On Friday, ISS announced the results of its 2021 benchmark policy survey. 159 investors responded — as well as 246 companies, directors, advisors and other company-related folks. Here are some of the highlights:
1. Racial Equity Audits: The survey evidences a philosophical split on these proposals. Almost half of investors chose “most companies would benefit” and almost half chose “it depends on company-specific factors.” About a tenth of investor respondents chose that most companies would not benefit from an independent racial equity audit. That percentage was higher for non-investor respondents. The case-by-case analysis approach was by far the most popular answer for non-investor respondents. Investors & companies said that involvement in controversies was a factor that could merit a recommendation in favor of a racial equity audit proposal.
2. Virtual-Only Meetings: When asked which practices would be considered problematic related to a company’s virtual-only meeting, the top three most concerning practices according to investor respondents were management unreasonably curating questions, the inability to ask live questions at the meeting, and question and answer opportunities not provided. Each of these practices were considered problematic by at least 90 percent of investors. The majority of investor respondents indicated that problematic practices related to virtual meetings could warrant votes against directors.
3. Pre-2015 Poor Governance Provisions: As time goes by, there’s less of a reason to distinguish between companies that went public prior to 2015 and were allowed to continue “poor governance provisions” – such as multi-class shares, supermajority voting requirements, and classified boards – and those that have gone public since then. A high percentage of investor respondents supported ISS revisiting this policy and considering issuing adverse director recommendations at any company that maintains these poor governance provisions. A little over half of non-investors answered the same way.
4. Recurring Adverse Director Recommendations: ISS’ current policy is to recommend against director nominees every year while certain poor governance provisions – such as supermajority vote requirements – are maintained. In some cases, the company has sought shareholder approval to eliminate supermajority vote requirements, but the proposal has failed (because it is hard to get the supermajority support). On this question, the most popular answer indicated by investors was for ISS to continue to recommend against directors every year there is not a management proposal on the ballot to reduce the supermajority vote requirement.
The most popular answer choice among non-investors was that a single try by the company to get shareholder support for a provision to remove the supermajority standard is enough. The second most popular choice among investor respondents was that if a company has tried and failed for several years to eliminate the supermajority vote requirement, ISS should stop recommending against directors. When asked how many years the company should offer the proposal, three years was the most popular answer choice.
5. SPACs & Proposals with Conditional Poor Governance Provisions: Current ISS policy is to evaluate SPAC transactions (business combination with a target company) on a case-by-case basis, with one of the main drivers being the market price relative to the redemption value. However, due to the mechanics of SPACs and considering SPAC investor voting practices over recent years, ISS is considering changing its policy to generally favor supporting the transaction. Responses on the survey showed that most institutional investors did not own SPACs. Among those who did, the response was split, but a preference not to change ISS’s policy received a slightly higher response.
ISS noted that it was seeing instances where shareholders were asked to approve a new governing charter with poor governance or structural features as a condition for a transaction to close. The proxy statements will commonly state that these closing conditions may be “waived” by the parties to the transaction if they are not approved by shareholders, but there is the risk that waiving the provisions would jeopardize the transaction. When asked what the best course of action was in this case, a strong majority of both investors and non-investors responded that ISS’s current policy was the right way forward: to support the transaction but make note of disapproval with any poor governance provisions.
-Liz Dunshee, TheCorporateCounsel.net October 4, 2021