ISS Guidance: “Appropriate Discretion” Will Be Used To Evaluate Board Decisions

It's not clear yet how ISS will implement the guidance, so full disclosure on all decisions made will help boards avoid clashes.

As corporate directors decide which adjustments will help them best deal with the COVID-19 pandemic,  proxy advisory firm ISS recently issued guidance to help companies understand how their actions will be judged during this proxy season.

“We feel that it is appropriate in this time of uncertainty to provide stakeholders with some specific guidance on a number of voting policy issues that are likely to be directly affected over the coming months by the pandemic and the global response to it,” Georgina Marshall, Global Head of Research and Chair of the ISS Global Policy Board stated in a press release.

The primary message communicated is that ISS will “exercise appropriate discretion and use case-by-case analysis” when evaluating board decisions on a long list of items including: annual meeting postponements; opting for virtual-only meetings; standards for director attendance; changes in compensation metrics, goals, targets and options awards; decisions on capital structure and payouts, dividends, share buy-backs, and raising capital; and any defensive moves boards might make including adding poison pills.

Of course the key word in all of this is “discretion.” While it is up to the discretion of the board to make changes that it believes will help navigate the company through this crisis situation, ISS has made it clear that it will use its discretion to determine whether the board’s actions are in the best interest of all stakeholders and do not result in personal gain for board members and management.

Presenting full, written disclosures explaining all decisions the board makes in reaction to the COVID-19 pandemic (in proxy statements, press releases, website postings) can help directors avoid clashes with ISS and shareholders. Additionally, it might be wise to engage in additional outreach to ISS to determine how the advisory firm might view specific issues a board might be facing before final decisions are made. Discussions with shareholders about how to move forward with sensitive issues during these uncertain times might also be constructive for boards. All of these measures will help avoid reputational damage and potential shareholder actions against the board during these uncertain times.

Notable issues covered in the ISS guidance:

On Annual Meetings: Since health and safety concerns are paramount during the pandemic, companies opting to hold virtual-only meetings are encouraged to clearly disclose the reason for the decision, allow shareholders full participation including having the opportunity to ask questions virtually and make a commitment to return to in-person or “hybrid” meetings as soon as is practical.

On Poison Pills: Since many companies are being advised to adopt poison pills to defend against hostile takeovers if their stock takes a hit during the pandemic, ISS will review these situations on a case-by-case basis “which includes examining whether directors appear to have sought to appropriately protect shareholders from abusive bidders without inappropriately entrenching the existing board and management team.”

On Compensation Issues: ISS reiterates that it is not supportive of changes to long-term compensation midstream, and will examine any proposed changes on a case-by-case basis “to determine if directors exercised appropriate discretion and provided adequate explanation to shareholders of the rationale for changes.”

During this proxy season, ISS has made it clear that it will evaluate each board’s decisions during the COVID-19 pandemic on a case-by-case basis. Boards that provide full disclosure and reasonable rationales for their decisions will receive the benefit of the doubt.