Sullivan & Cromwell's informative analysis of ISS negative recommendations against directors included in its "2019 Proxy Season Review: Part 2" identified a continued correlation between ISS negative recommendations against directors and lower director shareholder support levels, with an average level of voter support of about 97% if ISS recommends "for" a director and 79% if ISS recommends "against." ISS reportedly issued negative recommendations (in uncontested elections) against 9% of directors through June 1, 2019, or about 1,100 directors at 411 Russell 3000 companies.
An informative table on page 2 of the memo identifies for the Russell 3000 and S&P 500 the frequency of ISS negative director recommendations, the associated average shareholder vote, and the number of directors receiving less than majority support by issue/topic. As depicted and discussed in the memo, lack of responsiveness to shareholder concerns (e.g., failure to implement a successful shareholder proposal) and excessive non-audit fees paid to auditors or failure to disclose a breakdown of fees were the most impactful, i.e., attained the lowest shareholder vote for directors in the face of an ISS withhold or against recommendation - garnering average shareholder votes of just 58% and 60%, respectively, for Russell 3000 companies. For S&P 500 companies, the most impactful ISS recommendations were associated with excessive non-audit fees or failure to disclose a breakdown of fees (55% average vote) and poor attendance (<75%) at board and committee meetings (63% average vote).
Additional noteworthy takeaways include:
- The most common basis for a negative ISS recommendation for the Russell 3000 related to adverse governance provisions at newly public companies not subject to a sunset. The average support level for directors in this category was 84%. The second most common basis for a negative ISS recommendation among these companies related to director independence issues.
- No S&P 500 directors were subject to ISS withhold or against recommendations for a lack of responsiveness to a low say-on-pay vote or other lack of responsiveness to shareholder concerns (e.g., failure to implement a successful shareholder proposal), poison pill issues (e.g., failing to obtain shareholder approval), or a unilateral action by the board that reduces shareholder rights.
See also the firm's "2019 Proxy Review: Part I" focused on Rule 14a-8 shareholder proposals, which we recently reported on here. Access numerous additional resources on our Proxy Advisors and Proxy Season pages. This post first appeared in the weekly Society Alert!