Institutional Shareholder Services (ISS) on November 12 released updates to its benchmark proxy voting policies, which will apply for shareholder meetings taking place on or after February 1, 2021. We highlight below some of the most significant changes for the 2021 proxy season, including a new policy directed at improving racial and ethnic diversity on public company boards.
This release represents the first time that ISS has directly addressed racial or ethnic diversity in a voting policy. For 2021, ISS will “highlight” boards of companies in the Russell 3000 or S&P 1500 that lack racial and ethnic diversity; that is, by indicating in research reports which boards lack such diversity. According to ISS, the purpose of this policy change for 2021 is to “help investors identify companies with which to engage” and “foster dialogue…on this topic.”
Beginning in 2022, ISS will recommend voting against or withhold from the chair of the nominating committee (or other directors, on a case-by-case basis), if a board has no apparent racially or ethnically diverse members. ISS will make an exception to this voting policy if (i) there was a racially and/or ethnically diverse board member at the prior year’s annual meeting and (ii) the board makes a firm commitment to appoint at least one racially and/or ethnically diverse board member within a year.
In its rationale for this new policy, ISS cited, among other factors, the recent social unrest that “has put racial and ethnic injustices at the forefront of many investors’ minds and boards’ deliberations.” ISS also noted that a majority of investors who responded to their 2020–2021 global policy survey indicated that they would consider voting against members of a board’s nominating committee to the extent a company’s board lacked racial and ethnic diversity.
The transitional year (2020) during which companies with boards that lacked a female director could make a future commitment to appoint a woman to the board has now passed. Effective February 2021, ISS generally will make adverse voting recommendations for nominating committee chairs (or other directors, on a case-by-case basis) at Russell 3000 or S&P 1500 companies where no women serve on the board. The only exception to this policy will be if there was at least one woman on the board at the prior year’s annual meeting, the board temporarily has lost this gender diversity, and the board commits to appointing another female director by the next annual meeting.
ISS voting policy currently provides that ISS will issue negative vote recommendations, under extraordinary circumstances, against board members in the event of, among other things, material failures of governance, stewardship, risk oversight, or fiduciary responsibilities at the company. ISS historically has called out bribery, large or serial fines or sanctions from regulators, significant adverse legal judgments or settlements, or hedging of company stock as examples of failure of risk oversight.
For 2021, ISS will include “demonstrably poor risk oversight of environmental and social issues, including climate change” as another example of a risk oversight failure. This change follows a roundtable discussion held during 2020 between ISS and eight institutional investors regarding ISS's approach on a variety of E&S-related topics, including climate change risk, human capital management, and E&S-related shareholder proposals.
ISS historically has found mandatory retirement policies and certain term limits problematic. Under its current policy, ISS will issue adverse voting recommendations against both (i) management proposals to limit the tenure of outside directors through term limits and (ii) management or shareholder proposals that seek mandatory retirement ages. In its updated policy, ISS presents an expanded view of board refreshment, against the backdrop of the relationship between a continuing focus on board diversity and board refreshment. ISS states its belief that board refreshment should be addressed holistically, “through an ongoing program of individual director evaluations, conducted annually, to ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed,” in lieu of “arbitrary” age limits and “poorly designed” term or tenure limits.
Under the new policy, ISS will continue to issue adverse voting recommendations for proposals seeking to implement retirement ages. However, ISS will now consider term limits on a case-by-case basis. With respect to management proposals seeking to impose term limits, ISS will consider factors such as the underlying rationale of the term limit, the board’s existing evaluation process, whether the limit is long enough to allow for a range of tenures, any potential disadvantage to independent directors, and any potential for the board to impose the limit in a discriminatory manner. For shareholder proposals, ISS will consider the scope of the proposal and any evidence of problematic issues that may have been exacerbated by board staleness.
Prior to the release of this policy update, ISS did not have a policy to recommend votes against companies that hold “virtual-only” meetings. In April 2020, as many companies were migrating to a virtual meeting format in light of the global pandemic, ISS released guidance encouraging companies to provide clear disclosure as to the rationale for a decision to hold a virtual-only meeting and “to strive to provide shareholders with a meaningful opportunity (subject to local laws) to participate as fully as possible, including being able to ask questions of directors and senior management and to engage in dialogue if they wish.” The ISS guidance also encouraged boards to commit to return to in-person or “hybrid” meetings as soon as possible, or allow shareholders to decide.
For 2021, ISS has adopted a new policy relating to proposals on the topic of virtual shareholder meetings. ISS generally will vote in favor of management proposals to allow shareholder meetings to be held virtually, as long as the proposal does not preclude in-person meetings. Tracking the April 2020 guidance, ISS’s policy encourages companies to disclose the circumstances under which they hold virtual-only meetings and allow shareholders attending virtually the same rights as if they were attending in person. ISS will vote case-by-case on shareholder proposals concerning virtual-only shareholder meetings, based on the scope and rationale of the proposal and the extent to which there are any concerns with the company’s prior meeting practices. In evidencing the rationale for this new policy, ISS notes that “there is compelling rationale for restricting physical meetings during an unprecedented global pandemic,” but also notes that several stakeholders (e.g., Council for Institutional Investors and the New York City Pension Funds) contest whether virtual-only meetings ultimately are beneficial to shareholders.
Currently, ISS will consider proposals requesting reports on pay data by gender or race/ethnicity, or reports on policies and goals to reduce any gender or race/ethnicity pay gaps, on a case-by-case basis, taking into account factors such as: (i) the company’s current policies and disclosure on diversity and inclusion policies and practices, together with its compensation policy on equitable compensation practices; (ii) whether the company has been subject to recent controversy, litigation or regulatory matters relating to gender, race, or ethnicity pay gap issues; and (iii) how the company’s reporting on gender, race or ethnicity pay gaps compares to that of its peers. For 2021, ISS also will consider the impact of any applicable local laws, noting that “some legal jurisdictions do not allow companies to categorize employees by race and/or ethnicity and that definitions of ethnic and/or racial minorities differ from country to country, so a global racial and/or ethnicity statistic would not necessarily be meaningful or possible to provide.”
ISS has adopted a new policy noting that it will consider shareholder proposals requesting reports on “company actions taken to strengthen policies and oversight to prevent workplace sexual harassment,” or “on risks posed by a company’s failure to prevent workplace sexual harassment,” on a case-by-case basis. In evaluating these proposals, ISS will consider the company’s current antiharassment policies and procedures, whether the company has been the subject of recent controversy, litigation, or regulatory action relating to workplace sexual harassment issues, and the company’s disclosure on workplace sexual harassment policies or initiatives vis-à-vis the disclosure of its industry peers. ISS noted that workplace sexual harassment is a high-profile topic and was the subject of a number of shareholder proposals in 2019 and 2020 that have received increased support from shareholders. ISS also indicated that its clients had “expressed interest in a specific policy on this topic,” thus leading to the new policy.
In another new policy, ISS will consider proposals that request a report on a company’s use of mandatory arbitration on employment-related claims on a case-by-case basis. ISS’s evaluation will consider: (i) the company’s current policies and practices as they relate to such mandatory arbitration; (ii) whether the company has been the subject of recent controversy, litigation, or regulatory matter relating to the use of mandatory arbitration agreements on workplace claims; and (iii) the company’s disclosure of such practices as compared to its peers. ISS notes the tension between a company’s desire to reduce costs in connection with employment-related disputes against a potential chilling effect on such arbitration agreements may have on employee lawsuits for violations relating to wage theft, discrimination, and sexual harassment. ISS also noted that shareholder proposals on this topic have received increased support from shareholders, with one passing in 2020 (this proposal received 51% approval). As with the topic of workplace sexual harassment-related proposals, ISS indicated that its clients had “expressed interest in a specific policy on this topic.”
In its release, ISS noted that the March 2020 ruling by the Delaware Court of Chancery validating charter and bylaw provisions designating US federal courts as the exclusive forum for cases arising under federal securities laws led to companies adopting such provisions “almost immediately,” either through a charter or bylaw amendment (ISS also noted that the latter can be adopted unilaterally by a company’s board).
Against this backdrop, ISS has adopted a new policy that addresses federal forum selection provisions, exclusive forum provisions for state law matters (with the policy carving out Delaware and then all states other than Delaware), and fee shifting provisions. ISS will generally recommend a vote “for federal forum selection provisions in the charter or bylaws that specify ‘the district courts of the United States’ as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.” However, ISS will vote against charter and bylaw provisions that restrict the forum to a particular federal district court.
With regard to exclusive forum provisions that restrict shareholders bringing derivative lawsuits against the company to the courts of a particular state (i.e., the state in which the company is incorporated), ISS first will consider whether the provisions specify courts located within Delaware or otherwise. ISS generally will support provisions that specify Delaware courts as the exclusive forum, as long as there are no “serious concerns about corporate governance or board responsiveness to shareholders.” For states other than Delaware, ISS will consider the provisions on a case-by-case basis, evaluating the stated rationale, any past harm from duplicative shareholder proposals in more than one forum, the breadth of the provision, and the presence of any relevant governance features such as shareholders’ ability to repeal the provision, a declassified board, and a majority vote standard for uncontested director elections.
Finally, ISS has retained its policy whereby it generally will vote against fee-shifting provisions that require a losing shareholder to pay all litigation expenses of the corporation and its directors and officers.
Noting current market practice among companies, ISS has revised its policy regarding advance notice requirements for non-Rule 14a-8 shareholder proposals and director nominations to provide that a reasonable deadline for such notice is no more than 120 days prior to the anniversary of the meeting, with at least a 30-day period for submission (i.e., a 90- to 120-day window), Previously, ISS only considered 60 days prior to the meeting as a reasonable deadline.
ISS last updated its policy on the adoption of poison pills without shareholder approval in 2017, a time when “there remained only a handful of companies with a deadhand or slowhand feature in their poison pills.” However, ISS notes that in light of market volatility caused by the global pandemic this year, many companies have adopted short-term poison pills with these features, which ISS characterizes as “unjustifiable from a governance perspective.” Accordingly, under its new policy, ISS will issue negative voting recommendations against all director nominees (with a limited exception for new nominees) if the company has a poison pill with a deadhand or slowhand feature, regardless of whether the pill is short- or long-term (ISS’s baseline policy is that it generally will consider short-term pills on a case-by-case basis). ISS also notes that because it considers unilateral adoption of a deadhead or slowhand pill to be a material governance failure, the adoption of such a pill could warrant adverse voting recommendations at the company’s next annual meeting, “even if the pill itself has expired by the time of that meeting.”
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
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Laurie Cerveny
Michael Conza
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Carl Valenstein
Julio Vega
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Torsten Schwarze
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Eli Gao
Louise Liu
Edwin Luk
Billy Wong
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Thomas J. Cartwright
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Thomas P. Giblin, Jr.
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Justin W. Chairman
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Bernard Lui*
Joo Khin Ng*
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Sean Donahue
Linda L. Griggs
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*A solicitor of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan, Lewis & Bockius LLP