November 23, 2015

ISS Releases 2016 Policy Updates

On Friday, ISS issued its 2016 policy updates. As noted in this press release, key US policy updates include changes to the director overboarding policy (we’re posting memos in our “ISS Policies” Practice Area):

– For most directors except for standing CEOs, maximum number of public company boards that a director can sit on before being considered “overboarded” reduced from six to five.
– There will be a one-year grace period until 2017, giving directors and companies sufficient time to make any changes in advance of the 2017 proxy season.
– During 2016, ISS research reports will highlight if a director is on more than five public company boards, but adverse voting recommendations will not be issued under this new overboarding policy unless the current maximum of six boards is exceeded.
– For CEOs, the current overboarding limit will remain at two outside directorships.

For board actions that significantly reduce shareholder rights without approval by shareholders (so-called unilateral board actions), the policy is being updated to distinguish between (1) unilateral board adoptions of bylaw or charter provisions made prior to or in connection with a company’s IPO and (2) unilateral board amendments to those documents made after the IPO.

On executive pay and transparency, the “Problematic Pay Practice” policy will be updated to add “Insufficient Executive Compensation Disclosure by Externally Managed Issuers (EMIs)” to the list of practices that may result in an adverse voting recommendation on executive compensation. This will apply when an EMI fails to provide sufficient disclosure to enable shareholders to make a reasonable assessment of compensation arrangements for the EMI’s named executive officers.

Director Compensation: Delaware Emphasizes Importance of Corporate Formalities in Facebook Case

Here’s a blog by Davis Polk’s Ning Chiu:

The litigation against Facebook for their director compensation raised a question of first impression: whether a disinterested controlling stockholder can ratify a transaction approved by an interested board of directors by expressing assent informally, instead of using one of the prescribed methods under Delaware corporate law, and be able to shift the standard of review from entire fairness to the business judgment presumption.

The board’s decision to approve the compensation of outside directors in 2013 was governed by the entire fairness review as a self-dealing transaction. After the filing of the lawsuit, which we previously discussed here and here, Mark Zuckerberg, who controlled over 61% of the voting power, approved the compensation in a deposition and with an affidavit. The company argued that these actions were enough to ratify the compensation and thereby shift the standard of review to the business judgment presumption.

The Court of Chancery of the State of Delaware disagreed in this opinion. Stockholder ratification of a self-dealing transaction must be accomplished formally by a vote at a stockholder meeting or by written consent. In denying the company’s motion for summary judgment, the court concluded that even a single controlling shareholder cannot ratify an interested board’s decision without adhering to the corporate formalities spelled out in Delaware corporate law.

A decision by interested directors about their own compensation will be reviewed as a self-dealing transaction under the entire fairness standard, but can gain the protection of the business judgment rule if a fully informed disinterested majority of stockholders ratifies the transaction. Under Section 228 of the DGCL, unless the charter otherwise restricts, any action that may be taken at any annual or special meeting of stockholders may be taken by majority stockholder consent without a meeting, notice or a vote. However, notice of the written consent (the taking of the action) must be provided to non-consenting stockholders to ensure some level of transparency.

Due to the potential for abuse, Delaware courts have traditionally adhered strictly to the technical requirements that signify stockholder approval. This court noted that if affidavits are considered sufficient as ratification, that could eventually lead to “Liking” a Facebook post of a proposed corporate action as being enough to express approval.

Interview: CEO Who Raised All Salaries to $70k

If case you didn’t catch the recent episode of “The Daily Show” where Trevor Noah interviews Dan Price – the CEO of Gravity Payments – who discusses why he raised all salaries to $70k or more. It’s fascinating – and certainly should give one pause when thinking about whether a CEO who already makes $5 million per year needs another raise…

By the way, here’s a recent documentary about conflict minerals…

Broc Romanek