On November 12, 2020, ISS announced the release of its 2021 benchmark policy updates that will apply to shareholder meetings occurring on or after February 1, 2021. The updated policies substantially adopt the policies as ISS proposed in October 2020 relating to (1) racial and ethnic diversity, (2) board oversight of environmental and social risks, including climate risks and (3) exclusive forum provisions, which we previously discussed here. Most notably, ISS has adopted a new policy on virtual meetings and made some clarifications on its policies governing poison pills and director age and term limits. Finally, it provides a reminder that its board gender diversity policy becomes effective February 1, 2021.
The policy updates are set forth in the “Americas Proxy Voting Guidelines Updates for 2021” covering selected countries in the Americas and the “ISS Benchmark Policy Updates, Executive Summary” covering regional and global policies. The summaries below reflect those applicable to the 2021 U.S. benchmarking voting policies.
I. Updated Policies Proposed Earlier This Year
1. Racial/Ethnic Board Diversity
ISS’s currently in effect 2020 benchmarking voting policies do not include a recommendation on racial/ethnic board diversity. ISS has added a new policy that expressly addresses racial/ethnic board diversity substantially as it proposed. Starting in 2022, ISS will generally recommend voting against or withholding from the nominating committee chair (or other relevant directors on a case-by-case basis) at any Russell 3000 or S&P 1500 company that has no apparent racial and/or ethnic board diversity. ISS will consider board-provided aggregate diversity statistics only if the statistics are specific to racial and/or ethnic diversity. ISS will make an exception for a company that lost its racial/ethnic board diversity since its last annual meeting and has a firm commitment to restore it within a year. As with the proposed policy, ISS does not define what qualifies as racial or ethnic diversity.
ISS will treat 2021 as a transition period, similar to its approach with its current board gender diversity policy, where the transition period ends January 31, 2021. In 2021, ISS will highlight which companies appear to lack racial and/or ethnic board diversity in the event that ISS’s investor clients want to engage with their portfolio companies on this topic.
2. Board Oversight—Material E&S and Climate Risk
The updated policy clarifies that a board’s failure to oversee social and environmental risks, including climate risk, may constitute a material oversight failure and may lead to an ISS vote recommendation against individual directors, committee members or the whole board.
3. Exclusive Forum Provisions
ISS amended its 2021 policy as previously proposed. Consistent with its proposal, it continues to anticipate that the changes will have a limited effect on the number of vote recommendations. Under the current 2020 benchmark policy, ISS generally recommends voting case by case. ISS’s revised 2021 policy generally supports the inclusion of exclusive forum provisions in charters or bylaws, but differentiates between provisions for federal securities law claims and state corporate law claims.
a. Federal Forum Provisions (FFPs). ISS will generally recommend voting for exclusive FFPs for federal securities law matters in the charter or bylaws. If the provision designates a specific federal court, however, ISS will generally recommend voting against since ISS believes that shareholders should have flexibility in choosing a court with a location that is convenient to them.
This proposed change was prompted by the Delaware Supreme Court March 2020 decision, Salzberg v. Sciabacucchi, resulting in some companies incorporating FFPs in their governing documents. We discussed that case previously here and here.
b. State Exclusive Forum Provisions. For Delaware companies, ISS will generally recommend forcharter or bylaw provisions designating Delaware or the Delaware Court of Chancery, as the exclusive forum for state corporate law matters.
For states other than Delaware, ISS will still recommend voting on a case-by-case basis for provisions designating a specific court as the exclusive forum for certain litigation, after considering a number of factors, such as the company’s rationale for the provision and the type of claims covered under the provision. ISS makes an exception for Delaware for several reasons, including that Delaware’s court system specializes in corporate law with a robust set of case precedents and the likelihood of judicial efficiency.
ISS proposes that it will generally recommend voting against provisions that require the designated forum be a local court within the state of incorporation or a state other than the state of incorporation.
A unilateral adoption of any exclusive forum provision without a shareholder vote, however, will still be considered a one-time failure under ISS’s Unilateral Bylaw/Charter Amendments policy.
II. Additional Changes
The 2021 updates include a handful of new or modified policies on topics not proposed earlier this year. ISS explains that they are changes or clarifications reflecting regulatory requirements, market practice developments or the termination of ISS policy transition periods. Some, like the virtual meetings policy, are completely new.
1. Virtual Meetings
ISS will generally support management proposals seeking to hold hybrid shareholder meetings giving shareholders the option of attending in person or electronically. ISS is concerned about situations where a company holds a virtual-only meeting primarily with the intent of avoiding an in-person meeting in absence of extenuating circumstances, such as health and safety concerns. ISS encourages companies to disclose under what conditions or circumstances virtual-only meetings would be held and how a shareholder’s experience and participation electronically would be comparable to those at an in-person meeting.
ISS will recommend voting case by case on shareholder proposals relating to virtual-only meetings.
2. Gender Board Diversity—Reminder Effective February 1, 2021
The transition period for a company to achieve gender board diversity ends January 31, 2021. Afterwards, ISS will generally vote against or withhold from the nominating committee chair (or other directors on a case-by-case basis) at companies where there are no women on the board. ISS adds that it will make an exception when there was a woman on the board at the preceding annual meeting and the board makes a firm commitment to resume having a gender-diverse board within one year.
3. Poison Pills
Deadhand and Slowhand Provisions. ISS states that its long-standing position has been that deadhand and slowhand provisions in poison pills constitute a material governance failure. To enhance transparency, ISS has added express language to this effect.
While there are variations, a deadhand provision generally provides that the poison pill can be terminated only by a majority of the directors who adopted it. According to ISS, the effect deprives shareholders of a say and deters potential acquirers from electing new directors who could modify or terminate the pill, thereby clearing the way for an acquisition. A slowhand extends the adopting directors’ ability to modify or redeem the poison pill for a set period of time after the election of new directors.
ISS’s current poison pill policy provides that it will generally vote against or withhold from director nominees seeking reelection when:
- The company has a poison pill that was not approved by shareholders; and
- The board makes a material adverse modification to an existing pill.
The revised policy captures deadhand and slowhand provisions within the against/withhold recommendation described above.
Short-Term Pills. With regard to short-term pills having an initial duration of less than a year, ISS will continue to generally recommend voting on a case-by-case basis on directors seeking reelection, depending on the existence of factors such as the level of disclosure or commitment to seeking shareholder approval. However, ISS notes that even if a short-term pill expires before the next shareholder meeting, but includes a deadhand or slowhand feature, ISS will generally not support the reelection of the director nominees.
ISS believes this policy update is needed because some companies included deadhand and slowhand features in their poison pills in response to recent pandemic-related market volatility.
4. Advance Notice Requirements
ISS will support proposals seeking advance notice provisions that require shareholders to submit proposals or director nominations no earlier than 120 days before the meeting. Its current provision specifies 60 days. ISS still supports providing shareholders with a minimum 30-day window to make annual meeting submissions.
ISS explains this change reflects market practice. This policy is not meant to apply to Rule 14a-8 proposals or director nominations via proxy access.
5. Board Refreshment (Age/Term Limits)
Under its current policy, ISS generally opposes management and shareholder proposals to limit the tenure of outside directors through mandatory retirement ages.
Age Limits. In addition to its existing policy, ISS will recommend voting for proposals to remove mandatory age limits.
Term Limits. In 2021, ISS will take a factor-based case-by-case approach to management proposals on director term/tenure limits. When making its determination, ISS will consider factors, including
- The rationale for the term/tenure limit,
- The robustness of the board evaluation process,
- Whether the limit will disadvantage independent directors compared with non-independent directors, and
- Whether the limit promotes a broad range of director tenures.
For shareholder proposals asking for term/tenure limits, ISS will also recommend on a case-by-case basis, considering the scope of the proposal and any evidence of issues at the company related to a lack of board refreshment.
ISS believes that these changes will help address investor demands for greater board refreshment and diversity.
6. Gender Pay Gap Shareholder Proposals
ISS clarifies that the evaluation of a company’s pay gap based on race and/or ethnicity will be determined by considering local law categorizations and the definitions of those terms.
7. Mandatory Arbitration
ISS is adding a new policy that the firm will generally take a case-by-case approach to shareholder proposals seeking a report on a company’s use of mandatory arbitration on employment-related claims. ISS will consider factors such as:
- The relevant company policies and practices;
- Whether the company has been the subject of recent controversy, litigation and regulatory actions involving the use of such provisions in employment-related claims; and
- The company’s relevant disclosure compared with peers.
ISS added this policy to reflect increased interest by investors in mandatory arbitration evidenced by the increased shareholder support shown on this topic.
8. Sexual Harassment Shareholder Proposals
The 2021 policy states that ISS will recommend on a case-by-case basis a shareholder proposal requesting either a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment or a report on risks posed by a company’s failure to prevent workplace sexual harassment. ISS will consider factors such as:
- The relevant company oversight mechanisms to preventing workplace sexual harassment, policies practices;
- Relevant litigation and regulatory matters; and
- The company’s relevant disclosure compared to its peers.
ISS added this policy in response to increased media attention and interest by investors on this topic.
9. Classifications of Directors
ISS has amended its “Executive Director” classification to include only officers, not other employees. ISS anticipates this change will have a limited effect on the number of vote recommendations. To continue to address circumstances where an employee’s pay is considerable and on par with a Named Executive Officer, ISS will expressly classify them as non-independent directors under “Other material relationships with the company.”
III. What’s Next?
In April 2020, ISS issued COVID-19-related guidance advising how the firm anticipates applying its policies on topics most impacted by the pandemic that we previously discussed. ISS states that it plans to continue issuing COVID-19 guidance into 2021, with updates and modifications as needed.
ISS expects to post on its website all updated 2021 benchmark policies in late November 2020 and its Frequently Asked Questions documents by December 2020.
ISS invites anyone interested to join its international webcast on the 2021 policy updates as well as other developments in the governance landscape, on Wednesday, December 9 at 11:00 a.m. EST. To register, please click here.