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08 December 2015

The Institutional Shareholder Services Inc. (ISS), which is a leading provider of corporate governance solutions to the global financial community, has announced the launch of its 2016 benchmark voting policy consultation period. The open comment period, which seeks the views of governance stakeholders globally on certain proposed voting policies for 2016, will run until 9 November 2015.

The ISS states that in order to ensure its voting policies take into consideration the perspectives of the corporate governance community and the views of its institutional clients, it gathers broad input each year from institutional investors, issuers, and other market constituents through a variety of channels and mediums.

ISS has made certain proposed voting policies for 2016 available for public comment. Of interest to Irish companies are the following:

Director overboarding policy (UK and Ireland)

ISS has an ‘overboarding’ policy in many markets which includes a recommended maximum number of directorships which an individual should hold in various circumstances. This approach is also followed in many voting policies of individual institutional investors.

The current ISS UK & Ireland policy includes a reference to directors' time commitments but does not refer to a recommended maximum number of board seats which directors should hold.

The change under consideration is for the policy to make explicit reference to a recommended maximum number of board positions and indicate that ISS may recommend against directors considered ‘overboarded’. This approach is consistent with ISS European policy and the proposed policy limits for UK and Ireland are as follows:

  • Executive directors are not expected to hold other executive or chairmanship positions. They may, however, hold up to two other non-executive directorships.
  • A board chairman is not expected to hold an executive position elsewhere, or more than one other chairmanship position. The chairman may, however, hold up to three other non-executive directorships.
  • A non-executive director who does not hold executive or chairmanship positions may hold up to four other non-executive directorships.

In assessing outside directorships and board positions, only publicly-listed companies will be counted.

The proposed policy also states that a stricter view may apply (case by case) for directors who serve on the boards of complex companies, or those in highly regulated sectors, or who chair a significant number of board committees. When applying this policy, ISS will consider the nature and scope of the various appointments and the companies concerned, and if any exceptional circumstances exist.

Auditors' fees, smaller companies policy (UK & Ireland)

Over a number of years, investors have increasingly raised concerns that non-audit services provided by the auditor of a company may impair audit objectivity. As a result, many investors do not support proposals authorising the board to fix the fees payable to the external auditors when auditors received significant non-audit fees and there is no satisfactory explanation for the provision of the non-audit services by the auditor.

ISS UK and Ireland policy generally considers non-audit fees to be excessive when they routinely exceed audit-related fees without adequate explanation. It will recommend voting against proposals relating to auditor fees when the ratio of non-audit fees to audit fees has been over 100% for more than one year without adequate explanation. This is applied to widely held companies (generally the main index companies in UK and Ireland). It is not currently applied to smaller companies.

ISS proposes to extend the current ISS UK and Ireland policy regarding fees for non-audit services, to be applied to smaller companies.

ISS would recommend a vote against proposals authorising the board to fix the fees payable to the external auditors when the ratio of non-audit fees to audit fees has been over 100 per cent for more than one year, there is no satisfactory justification (for example, exceptional circumstances linked to a one-off transaction) and the company appears unwilling to address the issue. In addition, the chairman of the audit committee may receive a negative voting recommendation when he or she is next standing for re-election.

General authorities to issue shares without pre-emptive rights policy (UK & Ireland)

The proposed change is for the ISS UK and Ireland policy to be updated to reflect a change in acceptable practice, by clarifying that a general authority to issue shares with a disapplication of pre-emption rights of up to 10 percent of the issued share capital is acceptable. This is provided that the extra 5 percent above the first 5 percent is to be used only for the purposes of an acquisition or a specified capital investment.

The policy will also clarify that a company which receives approval for an authority of this nature but subsequently abuses the authority during the year (for example, by issuing shares without pre-emptive rights up to 10 percent for purposes other than set out in the revised guidelines) may receive a negative recommendation on the authority at the following AGM.