Institutional Shareholder Services Inc (ISS), a US provider of proxy research and voting recommendations, is seeking comments on potential changes to certain of its voting policies in its 2015 UK & Ireland Proxy Voting Guidelines. The areas in which it proposes changes relate to “director overboarding”, auditors’ fees for smaller companies and general authorities to disapply pre-emption rights.
To meet the concerns of investors that directors have sufficient time and energy to be effective representatives of shareholders’ interests, ISS has an “overboarding” policy in the UK and Ireland as well as in other markets, which includes a recommended maximum number of directorships which an individual should hold in various circumstances. The current ISS UK & Ireland Proxy Voting Guidelines include a reference to directors’ time commitments but do not refer to a recommended maximum number of board seats which directors should hold. The proposed change is to make explicit reference to a recommended maximum number of board positions and indicate that ISS may recommend a vote against directors considered overboarded. The proposed policy limits for the UK and Ireland are as follows:
- Executive directors are not expected to hold other executive or chairmanship positions. However, they may hold up to two other non-executive directorships.
- The board chairman is not expected to hold an executive position elsewhere, or more than one other chairmanship position. However, the chairman may hold up to three other non-executive directorships.
- A non-executive director who does not hold executive or chairmanship positions may hold up to four other non-executive directorships.
ISS comment that in assessing outside directorship board positions, only publicly-listed companies will be counted. There will also be a stricter policy for directors who serve on the boards of complex companies, or those in highly regulated sectors, or who chair a significant number of board committees. When applying this policy, ISS will consider the nature and scope of the various appointments and the companies concerned, and whether any exceptional circumstances exist.
Auditors’ fees for smaller companies
ISS currently have a policy which considers non-audit fees to be excessive when they routinely exceed audit-related fees without adequate explanation. ISS will recommend voting against proposals relating to auditor fees when the ratio of non-audit fees to audit fees has been over 100 per cent for more than one year without adequate explanation. This policy is currently applied to widely held companies but not to smaller companies such as those listed on AIM.
ISS proposes to extend its current policy on fees for non-audit services to such smaller companies. ISS would recommend a vote against proposals authorising the board to fix the fees payable to the external auditors when the ratio of non-audit fees to audit fees has been over 100 per cent for more than one year, there is no satisfactory justification (for example, exceptional circumstances linked to a one-off transaction), and the company appears unwilling to address the situation. The chairman of the audit committee may also receive a negative voting recommendation when he or she is next standing for re-election.
General authorities to disapply pre-emption rights
ISS refer to the revised Pre-Emption Group Guidelines on the disapplication of pre-emption rights published in March 2015. In light of the revised guidelines, ISS proposes to change its UK and Ireland policy to reflect the change in acceptable practice, clarifying that a general authority to issue shares without a disapplication of pre-emption rights over up to ten per cent of the issued share capital is acceptable, provided that the extra five per cent above the first five per cent is to be used only for an acquisition or specified capital investment. The policy will also clarify that if a company receives approval for this sort of authorisation but then abuses that authority during the year (for example, by issuing shares without pre-emption rights up to ten per cent for purposes other than those set out in the revised Pre-Emption Group Guidelines) then it may receive a negative recommendation on the authority at the following AGM.
ISS will consider comments on these proposed changes to its UK and Ireland policy as it formally makes updates to its voting policies which will have to be applied to shareholder meetings taking place on or after February 1, 2016.
(ISS, Director Overboarding (UK & Ireland), 02.11.15)
(ISS, Auditors' Fees, smaller companies (UK & Ireland), 02.11.15)
(ISS, General authorities to issue shares without preemptive rights (UK & Ireland), 02.11.15)