By James B. Bristol

The 2008 proxy season has been completed for most companies, although fiscal year issuers are still conducting annual meetings. If you are a publicly traded company, your proxy was no doubt reviewed by Institutional Shareholder Services (ISS), which is owned by Risk Metrics. ISS reviews more than 38,000 proxies each year, and its influence with proxy voting is significant. Some institutional shareholders engage ISS to actually vote their proxies, based solely on ISS’s recommendations. Glass, Lewis & Company is another proxy and shareholder advisory service that reviews most proxies. Glass Lewis, however, seems to have only a fraction of the institutional business of ISS and does not seem to match ISS in influence.
Many companies have hired ISS to review their stock plan proposals under the ISSue Compass model to ensure that ISS will issue a favorable recommendation when it reviews the proxy. To mitigate the possibility of conflicts of interest, ISS has a “Chinese Wall” that separates the corporate services group who reviews your proxy under ISSue Compass and the proxy review group. We have seen, unfortunately, recent cases where the corporate services group gives a green light under ISSue Compass, but the proxy review team (on the other side of the wall) recommends no. These are some possible responses to a no recommendation from ISS:

1. Do nothing and hope that your proposal passes anyway. This strategy has worked for companies with no significant institutional shareholders, or with a large block of stock represented on the board. Some institutionals may not place significant weight on ISS recommendations, though this group seems smaller than it was. A good proxy solicitor can help you assess the leanings of your institutional shareholders. For many companies, doing nothing might not be the best option.
2. Call your larger institutionals and explain the reasons for your proposal. Shareholders usually appreciate being called and may go along with conditions. In a stock incentive plan proposal, for example, you may be asked to formally restrict option repricing.
3. Contact ISS to change the proposal in a way that will allow it to pass under their metrics. We’ve seen several examples where a stock incentive plan failed due to the company’s average “burn rate” (i.e., the rate that stock awards are granted). ISS generally will change to a “yes” if the company formally limits the burn rate to its industry average and files an 8-K or 14A proxy amendment.
4. Use your proxy solicitor service to solicit votes from non-institutional shareholders. Many of these shares may go unvoted. We have it on good authority that this can work.

We have found that these options, particularly 2 and 3, work best if your proxy solicitor and legal counsel work together to identify what will be persuasive and then communicate that to your shareholders and/or ISS. In one recent case where ISS had initially made an adverse recommendation on a stock plan proposal, we were able to help ISS find an error in the assumptions used in the burn rate analysis. They were happy to correct their analysis and promptly issued a reversal notice. Maybe ISS isn’t so bad after all.