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Institutional Shareholders Services ISS Policy Guidance in Light of COVID-19

Fulcrum Partners. Executive Benefits News

Earlier this week, Institutional Shareholder Services Inc ISS issued policy guidance regarding the impact of the COVID-19 pandemic on aspects of employee and executive compensation. ISS is a proxy advisory firm that provides data, analytics, and insights to companies and investors. Attorney Mike Melbinger, Partner in the Chicago offices of Winston and Strawn, has offered the following thoughts on some of the challenges to corporate boards when attempting to adjust performance metrics and goals in view of the coronavirus impact, and on stock option repricing, including the potential exclusion of executive officers and directors from that action.

ISS Issues Policy Guidance on the Impact of the COVID-19 Pandemic Apr 9, 2020

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.

Related ISS and Executive Benefit Topics

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Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through CapAcuity, LLC; Lion Street Advisors, LLC (LSF) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI, LSF and BDO Alliance USA are non-affiliated entities and separate entities from Fulcrum Partners and CapAcuity, LLC. Unless otherwise noted, VAI/VSI, LSF and BDO Alliance USA are not affiliated, associated, authorized, endorsed by, or in any way officially connected with any other company, agency or government agency identified or referenced in this document.

ISS and Winston Strawn are not affiliated with Valmark Securities, Inc. or Valmark Advisors, Inc.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.

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