Last week, ISS released its revised policy voting guidelines for 2018. We’re posting memos in our “ISS Policies & Ratings” Practice Area. Here’s an excerpt from this Wachtell Lipton memo (also see this Davis Polk blog):
1. Shareholder Rights Plans. In order to “simplify” ISS’s approach to rights plans and “to strengthen the [ISS] principle that poison pills should be approved by shareholders in a timely fashion,” ISS will now recommend voting against all directors of companies with “long-term” (greater than one year) unilaterally adopted shareholder rights plans at every annual meeting, regardless of whether the board is annually elected. Short-term rights plans will continue to be assessed on a case-by-case basis, but ISS’s analysis will focus primarily on the company’s rationale for the unilateral adoption.
2. “Excessive” Non-Employee Director Compensation. ISS will recommend voting against or withholding votes from members of board committees responsible for setting non-employee director compensation when there is a “pattern” (over two or more consecutive years) of “excessive” non-employee director pay without a compelling rationale or other mitigating factors. Because “excessive” pay would need to be flagged for at least two years under the new policy, ISS will not make negative vote recommendations on this basis until 2019.
3. Disclosure of Shareholder Engagement. In considering whether to recommend against compensation committee members of companies whose Say-on-Pay proposals received less than 70% of votes cast, ISS considers the company’s disclosure regarding shareholder engagement efforts. ISS provided guidance regarding the level of detail included in such disclosures, including whether the company disclosed the timing and frequency of engagements with major institutional investors and whether independent directors participated; disclosure of the specific concerns voiced by dissenting shareholders that led to the Say-on-Pay opposition; and disclosure of specific and meaningful actions taken to address the shareholders’ concerns.
4. Gender Pay Gap Proposals & Board Diversity. ISS will vote case-by-case on requests for reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account the company’s current policies and disclosure related to its diversity and inclusion policies and practices, its compensation philosophy and its fair and equitable compensation practices. ISS will also take into account whether the company has been the subject of recent controversy or litigation related to gender pay gap issues and whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers. ISS also noted that it would highlight boards with no gender diversity, but would not make adverse vote recommendations due to a lack of gender diversity. In addition, ISS revised its “Fundamental Principles” to state that boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.
In Canada where there are new disclosure requirements on companies’ gender diversity policies, ISS is introducing a new policy on board gender diversity that will generally recommend withhold votes for the chair of the nominating committee if a company has not adopted a formal written gender diversity policy and no female directors serve on its board.
5. Pledging of Company Stock. ISS has codified its existing practice to recommend withhold votes against the members of the relevant board committee or the entire board where a significant level of pledged company stock by executives or directors raises concerns absent mitigating factors.
6. Pay-for-Performance Analysis. In connection with its pay-for-performance analysis, ISS will consider, in addition to other alignment tests, the rankings of CEO total pay and company financial performance within a peer group measured over a three-year period.
7. Other Changes. ISS has further revised its voting recommendations on climate change shareholder proposals in order to promote greater transparency on these matters.
FCPA Disgorgement: Kokesh Decision Underlines “Need for Speed”
In a recent speech, SEC Enforcement Co-Director Steve Peikin reviewed the agency’s FCPA enforcement priorities. One of the more interesting parts of Steve’s remarks addressed the impact of the Supreme Court’s Kokesh decision on FCPA enforcement. Here’s an excerpt:
In many instances, by the time a foreign corruption matter hits our radar, the relevant conduct may already be aged. And because of their complexity and the need to collect evidence from abroad, FCPA investigations are often the cases that take the longest to develop. In contrast to the Department of Justice, the statute of limitations is not tolled for us while our foreign evidence requests are outstanding.
These limitations issues have only grown in the wake of the U.S. Supreme Court’s recent decision in Kokesh v. SEC, in which the Court held that Commission claims for disgorgement are subject to the general five-year statute of limitations. Kokesh is a very significant decision that has already had an impact across many parts of our enforcement program. I expect it will have particular significance for our FCPA matters, where disgorgement is among the remedies typically sought.
While the ultimate impact of Kokesh on SEC enforcement as a whole – and FCPA enforcement specifically – remains to be seen, we have no choice but to respond by redoubling our efforts to bring cases as quickly as possible.
Kokesh: The Bad Guys Want Their Money Back
It turns out that the need to bring FCPA cases on a more timely basis isn’t the only potential fallout from the Kokesh decision. In addition to barring claims for disgorgement beyond the limitations period, this King & Spalding memo points out that Kokesh raises the broader issue of whether the SEC has authority to seek disgorgement at all:
As it considers the impact of Kokesh, we expect that the SEC staff will be less aggressive in its disgorgement demands and more open to arguments limiting how disgorgement is calculated. At the same time, defendants and respondents who litigate will undoubtedly follow up on the Supreme Court’s apparent invitation, in a footnote, to challenge whether disgorgement is available at all as an SEC remedy in enforcement actions.
Now, this Bloomberg article says that the Supreme Court’s invitation to litigate that issue has been accepted. You know all of those guys that the SEC sought disgorgement from? Well, they want a refund:
Anyway some lawyers read the Kokesh opinion in that particular way and brought this class-action lawsuit against the SEC a couple of weeks ago. Delightfully the class of victims/plaintiffs in the lawsuit is securities fraudsters: Specifically, it’s “all persons or entities from whom the SEC has collected, during the period from October 26, 2011 to the present, purported ‘disgorgement,'” with some fairly minor-seeming exceptions. The alleged damages are “approximately but not less than $14.9 billion over the last six years.”
– John Jenkins