ISS’ Policy Update Regarding the Coronavirus Pandemic.

In light of the uncertainty caused by the COVID-19 pandemic, ISS released “Impacts of the COVID-19 Pandemic ISS Policy Guidance” on April 8, 2020 to provide stakeholders with some specific guidance on a number of voting policy issues that are likely to be directly impacted over the coming months by the pandemic and the global response to it.

ISS benchmark policies already provide their research teams the ability to exercise appropriate discretion and use case-by-case analysis in response to company-specific, sector-specific, and market-specific facts and circumstances. ISS analysts have regularly exercised such case-by-case discretion to deal with many company-specific situations, market disruptions, recessions and natural disasters in a measured approach. In addition to the already existing analyst discretion, ISS has provided specific guidance in four broad areas that are likely to be directly or indirectly affected by COVID-19:

1) AGMs: Meeting Postponements, Virtual-only Meetings

2) Poison Pills, and Directors: Poison Pills, Director Attendance, Changes to the Board or Management

3) Compensation: Change in Metrics/Shift in Goals or Targets, Option Repricing Dividends

4) Capital Structure: Dividends, Share Repurchases, Capital Raisings

ISS will update this guidance as new information becomes available. It is clear, the 2020 shareholder meetings will be affected and it is likely to expect that some long-term effects of COVID-19 may affect ISS’ policy development and policy application for 2021 and beyond.

1) AGMs

Meeting Postponements

There have already been widespread meeting postponements. In markets where online shareholder meetings are not permitted, companies will need to follow their markets’ regulatory guidance and only hold physical meetings when it is deemed safe to do so.

For Canadian markets, the TSX and TSX-V have each granted blanket extensions for all annual meeting deadlines in 2020. Issuers listed on those exchanges are allowed to hold their annual meeting on any date up to and including December 31, 2020, regardless of the fiscal year end date of the issuer. Click here for TSX Staff Notice 2020-0002 which describes this relief in more detail.

ISS has advised that companies should continue to update shareholders by way of continuous disclosure documents such as news releases, proxy circulars, etc. ISS will take a positive view on those companies and boards which utilize webcasts, conference calls and other mediums of electronic communications to engage with their shareholders and investors, even if meetings have been postponed.

Virtual-only Meetings

Until now, ISS favoured “hybrid” meetings (which included both in-person, and online methods of shareholder participation) over meetings that were “virtual-only”. However, given the current situation, ISS believes that virtual-only meetings may be both necessary and desirable. For meetings in most markets including Canada, ISS will avoid negative recommendations for companies who elect to hold a virtual-only meeting, provided that the reasons for doing so are clearly disclosed (i.e. that it is related to the COVID-19 pandemic). Virtual-only meetings should provide shareholders with the greatest ability to participate, including being able to ask questions of directors and senior management and to engage in dialogue if they wish. ISS encourages boards to commit to return to in-person or hybrid meetings (or to put that matter to shareholders to decide) as soon as practical.

2) Poison Pills, and Directors

Poison Pills and other Defensive Measures

With the recent share price drops, many company advisors have been advising boards to adopt a shareholder rights plan to protect against any opportunistic bidders. ISS’ existing policy approach already accounts for the adoption of poison pills in the face of genuine threats such as the current pandemic. ISS will continue to evaluate whether the pill allows for board or management entrenchment and assess certain provisions of the pill including: flip-in event triggers, definitions, what constitutes an offer, and waivers for passive investors.

Director Attendance

All jurisdictions in Canada allow directors to attend meetings electronically or telephonically, so ISS’ director attendance policy and application will remain the same. ISS generally recommends against directors who did not attend at least 75% of meetings in the prior fiscal year without a good reason. It seems as though ISS will consider absences due to COVID-19 as a good reason. That being said, issuers should provide shareholders with “adequate information” such that they can make an informed decision on the director’s attendance.

Changes to the Board of Directors and Senior Management

ISS believes that boards should have broad discretion during this crisis to ensure that they have the right team in place and will adjust the application of their policies as appropriate for the exceptional circumstances of the current pandemic. This will apply to ISS’ voting policies regarding independence (if directors are urgently required to fill in for management because of health issues), overboarding (if directors are called upon to fill vacancies at other companies), diversity (if the company’s female directors become incapacitated), or other attributes.

3) Compensation Issues

Change in Metrics/Shifts in Goals or Targets

ISS expects many boards will announce plans to materially change the performance metrics, goals or targets used in their short-term compensation plans in response to the drop in the markets and the possible recession that many economists now predict in the wake of the pandemic. Changes made by a company during 2020 will likely be considered by shareholders at the company’s 2021 AGM. ISS has encouraged boards to update shareholders with the rationale behind such changes.

LTP: Regarding long-term compensation plans, ISS’ benchmark voting policies generally are not supportive of changes to midstream or in-flight awards since they cover multi-year periods. ISS will evaluate any 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. Some boards may consider altering the structures of their long-term plans to take the new economic environment into consideration. ISS will assess such structural changes under the existing benchmark policy frameworks.

Option Repricing

Given the current market rout, some companies may be tempted to reprice stock options that are deep underwater. ISS has confirmed that they will be maintaining the same approach outlined in their policy guidelines and generally oppose option repricing. ISS will consider the following questions which may be considered mitigating factors for stock option repricing: Was there a value-for-value exchange? Were surrendered options not added back to the plan reserve? Do the replacement options not vest immediately? Were executives and directors excluded from the option repricing?

4) Capital Structure and Payouts

Dividends

If a company is the recipient of a government assistance program, then it is not uncommon for governments to prohibit the payment of dividends as a condition of the loan or subsidy. That said, in markets where ISS evaluates whether dividend payout ratios are within a certain range, ISS will support broad discretion for boards that seek to set payout ratios that may fall below historic levels or customary market practice.

Share Repurchases

In the current pandemic situation, many companies have decided to put buyback programs on hold to conserve cash. ISS noted that directors will need to take into account the reputational, regulatory and business risks associated with undergoing a share buyback at this time even if it has been approved by shareholders. ISS has reaffirmed it will generally maintain a favourable view of repurchases within appropriate limits for each market but boards will be reviewed throughout 2020 leading up to their next AGM to consider if the directors managed risks in a responsible fashion for any repurchases undertaken.

Capital Raisings

Economic fallout from the pandemic will lead many companies to need additional sources of financing to help them through the crisis. ISS’ existing approach takes into account exceptional circumstances like that of COVID-19 and will continue to apply their case-by-case analysis. ISS will also consider any appropriate local market regulatory relaxations or new guidance as a result of the crisis. Additionally, ISS will consider exceptional circumstances such as whether the company’s auditor has indicated that the company has going concern issues.

Questions?

Our team is available to speak in more detail, and provide case-by-case advice on how to proactively avoid or manage negative ISS recommendations as they relate to these changes and other ISS voting policies.