Lawyer Article

Published in the November 29, 2005 issue of Southeast Tech Wire.

On November 18, 2005, Institutional Shareholder Services (ISS), a leading provider of proxy voting and corporate governance services, announced its new policy position regarding shareholder proposals on majority voting standards. In taking this action, ISS increased the likelihood that majority voting principles eventually will replace plurality voting in the election of directors.

Under the new position, ISS will continue to recommend a vote “For” reasonably crafted shareholder proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors (other than in contested elections). However, in an effort to encourage companies to voluntarily move in the direction of majority voting, ISS will now consider recommending a vote “Against” a shareholder proposal if the company has adopted formal corporate governance principles that present a meaningful alternative to the majority voting standard. At a minimum, a company’s policy should include the following elements to address each director nominee who fails to receive a majority of votes cast in an election:

• Disclosure each year in the company’s proxy statement of established guidelines for dealing with nominees who fail to receive an affirmative majority of votes cast;
• A clear and reasonable timetable for all decision-making regarding the nominee’s status;
• Independent director management of the process for determining the nominee’s status;
• An outline of the range of remedies that can be considered concerning the nominee (e.g., acceptance of the resignation or maintaining the director but curing the underlying causes of the withheld votes); and
• Prompt SEC disclosure of the final decision on the nominee’s status and how the decision was reached. 

In considering whether to recommend a vote “Against” a majority vote shareholder proposal, ISS will also consider the company’s articulated rationale for why its alternative corporate governance principles are a better way to demonstrate director accountability. ISS will also evaluate the company’s history of accountability to shareholders in its governance structure and in its actions, including whether the company has a classified board structure or a history of ignoring majority-supported shareholder proposals.

Practice Pointers

The new ISS policy presents an opportunity for companies to review their existing corporate governance structures to determine whether they ensure director accountability, as several companies already have done. Accordingly, it may be appropriate at this time for you to consider revising your corporate governance principles to comply with the new ISS guidance (and, if such revisions are made, updating your disclosure controls to provide for proxy statement disclosures and SEC filings regarding the status of director nominees).