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Corporate Governance: new voting guidelines from NAPF and ISS

Tom Martin
17/03/2015

Both the National Association of Pension Funds (NAPF) and Institutional Shareholder Services (ISS) have published voting guidelines for the 2014/2015 AGM season.

NAPF Corporate Governance Policy and Voting Guidelines 2014/2015

NAPF has published updated Corporate Governance Policy and Voting Guidelines.  In a change from the previous format of commentary on the UK Corporate Governance Code (Code), NAPF has published its opinions by reference to typical AGM resolutions.  It has adopted this approach in order to assist investors and their proxy voting agents in forming judgements on the resolutions presented to shareholders at a company's AGM.

NAPF encourages investors to make use of their ability to affect the corporate governance of companies by voting coherently at AGMs, and has moved away from its previous approach of advocating abstention.  However, the guidelines state that a decision to vote against management should only be taken after proper consideration of the company's explanation for non-compliance, in the light of the particular circumstances at that company and ideally after engagement with the board.

While the Code only applies on a mandatory basis to companies with a premium listing, NAPF encourages investors to refer to the Quoted Companies Alliance Corporate Governance Code for Small and Mid-Size Quoted Companies (QCA Code) as an indication of the corporate governance standards expected of smaller quoted companies, and recommends that regular and constructive engagement with shareholders be a key focus for such companies.

Particular points to note in the guidelines are:

  • The guidelines emphasise that the success of a board is down to its members' contribution, and that shareholders are responsible for holding directors individually accountable.  NAPF encourages that individual directors' contributions be disclosed in the report and accounts, and that directors make themselves available for shareholders to contact them.
  • The re-election of the chairman (or, where different, the chairman of the nomination committee) may be opposed in the absence of a diversity policy, successful implementation of measurable targets or actual board change consistent with company strategy.
  • The guidelines no longer state that a share issuance authority equal to one-third of current issued share capital is the norm, and provide that this proportion may be exceeded as part of a fully pre-emptive rights issue.
  • The report of the directors should cover key strategic and operative risks, for example the reputational risk of artificial or 'aggressive' tax planning and emerging risks such as those from cyber security and climate change.

ISS 2015 United Kingdom and Ireland Proxy Voting Guidelines

2015 is the first year that ISS, a US proxy voting service, will operate a standalone policy for the UK and Ireland, having previously used the guidelines of NAPF (with which they had a formal agreement) as their standard reference.  The new guidelines build on and take account of the NAPF guidelines as well as other commonly used statements of best practice. 

ISS has a policy on smaller companies applying to members of the FTSE Fledgling Index, AIM companies and other companies whose shares are not widely held, and notes that the QCA Code may be useful in considering AIM companies.  Noteworthy features of the ISS smaller company guidelines are:

  •  A non-executive director is likely to be considered non-independent if he or she has a shareholding of over 3%.  The holding of options may impair independence, but not if the quantum is not material and the company has adopted a policy of no longer granting options to non-executives.  Materiality for these purposes is left undefined.
  • The chairman may sit on all board committees if he is independent.
  • The audit and remuneration committees for AIM companies must comprise a majority of independent non-executive directors and half of nomination committee members must be independent.
  • The core ISS policy on pre-emption disapplication of 5% is extended to 10% for smaller companies.
  • A negative vote recommendation would be considered if any of the following had occurred:  executive directors do not have formal service contracts or their service contracts have notice periods of more than 12 months; if non-executives received performance-related pay during the relevant year; if options have been re-priced during the year; if re-testing is allowed during that period, or the vesting of incentive awards is not conditional on the achievement of performance hurdles; or if executive awards during that year feature a vesting period of less than three years.

Tom Martin is a Director in Fieldfisher's Corporate Group in London.