Update on the current board issues: November 2015

Issues in brief

Proxy advisors change voting recommendation policies on overboarding, unilateral board decisions

ISS and Glass Lewis recently released their voting recommendation policies for the 2016 proxy season, which included changes related to director elections.

Specifically, ISS and Glass Lewis changed their voting recommendation policies concerning “overboarding” and unilateral board actions. ISS policies are available here and Glass Lewis policies are here.

Director overboarding

Directors are considered overboarded, according to ISS, if they sit on too many boards, which could result in excessive time commitments. ISS announced it lowered the acceptable number of public company boards on which directors may sit because of “increasing demands on directors’ time, as they play a larger role in company and risk oversight, shareholder engagement, and other activities.” 

In 2016, for all directors other than CEOs, ISS will continue its 2015 general recommendation policy of recommending a vote against or withhold a vote for directors who sit on more than six boards. But it will begin noting in its analysis if a director is serving on more than five public company boards. Starting in February 2017, ISS will recommend against such directors.  ISS has not proposed any change to their existing policy on directors who are sitting CEOs. 

Glass Lewis will not make any official change in 2016, but will closely review director board commitments and may note instances of (1) directors who are not also executives serving on more than five total boards and (2) directors who serves as an executive of a public company serving on more than two total boards. Beginning in 2017, Glass Lewis will generally recommend voting against a director who is a CEO of a public company while serving on more than two public company boards and any other director who serves on more than five public company boards. This will bring Glass Lewis in alignment with ISS.

In 2016, Glass Lewis will continue its policies of recommending a vote against a director who is a CEO of a public company while serving on more than three total boards and recommending a vote against any other director who sits on six or more total boards. 

CalSTRS, one of the country’s largest institutional investors, earlier this year stated that it prefers CEOs serve on only one  public board other than their own company’s, and that other directors be limited to four public company boards.

Unilateral board actions

With regard to unilateral board actions, ISS’ 2016 policies establish separate voting recommendation policies for IPO companies and post-IPO companies.

Newly public companies: ISS will vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if, before or during the company's public offering, it or its board adopts bylaw or charter provisions adverse to shareholders' rights. 

Post-IPO companies: ISS will vote against director nominees (except new nominees, who should be considered case-by-case) if a board takes action without shareholder approval to classify the board, adopt a supermajority vote requirement, or eliminate shareholders’ ability to amend bylaws. 

In both cases, unless the board action is reversed or submitted to a vote of shareholders, ISS will evaluate the individual circumstances before providing a recommendation on director nominees in subsequent years.

The 2015 policy advocates a negative vote recommendation for individual directors, committee members, or the whole board (except for new director nominees, who will be on a case-by-case basis) if a board amends certain company bylaws or the board’s charter without shareholder approval. The negative recommendation would stay in force until the unilateral action is reversed or shareholders are allowed to ratify the bylaw or charter amendment.

In a change from its 2015 policy, Glass Lewis states that it may recommend shareholders vote against the chairman of the governance committee, or the entire committee, where the board has amended the company’s governing documents to reduce or remove important shareholder rights without seeking shareholder approval. 

SEC Chair: Expect more enforcement actions

SEC Chair Mary Jo White expects the Commission to remain tough on white collar criminals in 2016 by using “all of the enforcement tools in our arsenal.”

That was one of her messages in a November 2 speech at the Annual International Institute for Securities Enforcement and Market Oversight event. “My experience at the Commission, as well as my time as a criminal prosecutor, have underscored the importance of attacking misconduct in as many ways as we can in order to sufficiently punish wrongdoers, protect investors and the markets, and achieve strong deterrence of other would-be fraudsters,” she said.

The tools White referred to include:

  • Pursuing individuals, not just companies, in enforcement actions to hold them accountable for their actions.
  • Utilizing the whistleblower programs of companies and the SEC. Note that in fiscal year 2015, the commission received over 4,000 tips.
  • Tough sanctions against companies and individuals to get the attention of the board and shareholders.

These tools led to a record number of enforcement actions in 2015. In the fiscal year that ended September 30, the SEC filed 807 enforcement actions covering a wide range of misconduct, and obtained orders totaling approximately $4.2 billion in disgorgement and penalties.

More new independent directors added to S&P 500 boards

While the shareholders of S&P 500 companies just elected the largest class of new independent directors in seven years, the annual board turnover rate remains at about 7%, according to the 2015 Spencer Stuart Board Index. There were 376 new independent directors elected in 2015, compared to 380 independent directors in 2008, according to Spencer Stuart. The new class of independent directors includes more active executives, executives with financial backgrounds, and incrementally more women than in 2014. 

Twenty percent of new independent directors are active chairs, vice chairs, CEOs, COOs, or presidents, compared with 32% in 2005. Fifty-seven percent of S&P 500 CEOs today don’t sit on outside boards.

Women represented 31% of new directors in 2015, up one percentage point from 2014. 

Other highlights from the 2015 study include:

  • Female representation: Women now represent 20% of all S&P 500 directors, compared with 16% five years ago, yet women are underrepresented in board leadership roles. Only 16% of nominating committees are chaired by a female director, 13% of audit committees, and 10% of compensation committees.
  • Chair/CEO separation: Nearly half (48%) of S&P 500 companies split the chair and CEO role compared to 40% in 2010 and 29% in 2005. Twenty-nine percent of those who serve in the chair role are deemed independent chairs, having met the NYSE or NASDAQ rules for independence.