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Letter to Gary Retelny Regarding 2013 Institutional Shareholder Services (ISS) Proxy Voting Policy Change

We are writing in regard to the Institutional Shareholder Services (ISS) 2013 proxy voting policy change relating to board responsiveness to majority-supported shareholder proposals. As many commenters noted in their letters on the draft 2013 policy updates, the revised ISS policy raises a number of significant issues. We believe that the roughly three-week comment period on the draft 2013 policy updates did not provide all interested parties with sufficient time to adequately consider and evaluate the proposed policy changes, or to provide complete comments on those changes.

While we appreciate that ISS provided for a one-year transition period to implement the revised ISS policy and indicated that it will examine “the sufficiency of a company’s action in response to a majority-supported shareholder proposal,” we continue to have grave concerns that it will work against, rather than promote, the interests of the company and its shareholders. Accordingly, we request that ISS include an inquiry in its forthcoming proxy voting policy survey in order to provide an additional opportunity to consider the issues presented by the revised ISS policy. We suggest that the inquiry seek comments on an alternative policy with respect to majority- supported shareholder proposals that could form the basis for this inquiry and is discussed in more detail below.

As an initial matter, many commenters noted in their letters on the draft 2013 policy updates that the revised ISS policy raised serious questions relating to director accountability and the fiduciary duties of directors. It is a fundamental principle of state corporate law that directors must exercise their independent judgment and act in the best interests of the company and its shareholders. While a board of directors should, of course, consider the results of any given vote on a shareholder proposal, it cannot automatically implement a shareholder proposal without considering all relevant factors in determining the most appropriate response to the proposal consistent with the best interests of the company.

Indeed, those who commented on the 2012 policy updates noted that shareholder proposals are binary in nature, presenting a stark choice between one proposed course of action or non-action. Thus, an affirmative vote by a shareholder on such a proposal is not necessarily a vote against every other possible alternative approach to addressing the issue that the proposal seeks to address. Nonetheless, under the revised policy, ISS could determine that a board did not adequately respond to a shareholder proposal and recommend votes “against” re-electing directors, even if the board engages with shareholders, carefully considers their views, and addresses their concerns through an alternative means.

Negative voting recommendations have serious consequences for companies and, accordingly, should be made in clearly defined and significant circumstances. By lowering the threshold to trigger a negative voting recommendation, the revised ISS policy is likely to result in more negative voting recommendations against directors in a wide range of circumstances, where such recommendations may not be appropriate.

In view of the significance of negative voting recommendations and continued concern about the policy with respect to majority-supported shareholder proposals, we believe that further consideration and discussion is warranted. Accordingly, consistent with ISS’s commitment to a transparent policy formulation process, we ask that ISS raise this issue for further discussion in its forthcoming proxy voting policy survey.

In particular, we believe that a board should be deemed responsive to a shareholder proposal that received a majority of votes cast if the board conducts a thorough review of the proposal and the underlying issues, makes an informed decision about how to address the proposal, demonstrates its thorough review through disclosure, and explains its rationale. We therefore request that the following question be included in the forthcoming survey:

Should a board of directors be deemed responsive to a shareholder proposal that received a majority of votes cast if it conducts a thorough review of the proposal and the underlying issues, makes an informed decision about how to address the proposal, and discloses its rationale for the actions it took?

This approach preserves shareholders’ ability to re-propose the original shareholder proposal or an alternative proposal if they are unsatisfied with the board’s response, and is fully consistent with a policy of maintaining the board’s accountability and responsiveness to shareholders’ interests, as expressed through frequent engagement.

We appreciate your attention to this matter and would be glad to discuss this further. Please do not hesitate to contact Don Green of Business Roundtable at (202) 496-3275 if we can provide additional information or answer any questions about this matter.

Sincerely,

Business Roundtable
Center On Executive Compensation
Society of Corporate Secretaries and Governance Professionals
U.S. Chamber of Commerce

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