John A. Zecca Senior Vice President General Counsel North America 805 King Farm Blvd, Suite 100 Rockville, MD 20850 / USA (301) 978-8498 john.zecca@nasdaq.com Nasdaq.com By Electronic Mail Only August 24, 2018 Institutional Shareholder Services Inc. ( ISS ) 702 King Farm Boulevard, Suite 400 Rockville, MD 20850 Email: policy@issgovernance.com Re: 2019 Annual Policy Survey Dear Sir or Madam: Nasdaq, Inc. ( Nasdaq ) 1 appreciates the opportunity to comment on ISS 2019 Annual Policy Survey. We respond as a public company and a home to public companies, especially high-growth, earlystage companies, and their investors. We strive to operate our markets consistent with the highest regulatory standards to protect investors and the public interest, and we have a unique lens on the issues facing global companies and their investors in today s marketplace. The Annual Policy Survey consists of two parts: the high-level Governance Principles Survey and the follow-on Policy Application Survey. Nasdaq reviewed the latter with respect to the Americas region. Nasdaq has submitted responses to certain survey questions online, and we are respectfully providing feedback on some of the survey topics and on proxy advisory firms generally through this letter. We appreciate ISS soliciting our views and the views of the public. 1 Nasdaq is a leading global provider of trading, clearing, exchange technology, listing, information and public company services. Through its diverse portfolio of solutions, Nasdaq enables customers to plan, optimize and execute their business vision with confidence, using proven technologies that provide transparency and insight for navigating today s global capital markets. As the creator of the world s first electronic stock market, its technology powers more than 100 marketplaces in 50 countries, and 1 in 10 of the world s securities transactions. Nasdaq is home to approximately 4,000 total listings with a market value of approximately $14 trillion. To learn more, visit business.nasdaq.com. 1
I. Comments on ISS Governance Principles Survey A. Questions 5-6: Auditors and Audit Committees In Question 5, ISS asks what audit-related factors, other than non-audit services and fees, could be considered to evaluate the independence and performance of the external auditor in connection with periodic shareholder votes on auditor ratification. 2 Arguments can be made for each of the potential factors listed by ISS as well as other factors, but as with all ISS policies, Nasdaq cautions against applying a one-size-fits-all approach to proxy proposals on auditor ratification. In particular, audit firm tenure is a complicated and nuanced issue, and it is difficult and expensive for companies to change auditors given that there are only four major, multinational accounting firms. In addition, auditors acquire specialized knowledge about a particular company and its risks over time, so a longer audit tenure can be a factor in favor of a particular audit firm. Finally, Nasdaq notes that there are already extensive SEC rules in place regarding audit partner tenure and auditor independence; 3 these rules were subject to a robust rulemaking process, including a public notice and comment period. Nasdaq therefore cautions ISS against using its process to set more stringent standards than those already embodied in the existing SEC rules. On a related topic, question 6 asks what information should be considered by shareholders in evaluating a company s audit committee. 4 Again, while these all may seem like reasonable factors to consider in evaluating an audit committee, Nasdaq cautions against a one-size-fits-all approach or attaching too much weight to any one individual factor. 5 For example, factors that may be important in evaluating the audit committee of a global manufacturing company may be less important in evaluating the audit committee of an early-stage biotech company. Similar to the discussion on audit firm tenure above, Nasdaq especially cautions against overemphasizing the frequency of audit committee refreshment. Audit committee members gain specialized knowledge about a company, its risks, its accounting procedures and its external auditors over time, so audit committee members with longer tenure may actually provide a benefit to a company and its shareholders. B. Questions 7-9: Director Accountability and Track Records Questions 7-9 inquire whether ISS should note in its research reports where a director at one company has received a negative ISS vote recommendation at another company due to ISS assessment that the individual director failed in his or her oversight responsibilities. In the abstract, transparency on 2 Potential factors suggested by ISS include: identity of the audit partner and any links to the company or its management; audit firm tenure; audit partner tenure; significant audit controversies; regulatory fines or other penalties on the company related to financial disclosure practices or weaknesses not identified in the audit report; and regulatory fines or other penalties on the auditor for weaknesses or errors in audit practices. 3 See 17 CFR 210.2-01. 4 Potential factors suggested by ISS include: skills and experience of audit committee members (including number of financial experts, if applicable); quality of the company s financial reporting (e.g., number of restatements; nature of restatements); significant financial reporting or audit controversies; the level of disclosure of factors used in the audit committee s assessment of the external auditor s independence, tenure, qualifications and work quality; frequency of audit committee meetings; and frequency of audit committee refreshment. 5 Nasdaq urges ISS to avoid one size fits all approaches in developing all of its policies. Another example of an area where such an approach should be avoided is in connection with question 5 on the Policy Application Survey for the Americas, which asks about factors that should be considered in evaluating an independent chair proposal. 2
past oversight failures could be useful for investors, provided that the disclosure is unbiased and based on accurate information. However, Nasdaq frequently hears from other companies that ISS research reports often contain errors and that ISS does not adequately take into account the views of issuers in its proxy recommendation process. For example, in the United States, only companies in the S&P 500 index have the opportunity to receive and comment on a draft of their ISS report prior to publication and those companies are limited only to a factual review of the draft analysis. Since ISS comments can greatly influence the voting results of a company s stockholder meeting, all companies should have the opportunity to comment on ISS reports prior to publication. In addition, companies should be allowed to provide feedback on the entirety of the ISS report, not just the accuracy of factual statements. When companies do have the opportunity to respond to ISS draft reports, the turnaround time is often unreasonably short and there is no guarantee to the companies that ISS will give their feedback the appropriate weight or consideration. It would also improve ISS reports, to the benefit of investors and transparency, if companies could provide a rebuttal statement that would be included in the final ISS report. If ISS moves forward with its proposal on director track records, it should give companies, and perhaps also the relevant directors, the opportunity to set the record straight on any inaccuracies in ISS assessment that an oversight failure occurred. C. Questions 10-11: Gender Diversity on Boards Questions 10 and 11 focus on gender diversity in corporate boardrooms, a topic that ISS is revisiting from last year s Annual Policy Survey. As Nasdaq stated last year, diversity is an important factor for public companies in determining board composition. In fact, in 2018, Nasdaq affirmed its own commitment to diversity in the boardroom with membership in the 30% Club, which campaigns in the U.S. to achieve 30% female directors on S&P 100 boards by 2020. It makes good business sense for the boards of public companies to be as diverse as their investors and customers. Over time, diverse boards will have more robust debates, make sounder decisions, understand customers better and attract higher performing employees. A focus on diversity should, however, include all types of diversity, especially diversity of gender, race, age and skill sets. 6 Achieving gender diversity is but one step in building a strong board. We encourage other public companies to consider diversity (not just of gender, but of all types) as an important factor as they regularly refresh their boards. However, we do not believe that it is appropriate for ISS to attempt to force this issue by recommending votes against directors of public companies without female directors. D. Questions 12-14: One Share, One Vote Principle Questions 12-14 also revisit a topic from last year s survey, differential voting rights. This year ISS explores that topic further, asking if it should provide adjusted vote results where possible in its reports on companies with multi-class capital structures with differential voting rights. ISS also asks whether it 6 Nasdaq s own board currently consists of ten directors, of whom 30% are women and 30% were born outside the U.S. As of the filing of our most recent proxy statement on March 14, 2018, our directors ranged from 45 to 67 years of age, with an average age of 56.2. Finally, our board members exhibit a broad range of skills, including experience with capital markets, cybersecurity, fintech, mergers & acquisitions, public company boards & corporate governance, risk management and strategic acumen & leadership. 3
should use adjusted vote results to determine the need for board responsiveness to shareholder vote results in the following year. As stated last year, Nasdaq released a report, entitled The Promise of Market Reform: Reigniting America s Economic Engine (the Revitalize Report ), which notes that the continued strength of U.S. financial markets is far from certain and issues a call to action to revitalize those markets. 7 Among its many recommendations in the report, Nasdaq expressed its continued support for differential class structures in appropriate situations. Each publicly traded company should have the flexibility to determine the class structure that is most appropriate for it, so long as this structure is fully transparent and disclosed up-front so that investors have complete visibility into the company. While differential class structures have existed for some time, they have risen in prominence recently as companies are using them as a method to facilitate long-term thinking and value creation. For example, these structures may: provide protection against short termers, raiders and activists looking to promote their own agenda, such as stock buybacks or an untimely company sale; reduce pressure on companies to achieve short-term earnings targets at the expense of long-term growth; and allow companies to pursue opportunities with longer time horizons but significant upside potential. In the United States, securities exchanges prohibit any action that disenfranchises existing shareholders. 8 For this reason, differential class structures are generally adopted only when a company first goes public, ensuring that the structure is disclosed in advance to all public investors. Accordingly, differential voting classes are transparent from the outset. In order to ensure the long-term success of the American economy, we need to be careful about assuming that a one-size-fits-all voting structure is appropriate for all companies. Differential class structures allow Main Street investors to invest in innovative and high-growth companies, enjoying the financial benefits of these companies success. If such companies decide not to go public, retail investors are denied these opportunities to share in wealth creation. Investors have the choice as to whether to invest in these companies or not. Going public, of course, provides the investing public with more information on which to base their decision than the private market. For these reasons, Nasdaq discourages ISS from adopting policies that penalize companies with differential class structures. II. Comments on ISS Policy Application Survey: Americas Nasdaq also would like to provide feedback on Questions 6-8 in the Policy Application Survey for the Americas, which ask whether companies should be allowed to set minimum stock ownership 7 The Promise of Market Reform: Reigniting America s Economic Engine, issued May 2017, available at: http://business.nasdaq.com/revitalize. The report, which is based on extensive research and insights, is a blueprint for reform designed to create a dialogue and facilitate common sense action steps that help reignite America s economic engine by modernizing market structure, reconstructing the regulatory framework and reorienting to a longer term view. See also Progress In Process: Update on Nasdaq s Blueprint to Revitalize Capital Markets, issued May 2018, available at: http://business.nasdaq.com/revitalize. 8 See, e.g., Nasdaq Listing Rule 5640, which provides that voting rights of existing shareholders of publicly traded common stock cannot be disparately reduced or restricted through any corporate action or issuance. 4
requirements (in excess of that specified in SEC Rule 14a-8) for shareholders who want to propose binding amendments to corporate by-laws. In connection with the Revitalize Report and related initiatives, Nasdaq has specifically called for increases in the minimum ownership amount and holding period required for shareholders to submit proposals under Rule 14a-8 to ensure that such proposals have meaningful shareholder backing. Rule 14a-8 currently allows any shareholder holding $2,000 or more of company stock for one year or longer the ability to include an issue on the company proxy for a shareholder vote, 9 even if the issue is not material or relevant to the company s business. The current rule 14a-8 process is costly, time-consuming and frustrating for companies, often with little or no value for shareholders. Accordingly, Nasdaq believes it is entirely reasonable for companies to set a minimum stock ownership requirement in excess of that in Rule 14a-8 for shareholders who want to propose binding by-law amendments. Finally, determination of the appropriate ownership threshold and other procedural requirements for such proposals is best left to individual companies and their shareholders. III. Comments on Proxy Advisory Firms Generally Nasdaq s concerns about proxy advisory firms, particularly relating to transparency and conflicts of interest, are well-known. 10 We reiterated those views in the Revitalize Report 11 and related initiatives, where we continue to advocate for transparency and fairness in the proxy advisory industry, and we have articulated many of our concerns above. We note that others, including the Congress 12 and the Wall Street Journal Editorial Board, 13 share our concerns. We emphasize again, however, that in practice, the proxy advisory industry is a largely unregulated black box, rife with opacity, lack of accountability and conflicts of interest. Absent requirements to explain their criteria or to provide companies a means to question analysis or even correct factual errors, the outcome of critical decisions is often at the whim of unpredictable and impenetrable advisory firms. Additionally, these firms are not even required to disclose whether they have a financial relationship or ownership stake in the companies on which they report. Proxy advisors must have a line of communication with the companies they analyze and clear transparency around ownership of, or short interest in, covered companies. We continue to urge you to voluntarily adopt measures to fully address these important concerns. * * * * * 9 See 17 CFR 240.14a-8. 10 See letter from Mr. Edward S. Knight, Executive Vice President, General Counsel and Chief Regulatory Officer, Nasdaq, to Ms. Elizabeth M. Murphy, Esq., U.S. Securities and Exchange Commission, dated October 8, 2013, available at: https://www.sec.gov/rules/petitions/2013/petn4-666.pdf. 11 See the Revitalize Report, at page 8. 12 In 2017, the House of Representatives passed a bill that would increase the transparency and accountability of proxy advisory firms by, among other things, requiring them to register with the SEC. 13 See The Editorial Board, "The Proxy Advisors Veto," The Wall Street Journal, August 10, 2018, available at: https://www.wsj.com/articles/the-proxy-advisers-veto-1533941976. 5