use electronic communications (webcasts, conference calls, etc.) to engage with their shareholders even if their annual meetings have been postponed.

Virtual-Only Meetings: ISS does not have a policy to recommend voting against US companies that hold virtual-only shareholder meetings. ISS confirmed that there will be no change to its current approach for the remainder of the 2020 proxy season.

Poison Pills, Shareholder Rights and Boards/Directors

Poison Pills: ISS announced that its existing policy is “appropriately flexible” to account for the adoption of poison pills during the COVID-19 pandemic. The existing policy evaluates poison pills on a case-by-case basis, taking into consideration the board’s rationale and the specific provisions of the poison pill. ISS noted that a severe stock price decline due to the COVID-19 pandemic will likely be considered a valid reason for adopting a pill of less than one year duration without a shareholder vote, provided that the board discloses its rationale.

Director Attendance: ISS noted that telephonic/electronic participation counts as full participation in board and committee meetings for US companies.

Changes to the Board of Directors or Senior Management: ISS announced that its existing policies provide “appropriate discretion and flexibility” to account for changes to boards or senior management. If a board needs to fill vacancies or add critical expertise because of COVID-19, ISS will evaluate the situation on a case-by-case basis.

Compensation Issues

Compensation: ISS encourages boards to provide contemporaneous disclosure to shareholders of their rationale for making material changes to performance metrics, goals or targets used in short-term compensation plans for 2020. Midstream or in-flight changes to awards granted under long-term compensation plans will be evaluated on a case-by-case basis to determine whether boards exercised appropriate discretion and provided adequate explanation to shareholders.

Option Repricing: ISS will apply its existing US benchmark policy on board accountability to repricing actions taken without seeking shareholder approval/ratification in a timely fashion. If a board seeks shareholder approval/ratification of repricing actions, ISS will apply its existing case-by-case approach. ISS generally recommends opposing repricing that occurs within one year of a precipitous drop in the company’s stock price. The factors taken into consideration include whether:

• The design is shareholder value neutral (a value-for-value exchange).

• Surrendered options are not added back to the plan reserve.

• Replacement awards do not vest immediately.

• Executive officers and directors are excluded.

Capital Structure and Payouts

Dividends: ISS supports broad discretion by boards that set payout ratios falling below historic levels or customary market practice.

Share Repurchases: ISS encourages boards to consider the reputational, regulatory and business risks associated with undertaking a share buyback program, even if approved by shareholders. ISS announced that it will consider whether a board appropriately managed risks for any repurchases in 2020.

Share Issuances: ISS will apply is existing case-by-case analysis to general authorization and share issuance requests, but will also adapt the approach for any regulatory relaxations or new guidance as a result of COVID-19. Factors under the existing framework include:

• Proxy statement disclosure of the specific purposes for the proposed increase

• The risks to shareholders of not approving the request

• The size and potential dilutive impact of the request combined with any market-specific guidelines on limits and preemptive rights.

Private Placements: ISS’s existing voting policies provide for case-by-case analysis of private placement issuances considering:

• The rationale for the private placement issuance

• The potential dilution to existing shareholders

• The discount/premium in issuance price to the unaffected share price before the announcement of the private placement

• Any conflicts of interest

• Consideration of alternatives

• The market’s reaction to the proposed private placement since announcement.

ISS also will consider whether there are any exceptional circumstances.

Glass Lewis Policy Updates

Virtual Shareholder Meetings: Glass Lewis announced a change to its standard policy on virtual-only shareholder meetings. For companies holding virtual-only shareholder meetings because of COVID-19, Glass Lewis will generally refrain from recommending to vote against the governance committee members so long as the company discloses its rationale, including citing COVID-19. Glass Lewis will revert to its standard policy for virtual meetings occurring after the 2020 proxy season.