RiskMetrics Update Continues to Hamper Director Discretion

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on Friday February 20, 2009 at 1:14 pm

(Editor’s Note: Previous posts on this blog concerning RiskMetric Group’s policy updates are available here and here.)

My colleague Laura A. McIntosh and I (with help from our colleague David Adlerstein) wrote an article entitled “RiskMetrics Update Continues to Hamper Director Discretion,” which discusses the 2009 updates to the domestic and international corporate governance policies of RiskMetrics Group (formerly know as ISS). RMG’s policy updates continue its trend of espousing policies that tend to shift corporate decision-making from boards of directors to shareholders, including activists and special interest groups. In particular, RMG’s updated policies seek to further limit directors’ discretion in areas traditionally within the board of directors’ clear authority under state law, including executive compensation, corporate governance matters and social policy.  As an example, RMG has revised its policy with respect to management proposals to ratify a shareholder rights plan. In addition to considering whether a shareholder rights plan includes RMG’s prescribed attributes (such as a 20 percent or higher triggering threshold and a shareholder redemption feature), RMG also will take into consideration a company’s existing governance structure, including board independence, existing takeover defenses and “any problematic governance concerns.” In the face of these new, subjective criteria, it remains to be seen in what circumstances RMG would, in fact, recommend in favor of adopting a shareholder rights plan. Importantly, RMG is continuing its policy of recommending “withhold votes” against an entire board of directors, if the board adopts or renews a rights plan without shareholder approval, does not commit to putting the rights plan to a shareholder vote within one year of adoption, or reneges on a commitment to put the rights plan to a vote and has not yet received a “withhold vote” recommendation for this issue. The article explains why we believe this policy update could be problematic for corporations in the current troubled market environment.‬ ‪ ‬‪

The article is available here.