Yesterday, ISS issued Policy Guidance on the Impacts of the COVID-19 Pandemic addressing the following issues:
- Annual Shareholder Meeting Issues (i.e., Postponements and Virtual-Only meetings),
- Poison Pills, Shareholder Rights and Boards/Directors, including poison pills and other defensive measures, boards/directors attendance, and changes to the board of directors or senior management,
- Capital Structure and Payouts, including dividends, share repurchases, and capital raisings, and
- Compensation Issues.
Regarding compensation issues, the ISS guidance specifically addresses option repricing and changes in metrics or shifts in goals or targets.
- ISS recognizes that many boards are likely to 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. ISS also recognizes that directors’ decisions to make such adjustments to 2020 compensation programs generally will be described to and analyzed by shareholders at next year’s shareholder meetings, but encourages boards to provide contemporaneous disclosure to shareholders of their rationales for making such changes in order to provide them with greater insights now and next year into the board’s rationale and circumstances when the changes are made.
- ISS states that it will look at changes made to long-term awards on a case-by-case basis to determine if directors exercised appropriate discretion, and provided adequate explanation to shareholders of the rationale for changes, noting that its benchmark voting policies generally are not supportive of changes to midstream or in-flight awards.
- ISS will assess any structural changes to a company’s long-term plans to take into account the new economic environment under its existing benchmark policy frameworks.
- Regarding stock option repricing, ISS states that if a board undertakes repricing actions without seeking shareholder approval or ratification, the directors’ actions will be subject to scrutiny under its benchmark policy board accountability provisions. If a company’s board seeks shareholder approval/ratification of repricing actions at 2020 meetings, ISS will apply its existing case-by-case policy approach under which ISS will generally recommend opposing any repricing that occurs within one year of a precipitous drop in the company's stock price. However, ISS indicates that it will examine whether (1) the design is shareholder value-neutral (a value-for-value exchange), (2) surrendered options are not added back to the plan reserve, (3) replacement awards do not vest immediately, and (4) executive officers and directors are excluded. We consider this approach to continue to be appropriate during the circumstances of the COVID-19 pandemic.