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CALIFORNIA CORPORATE & SECURITIES LAW

Is ISS A Board Declassification Denier?

Institutional Shareholder Services (aka ISS) recently published its 2018 Americas Proxy Voting Guidelines Update.  Among other changes, ISS will now recommend a vote against or withhold from the entire board of directors (except new nominees, who will be considered case-by-case) if the company has opted into, or failed to opt out of, state laws requiring a classified board structure.

One has to question why ISS would adopt such an extreme policy in the face of serious academic studies concluding that declassification has actually lowered stockholder value.  See Did The Harvard Shareholder Rights Project Prove Itself Wrong?   Recently, Professors K.J. Martijn Cremers and Lubomir P. Litov examined the effects of staggering and de-staggering decisions over the period 1978-2015.  They concluded “that firm value increases (decreases) after firms adopt (remove) a staggered board”.  It is true that other academics have reached different conclusions.  See  Lucian Bebchuk and Alma Cohen, Recent Board Declassifications: A Response to Cremers and Sepe.  However, the fact that the merits (or demerits) of declassification are so seriously controverted should dictate caution on ISS’ part.  In this context, ISS’ advice might be viewed as being more akin to “ready, shoot, aim” than a considered and informed opinion.

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