How ISS Judges Individual Directors
from May/June 2003
Director elections get plenty of consideration from Institutional Shareholder Services. Last proxy season the firm recommended “withhold authority” votes against at least one director at about a third of the 8,500 companies it examined. In other words, it questioned the ability or commitment of more than 2,500 individual board members.
Often those recommendations are against an entire standing slate of directors because of a specific board action (or inaction). But each director is considered on his or her own merits. Individuals can be singled out for failing to meet key independence or attendance criteria, or simply because they lack what ISS thinks it takes to be a good board member. Among past targets: Frank Savage, a Lockheed Martin director who got a thumbs-down last year because his failures as a member of Enron’s board and compensation committee to properly monitor the compensation of the company’s former CFO, Andrew Fastow, “raise significant questions as to his ability to be an effective director.”
This year the bar is going up a notch for “affiliated” outside directors, those with business ties to a company—a change that means they’ll be judged by the same standards as insiders.
The things that will get your board on the blacklist include:
- Implementing or renewing a dead-hand poison-pill plan, which effectively blocks all takeover bids
- Ignoring a shareholder proposal approved by the majority of votes cast for two consecutive years
- Rejecting a takeover offer if a majority of shareholders have tendered shares.
ISS will also oppose individual directors who fail to attend, in person or by phone, at least 75% of board or committee meetings in a year without a good excuse; valid reasons include illness or company business. New for 2003: Inside or affiliated directors will garner “against” recommendations if they sit on audit, compensation, or nominating committees.
An ISS call to withhold authority has yet to result in the failure of a sitting director to win reelection. For one thing, most run unopposed. Savage, for example, was reelected with 72% of the vote. Still, as Jennifer Bethel, a finance professor at Babson College, notes, it makes for bad public relations if board members don’t secure at least 90% of the vote: “If you’re only getting 70%, it can be embarrassing to the company, and there will probably be a private conversation asking you to step down.”
It’s unclear whether Savage has had such a conversation. As of February, he was still serving on the Lockheed Martin board.
