Yesterday, ISS issued FAQs explaining its views on director qualification/compensation bylaws. These types of bylaws disqualify from serving as directors persons who receive third-party compensation, typically from activist investors, for their service as directors. Such bylaws have been adopted since last spring by some companies to prevent arrangements similar to those proposed by activist shareholders running minority slates of directors for the boards of Hess Corp. and Agrium, Inc. in early 2013. See here.
In November 2013, ISS recommended that shareholders of Provident Financial Holding withhold their votes from three director candidates coming up for re-election who were serving on the company’s nominating and governance committee, because the Provident board had adopted a director qualification/compensation bylaw. See here. At the company’s annual meeting on November 26, 2013, the three candidates were re-elected by low margins, receiving withhold votes ranging from 33.4% to 34.1%. See here and Provident Financial’s November 27, 2013 Form 8-K.
According to the FAQs, ISS continues to view director qualification/compensation bylaws negatively, in particular if they have not been put to a shareholder vote. A board-adopted director qualification/compensation bylaw “may be considered a material failure of governance” and ISS “may, in such circumstances, recommend a vote against or withhold from director nominees for material failures of governance, stewardship, risk oversight, or fiduciary responsibilities.” If such a bylaw is put to a shareholder vote, “ISS will apply a case-by-case analytical framework, taking into consideration among other factors the board’s rationale for proposing the bylaw, whether the proposed bylaw materially impairs . . . shareholder rights, and any market-specific practices or views on the underlying issue.”