Securities Law Blog

Institutional Shareholder Services Announces Results of its 2017-2018 Global Policy Survey Covering Governance Issues Relevant to Shareholder Activism

On September 25, 2017, Institutional Shareholder Services (“ISS”) issued the results of its survey for its 2017-2018 policy cycle. The survey, which is an important part of ISS’ yearly global benchmark policy formation process, covers five “select high-profile governance” topics, three of which we believe are particularly relevant to shareholder activism and are summarized in this blog post.

The survey was open to institutional investors, company executives, company directors and other constituencies. There were approximately 600 responses to the survey, broken down as follows: approximately 78.5% of the responses were from corporate issuers, company advisors, company directors and other company representatives and service providers (“non-investors”) and approximately 21.5% of the responses were from institutional investors and organizations that represent or provide services to institutional investors (“investors”).

Below is a summary of ISS’ key findings of the survey that we believe are most relevant to shareholder activism.

Multi-Class Share Structures with Unequal Voting Rights

In light of the rise of dual class share structures with unequal voting rights, especially in the tech industry (think Google IPO in 2004 and, more recently, the Snap IPO) intended to concentrate voting power among founders or a particular group of investors, ISS solicited views on this topic.

43% of investor respondents indicated that multi-class structures with unequal voting rights are “never appropriate” for public companies while 43% indicated that unequal voting rights structures may be justified at new public companies if they are subject to sunset provisions or if periodically approved by the shareholders with the diminished voting rights. A very small percentage of investors responded that companies should be allowed to use their own discretion when choosing their voting rights structures.

50% of non-investor respondents indicated that companies should be allowed to use their own discretion when choosing their voting rights structures, 27% indicated that unequal voting rights structures may be justified at new public companies if they are subject to sunset provisions or if periodically approved by the shareholders with diminished voting rights, and 11% indicated that multi-class structures with unequal voting rights are never appropriate.

Board Gender Diversity

Board diversity is currently one of the hottest corporate governance topics and will be highly relevant during the upcoming proxy season. Recognizing this, ISS asked respondents whether the absence of a woman on a public company board would be “problematic.” A majority of both investor and non-investor respondents indicated that an all-male board is problematic.

69% of investor respondents stated that the complete lack of gender diversity on a board would be problematic. 43% of investor respondents stated that an all-male board could indicate that there are issues with the board’s process for recruiting directors. 26% stated that concerns with the lack of gender diversity would be mitigated if the company disclosed a policy to increase diversity. Less than 10% of investor respondents would not be concerned with a lack of gender diversity. Of significant relevance to shareholder activists, among the investors who indicated that a lack of gender diversity is problematic, the highest-favored response for addressing the issue was board engagement, the second highest-favored response was to consider supporting a shareholder proposal to take action to increase diversity, and the third highest-favored response was to support a director candidate nominated by a shareholder.

54% of non-investor respondents stated that an all-male board would be problematic, more than half of which also indicated that their concerns may be mitigated if the company disclosed a policy to increase diversity. 19% of non-investor respondents indicated that they would not be concerned with a lack of gender diversity. The most popular measure cited by non-investors to address gender diversity issues was board engagement. However, departing from their investor counterparts, the non-investors indicated that they would prefer to vote against members of the nominating committee of a company with gender diversity issues rather than support a shareholder-nominated director.

Virtual and Hybrid Meetings

ISS also solicited views on the increasing number of companies in the U.S. and abroad that are holding shareholders meetings exclusively by electronic means (i.e., virtual-only meetings) as well as virtual shareholders meetings simultaneously with physical meetings (i.e., hybrid meetings). As ISS noted, concerns have been raised that “replacing physical meetings with virtual-only meetings may hinder meaningful exchanges between board members and shareholders.” From a shareholder activist standpoint, we are equally concerned that virtual-only meetings could be used by management during a contested meeting to obtain an unfair advantage over the dissident by taking complete, unfettered control over all meeting and voting mechanics.

While 19% of investor respondents found virtual-only or hybrid meetings to be acceptable, 8% of investors were opposed to either form of meeting. 36% of investor respondents stated that hybrid meetings were acceptable but were opposed to virtual-only meetings. 32% of investor respondents found hybrid meetings to be acceptable and would come around to supporting virtual-only meetings if they afforded the same rights that shareholders have at physical meetings.

42% of non-investor respondents found virtual-only or hybrid meetings to be acceptable. Among the majority of non-investor respondents who disagreed, 22% indicated that hybrid meetings are generally acceptable and would come around to supporting virtual-only meetings if they afforded the same rights that shareholders have at physical meetings and 15% were not supporters of either hybrid or virtual-only meetings.

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According to ISS, a more comprehensive supplemental survey covering other issues will remain open until October 6, 2017. ISS will publish draft 2018 policy updates in late October and anticipates releasing final policy updates in mid-November. Please contact the Olshan attorney with whom you regularly work or one of the attorneys listed above if you would like to discuss further or have questions regarding the survey.