Annual Corporate Governance & Executive Compensation Survey

Shearman & Sterling LLP IPO Corporate Governance | 61 IPO CORPORATE GOVERNANCE Richard B. Alsop and Yoon-jee Kim INSIGHTS In 2016, we began examining the impact of the new voting policy initiated by ISS in its Executive Summary of 2016 Global Benchmark Policy Updates published in November 2015 on the corporate governance practices of newly public companies. The voting policy recommended a vote against directors of newly public companies due to the adoption, prior to or in connection with an IPO, of bylaws or charter provisions that adversely impact shareholder rights, focusing on (i) the level of impairment of shareholder rights caused by the provision, (ii) the shareholders' rights disclosed rationale for adopting the provision, (iii) the ability to change the governance structure in the future, (iv) the ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure, and (v) a public commitment to put the provision to a shareholder vote within three years of the IPO. ISS has updated its policy in 2017 to expand the adverse vote recommendation to directors of IPO companies with a multi-class capital structure with unequal voting rights. ISS also removed as a positive factor in the policy the public commitment by the company to have a shareholder vote on the provision within three years of its IPO. In its place, ISS included a more stringent requirement of a reasonable sunset provision with the intention of ensuring that the adverse practice is eventually eliminated. THE ISS POLICY The ISS voting policy states that for newly public companies, ISS will generally vote against or withhold votes from individual directors, committee members or the entire board (except new nominees, who are considered on a case-by-case basis) if, prior to or in connection with the company's IPO, the company or its board adopted bylaw or charter provisions materially adverse to shareholder rights or implemented a multi-class capital structure in which the classes have unequal voting rights. ISS considers the following factors when making its voting recommendation: Although the ISS policy does not define "charter provisions materially adverse to shareholder rights," the ISS policy on director performance evaluation identifies problematic provisions to include: • a classified board structure • a supermajority vote requirement • either a plurality vote standard in uncontested director elections or a majority vote standard contested director elections • the inability of shareholders to call special meetings • the inability of shareholders to act by written consent • a multi-class capital structure and/or • a non-shareholder approved poison pill For subsequent years, ISS recommends that unless the adverse provision and/or problematic capital structure is reversed or removed, votes for director nominees should be on a case-by-case basis. Level of impairment of shareholders' rights Ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board Disclosed rationale Any reasonable sunset provision Ability to change the governance structure (e.g., limitations on shareholders' right to amend the bylaws or charter, or supermajority vote requirements) Other relevant factors

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