ISS Announces 2019 Updates to U.S. Proxy Voting Guidelines

By: Phil Theodore

November 26, 2018

On November 19, Institutional Shareholder Services, the leading proxy advisory firm (“ISS”), announced revisions to its 2019 proxy voting guidelines[1]. While the revisions consist largely of minor tweaks to existing policies, two of the 2019 revisions are noteworthy. First, ISS revised its voting policy on directors for companies with no female directors and, second, it adopted a package of policies related to management proposals to ratify existing charter or bylaw provisions. What is more noteworthy, however, is that ISS did not adopt a proposed modification to its methodology for applying a “Financial Performance Assessment” as part of its pay-for-performance review of CEO pay. The change to the voting policy on directors for companies with no female directors will have a one-year grace period, becoming effective for meetings held on or after February 1, 2020. The other voting-guideline revisions will be effective for meetings on or after February 1, 2019. 

Board Gender Diversity

Beginning in 2018, ISS research reports noted when a company’s board lacked gender diversity, but ISS made no adverse recommendations with respect to the company because of this deficiency. That will change for companies in either the Russell 3000 or S&P 1500 indices starting with meetings held on or after February 1, 2020. After that date, ISS may issue an adverse voting recommendation against nominating committee chairs at boards with no gender diversity. If there is no nominating committee, and otherwise on a case-by-case basis, ISS may issue an adverse recommendation against the election of other directors who are responsible for the board nomination process. 

ISS will consider the following factors in mitigation of its decision to issue an adverse voting recommendation:

  • Whether the company disclosed in its proxy statement or in other SEC filings a firm commitment to appoint at least one female director in the near term;
  • The presence of a female director on the board at the preceding annual meeting; and/or
  • Other relevant factors as applicable[2]

Proposals to Ratify Existing Charter or Bylaw Provisions

ISS adopted two new guidelines and amended an existing guideline in response to a recent spate of management proposals to ratify existing charter or bylaw provisions. According to ISS, during the 2018 proxy season, seven companies obtained no-action relief that permitted them to exclude from their proxy statement a shareholder proposal to rescind a charter or bylaw provision by including in the proxy statement a management proposal to ratify the same provision. The SEC granted no-action relief pursuant to Exchange Act Rule 14a-8(i)(9), which states that a company may exclude a shareholder proposal from its proxy statement “[i]f the proposal directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting”[3]. The provision at issue prohibited shareholders from calling a special meeting of shareholders. 

In such a situation, ISS will, according to one of the new guidelines, generally recommend voting against the management proposal, unless the charter or bylaw provision for which ratification is sought comports with the ISS view regarding best corporate-governance practices. Furthermore, another new guideline provides that when a board asks shareholders to ratify existing charter or bylaw provisions, ISS may recommend voting against individual directors, members of the governance committee or the full board, considering several factors, including the board’s stated rationale for seeking ratification of the provision and the level of impairment to shareholders’ rights caused by the existing provision.[4] Finally, an amendment to an existing guideline provides that, if a management proposal seeking to ratify an existing charter or bylaw provision receives opposition from a majority of shares cast, ISS may recommend a vote against individual directors, committee members or the entire board at the next annual meeting, unless the board revokes the provision[5].

Financial Performance Assessment Methodology

As noted above, ISS did not adopt a proposal relating to the methodology for its pay-for-performance analysis. ISS uses a two-part methodology in its review of pay-for-performance alignment. The first part of the methodology measures CEO pay against “Total Shareholder Return”. When ISS determines that a company’s pay practices raise a “low” or “medium” level of concern that there is a misalignment between CEO pay and company performance based on the application of the Total-Shareholder-Return analysis, ISS subjects the company’s pay practices to a second level of analysis. The second level is the “Financial Performance Analysis”. (Companies that evidence a “high” level of concern based on the Total-Shareholder-Return analysis are stuck with that classification; they are not subjected to the second-level Financial Performance Analysis.) The point of the second-level Financial Performance Analysis is to provide a view of pay relative to company performance that is in more depth than the Total Shareholder Return analysis. As a result of the more in-depth analysis, a company’s score could be changed from a “medium” level of concern to a “low” level or vice versa

Last summer, ISS proposed to abandon its use of GAAP-based financial metrics in the Financial Performance Analysis in favor of an “Economic Value Added” (“EVA”) methodology. Currently, ISS analyzes a company’s capital productivity and profitably by focusing on the GAAP-based measures of return on assets, return on equity and return on invested capital. The EVA measures proposed were EVA Spread and EVA Margin. Growth, which is measured by reference to EBITDA and cash-flow, would have been measured by EVA momentum, denominated by capital and sales. 

ISS explained its proposed reliance on EVA, which it described as being equivalent to net operating profit after tax minus a capital charge, by stating that “using EVA measures … creates a more reliable and accurate view of company performance” because “EVA provides a standardized view of economic performance, versus accounting results, by applying a series of uniform, rules-based adjustments to financial statement data.”[6] No matter how valid the conceptual underpinnings for the shift to EVA measures, the fact remains that few companies use EVA metrics in incentive compensation plan design.  Taylor English compensation lawyer, Don Kohla, who has over 40 years of experience in plan design, observes “I am not aware of a single company that uses EVA as a formal incentive plan metric. It is difficult to envision widespread adoption of EVA as an incentive plan metric because EVA is complicated, especially when compared to well-known GAAP measures of performance.”  Furthermore, most investors who responded to ISS’s request for comments on the move to EVA preferred that ISS continue to use GAAP-based financial measures in the Financial Performance Analysis., perceiving EVA as somewhat of a “black box”.[7]

At any rate, ISS will not be making any methodology change for the 2019 proxy season. ISS will provide EVA metrics in their 2019 research reports, while continuing to explore the future use of EVA metrics as part of the Financial Performance Analysis. This subject merits continued attention. 

Disclaimer – The information in this law alert is for informational purposes only and does not constitute legal advice. No attorney-client relationship has been or will be formed by any communication(s) to, from or with the law alert or author. The opinions expressed are those of the author, and decisions relating to the content belong to the author.


[1] Institutional Shareholder Services, 2019 Americas Proxy Voting Guidelines Updates (November 19, 2018) https://www.issgovernance.com/file/policy/latest/updates/Americas-Policy-Updates.pdf (hereinafter “2019 Policy Guidelines”).
[2] Id. at 3.
[3] 17 CFR 240.14a-8(i)(9). 
[4] 2019 Policy Guidelines at 8. 
[5] Id. at 10. 
[6] https://www.issgovernance.com/file/policy/2018/ISSPayforPerformanceModel-FinancialPerformanceAssessmentMethodology-USandCanada.pdf
[7] See, e.g., Meridian Compensation Partners LLP, Meridian Client Update, October 26, 2018, at pages 2-3.  http://www.meridiancp.com/iss-issues-proposed-policy-updates-for-2019/  Meridian speculated that ISS is moving to an EVA analysis in order to sell the services of its recently acquired EVA-analytics firm to companies that are evaluated using the Financial Performance Analysis. 

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