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ISS Proposes 2021 Benchmark Voting Policy Changes

On October 14, 2020, ISS released its proposed voting policy changes for 2021. The changes for the United States focus mainly in these three areas: (1) racial and ethnic board diversity, (2) board oversight of environmental, climate and social risks and (3) exclusive forum provisions.

ISS requests feedback on the proposed changes. Market participants can submit comments via email to policy@issgovernance.com through 5:00 PM ET on Monday, October 26, 2020. ISS expects to release its final voting policies in the first half of November 2020.

Over the summer, ISS administered its annual benchmarking voting policy survey to market participants. It plans to use the survey results, which we discussed here, to inform its benchmarking policies.
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World Economic Forum Pledges to Stand By Stakeholders in the COVID-19 Era

The novel coronavirus (COVID-19) pandemic has posed unprecedented health risks and has led to global economic disruptions. The World Economic Forum (WEF), an international organization that fosters public-private cooperation on global, regional and industry agendas, released this month the “Stakeholder Principles in the COVID Era” (Stakeholder Principles) as part of its COVID Action Platform and called businesses to action stating that, during this time of crisis, “[t]he business community’s contribution: [is] to be leaders of responsiveness and stewards of resilience.” In January 2020, the WEF made headlines by issuing its Davos Manifesto 2020, challenging companies to incorporate stakeholders into their corporate purpose, as well as issuing, through its International Business Council (IBC) a draft corporate sustainability disclosure framework, “Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.”
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ISS Releases Policy Application Guidance For COVID-19’s Impact

On Wednesday, April 8, 2020, Institutional Shareholder Services Inc. (ISS) issued guidance on voting policies of various corporate governance-related issues that are likely to be implicated by the coronavirus (COVID-19) pandemic during the 2020 proxy season. The guidance does not introduce any new formal policies. Rather, the guidance provides ISS’s perspective on selected market developments and application of several of its existing policies relevant to the U.S. markets. Importantly, the guidance sheds some light on which company-specific and market-specific facts and circumstances are more likely to influence the proxy advisor’s determinations during and following the pandemic.

EXECUTIVE SUMMARY

The guidance makes three points relevant to the U.S.
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BlackRock Releases Its 2020 Public Company Engagement Priorities

While managing COVID-19 related risks and impacts may be the current priority for many public companies, BlackRock provided a reminder yesterday that environmental, social and governance (ESG) issues will form a core part of its engagement strategy this proxy season.  Publishing its investment stewardship team’s public company engagement priorities for 2020 (Priorities), BlackRock stressed, among other things, that it intends to hold board directors accountable for demonstrating “material progress” on ESG-related disclosures and practices.

BlackRock’s 2020 Investment Stewardship Engagement Priorities

The Priorities place an enhanced focus on sustainability-related issues and disclosures. Moreover, the Priorities articulate key performance indicators against which the asset manager will track companies’ progress and identify those directors whom it will hold responsible for demonstrating progress on these issues. 
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A Snapshot of Board-Shareholder Engagement Trends

Directors of SEC-registered public companies are increasingly taking a more active role in the shareholder engagement process given the evolving corporate governance landscape, including the increasing number of requests for their participation by some of the largest institutional investors. The Conference Board and Rutgers University’s Center for Corporate Law and Governance have recently published a report showing the emerging practices surrounding when and how corporate directors engage with shareholders based on a survey administered in 2018. Because board-shareholder engagements are often undisclosed and private, the results from this survey provide greater insight about how these communications are evolving and may help public company boards prepare for their shareholder engagements going forward.
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A Profile of Some of the Largest U.S. Tech Boards

The 2019 U.S. Technology Spencer Stuart Board Index (Tech Index) reflects the board practices and trends of 200 public tech companies with the highest revenues based on proxy statements released between July 1, 2018 and July 1, 2019.

I. Selected Spencer Stuart Perspectives

  • Like the S&P 500 companies, the largest tech companies are enhancing board diversity on multiple fronts including gender, skills and experiences as they add new independent directors.
  • The profile of the new director class is shifting, and CEO experience is required less often. While a technology background remains a priority, tech boards are also adding directors with more diverse functional and industry backgrounds.

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What Risk Trends in 2020 Should Be on Directors and Officers’ Radar Screens?

Last week, a global insurance company identified what it believes are the risk trends in 2020 that “have significant implications” to directors and officers (D&Os). The firm’s perspective provides a window into the types of trends insurers and underwriters are watching.

1. “Bad news” events resulting in more litigation

The insurer notes that there has been a rise in nonfinancial-based claims against D&Os stemming from what the firm calls “bad news” events, such as cybersecurity attacks, toxic culture (i.e., #MeToo movement), product liability, corruption and environmental disasters. The insurer warns that “bad news” events can prompt a regulatory investigation or cause share prices to fall, which the report states can “often result in significant securities or derivative claims.
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Spencer Stuart Shows How Boards Are Transforming

The 2019 U.S. Spencer Stuart Board Index (Index) reflects the board practices and trends of S&P 500 companies. According to the Index, boards are responding to investors’ increasing calls for greater diversity of “gender, age, race/ethnicity and professional backgrounds.” Spencer Stuart found that “boards are accelerating the addition of women and minority directors,” which in turn is driving notable changes in board composition. Spencer Stuart predicts that the biggest drivers of board refreshment will be replacing retiring directors and adding new skills to the board.

The Index covers public companies in the S&P 500 as of May 15, 2019 and the proxy statements released between May 30, 2018 and May 15, 2019.
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Russell 3000 Board Seats Occupied by Women Pass the 20% Mark

Women now occupy more than 20% of Russell 3000 board seats, according to a recently released Equilar report. Equilar states that this is the first time Russell 3000 boards have achieved this milestone. In addition, Equilar found that women constituted over 40% of new directors during the first half of 2019, compared to 17.8% of new directors in 2014.

As discussed in a September 11 WSJ article, companies may be responding to a number of factors including existing or anticipated state legislative pressure. California made headlines in 2018 by being the first state to require exchange-listed companies with principal offices within its borders to have at least one female board member or potentially face a monetary fine.
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State Street Updates Voting Guidelines and Engagement Protocol

State Street Global Advisors, or SSGA, updated and released earlier this week its Global Proxy Voting and Engagement Principles and Proxy Voting and Engagement Guidelines – North America (US & Canada). SSGA has created a new set of global policies dedicated to what companies can expect when engaging with SSGA on environmental and social matters and how SSGA intends to approach voting on sustainability-related proposals.

In addition, SSGA recently published its latest general issuer engagement protocol (as distinguished from guidelines dedicated to a specific engagement topic) informing its investee companies what to expect when engaging with the asset manager. These guidelines include important information such as where to direct an email requesting an engagement and what information to include.
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Benchmarking Against the Spencer Stuart S&P 500 Board Practices Report

Spencer Stuart has released its annual report on S&P 500 board practices, a useful guide for benchmarking.  The overall trends demonstrate few changes from the prior year, leading the report to conclude that there is a “chronic low rate of director turnover,” bringing about “gradual shifts in the complexion of U.S. boards,” and a “continued incremental evolution.”  The key data is below, with the statistics largely similar to prior years.

New directors added.  On average, S&P 500 boards added .88 directors.  Slightly more than a majority (57%) added at least one new director, and 22% appointed two or more.  Women account for 40% of new directors, and 19% are minorities, a slight decline from last year.
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MSCI to Retain Existing Indexes Unchanged for Voting Structures but Also Launch New Index Series

Unlike S&P and FTSE, after an 18-month consultation period, MSCI has announced that equity securities with unequal voting structures will continue to be included in the MSCI Global Investable Market Indexes at their free float market capitalization weight.

MSCI will instead launch a new index series to reflect the desire of some investors to take into account unequal voting structures in the indexes that they use.

The company’s press release states that it “supports fully” the one share, one vote principle, and that having equal voting rights should be a key consideration in equity investing.  However, the role of the indexes in this governance debate and how they should treat companies with unequal voting structures have divided international institutional investors.
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Part I of the Key Components in the Commonsense Principles 2.0 – Issuer Responsibilities

The Business Roundtable (BRT) and the Council of Institutional Investors (CII) have found common ground in supporting the revised Commonsense Principles 2.0, updated from 2016 and led once again by Warren Buffett and Jamie Dimon, along with several new CEO signatories, including some of the largest asset managers.

The open letter accompanying the principles acknowledges similar works by other groups, including the investor-led Investor Stewardship Group, the BRT’s Principles of Corporate Governance and The New Paradigm from the International Business Council of the World Economic Forum.  All those frameworks are endorsed, although the letter hopes that the many sets of principles can be harmonized and consolidated.
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California Enacts Law Requiring Public Company Boards to Include Women

As our client memo explains, yesterday the governor of California signed a bill that requires public companies with executive offices in the state to include a specific number of women on their boards of directors.

Governor Brown’s statement acknowledges that “serious legal concerns” have been raised about the bill, and that “flaws” in the bill may “prove fatal to its ultimate implementation.”  However, he believes that “recent events in Washington D.C. [and] beyond” make it “crystal clear that many are not getting the message.”

His letter was copied to the U.S. Senate Judiciary Committee.
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Boards and #MeToo

#MeToo may no longer dominate daily headlines but its indelible impression remains. Corporate boards’ mandate to act in their shareholders’ best interest includes not only overseeing strong financial performance, but also recognizing the ways that corporate culture impacts shareholder value. Reputational harm can cost a company in multiple ways, literally, and produce lasting damage.

Claims regarding sexual misconduct should be treated with proper diligence, and while it may warrant more sensitivity due to the nature of the grievance, boards should reinforce that employee misconduct is not tolerated. In our view, the care that boards exercise in reviewing their companies’ existing procedures and controls governing corporate conduct already provides sufficient incentives for management to consider whether appropriate action is taken when misconduct complaints are received.
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Companies Commit to Including Diverse Candidates in Board Searches

Six shareholder proposals are on ballots this season asking for increased board diversity, or disclosure about board diversity.

Amazon’s proposal asks the board to adopt a policy requiring that the initial list of potential candidates “should include (but need not be limited to) qualified women and minority candidates,” and that search firms or other consultants make those types of candidates part of the first pool of qualified individuals that they create.  The policy is intended to replicate the Rooney Rule in the National Football League, which mandate the inclusion of minority candidates for certain job positions.  The company has three women directors, but the supporting statement argued that the board lacked racial or ethnic minorities. 
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Company Prevails in Court Case Disputing Advance Notice Bylaws

HomeStreet received a notice, numbering 133 pages, the day before the advance notice deadline in its bylaws alerting the company that Blue Lion intends to nominate two directors and submit two proposals, seeking annual elections and a binding resolution for an independent chairman. Both the company and the shareholder acknowledged years of engagement that culminated in a decision by the board not to nominate a representative from Blue Lion as a director.

Less than a week later, the company announced that the notice was deficient, attaching a five-page letter to a Form 8-K that it sent to the shareholder. The letter stated that the notice provided by the shareholder failed to meet several of the bylaw’s disclosure requirements, including providing information related to the holder of shares that would be disclosed in a proxy statement governing a solicitation as well as deficiencies in the D&O questionnaires returned by the shareholders’ nominees.
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Delaware Case Challenges Forum Selection Provisions by Recent IPO Companies

A complaint for declaratory judgment in the Court of Chancery of the State of Delaware is challenging the forum selection clauses in several recent IPOs.  Plaintiff argues that the provisions adopted by Blue Apron, Stitch Fix and Roku are not permissible under Delaware law.

Unlike the Chevron-style forum selection clauses that make state courts the sole and exclusive forum for derivative actions, claims for breaches of fiduciary duties, claims arising under state law or incorporation documents, or claims governed by the internal affair doctrine of the state, the provisions in question at these IPO companies make federal district courts the exclusive forum for the resolution of complaints asserting causes of action under the Securities Act of 1933.
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As Spencer Stuart Releases its Latest S&P 500 Board Index, How Does Your Board Compare?

It’s no longer a trendy topic, but instead has become routine, to recognize that investors are deeply interested in board composition.  The 2017 Spencer Stuart Board Index on S&P 500 boards provides a useful and detailed benchmark on some key practices.

Companies continue to add new directors, and many of them are sitting on their first boards.  Slightly more than half, or 52%, of S&P 500 companies added one new independent director to their boards, for a total of 397 new directors, an increase of 15% from last year.   About 45% of the new directors are serving on their first public company boards, with women or minorities making up more than half of those first-time directors, who also tend to be actively employed.
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As the Investor Stewardship Group Framework Goes into Effect, Investors Want Companies to Explain Their Governance Practices

The Framework for U.S. Stewardship and Governance launched by the Investor Stewardship Group, which we previously discussed here, becomes effective on January 1, 2018.

According to a press release issued by ISG, beginning with the 2018 proxy season, ISG is “encouraging” companies to explain “how their governance structures and practices align with the ISG’s Corporate Governance Principles and where and why they differ in approach.” Companies are free to choose how and where to disclose their alignment with the Principles, which may be through investor relations, boards, corporate governance websites or shareholder engagement materials.

The release notes that the goal of ISG is to establish the very first broad-based U.S.
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Activism at Public Companies Leads to Less Diverse Boards

Shareholder activism decreases the number of women and minority directors on target company boards, an impact seen even after activism ends, according to a new ISS study commissioned by the Investor Responsibility Research Center Institute (IRRCi).

The study examined 380 board seats filled at S&P 1500 companies as a result of activist campaigns from 2011 through the end of 2015, including directors nominated by dissidents, directors who joined boards as a result of company settlements with activists and those added by corporate boards themselves immediately before or during activism.  The changes to board composition resulted in younger, more independent and less diverse directors who tended to have financial backgrounds and no prior board experience about half the time.
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Company Drops Plans to Issue No-Vote Share Class

In the midst of the controversy over Snap’s issued no-vote shares, and Blue Apron’s authorized but not issued no-vote shares, one company has discarded its efforts to form a class of stock without any voting rights.

In November 2016, IAC/Interactive Corp. announced a plan to adjust its capital structure through a charter amendment to enable a new class of non-voting capital stock, Class C. The company intended to declare and pay a dividend of one share of Class C for each outstanding share of IAC common stock and Class B common stock. Shareholders were asked to vote on the recapitalization at the company’s December annual meeting.
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Activist Files Suit Over Board Disqualification Bylaw

Activist Stilwell Funds has sought to invalidate and enjoin the enforcement of HopFed Bancorp’s bylaws on director qualifications, filing suit in the Delaware Court of Chancery. The activist owns 9.5% of the company’s shares.

Stilwell Funds had previously nominated Robert Bolton, who was elected to the company’s board at the 2013 meeting. In the complaint, the activist alleged that Bolton was excluded from committee service, and also barred him from major board deliberations by contending that he was affiliated with Stilwell. The complaint stated that the board even refused to reimburse Bolton for travel expenses to board meetings, and also discouraged his efforts to attend meetings by phone.
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