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Pamela Marcogliese, Maj Vaseghi, and Doru Gavril are partners at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Ms. Marcogliese, Ms. Vaseghi, Mr. Gavril, Elizabeth Bieber and Kelsey MacElroy.
On November 12, Institutional Shareholder Services (“ISS”) published its annual policy updates in its 2021 global proxy voting guidelines, which are effective for shareholder meetings held on or after February 1, 2021. Social and environmental issues, board diversity, shareholder litigation rights and COVID-19 recovery era policies emerged as ISS’ main areas of focus for its policy updates. Below is a summary of ISS’ key updates for U.S. companies:
ISS will recommend withhold votes against directors, committees or the entire board for, among other things, a material risk oversight failure, and this year will include in its list of examples as to what constitutes a material risk oversight failure the oversight of environmental and social issues, including climate change.
After an increase in shareholder proposals requesting reports on the use of mandatory arbitration in employment claims by companies in 2019 and 2020, ISS’ new policy provides it will recommend voting for shareholder proposals requesting such reports on a case-by-case basis, taking into account the company’s existing policies, public standing with respect to any controversies and the company’s disclosure of policies compared to its peers.
ISS unveiled a new policy recommending a case-by-case evaluation of shareholder proposals requesting reports on the actions taken by a company to prevent sexual harassment or on the risks posed by the company’s failure to take such actions. The analysis is also based on the company’s existing policies, whether there have been any recent controversies and the company’s disclosure of policies compared to its peers.
In light of recent social unrest and in response to increased investor focus on racial and ethnic diversity in the boardroom, ISS will recommend withhold votes starting in the 2022 proxy season for the chair of the nominating committee or individual directors on a case-by-case basis if the boards of companies in the Russell 3000 or S&P 1500 do not have apparent racially or ethnically diverse directors. Similar to the roll-out of the gender diversity policy, a company without racially and/or ethnically diverse directors on the board in the preceding year may not receive a negative recommendation if the company makes a firm commitment to appoint at least one racially and/or ethnically diverse director within a year. With respect to its gender diversity policy exceptions, ISS also noted that for boards lacking any female directors, a withhold vote may not be warranted if the company had a female director in the preceding year and makes a commitment to restoring gender diversity within the following year. ISS noted that in their 2020-2021 Global Policy Survey almost 60% of investors indicated that boards should reflect the broader society and a company’s customer base, which ISS views as a signal of equality and good governance.
For its case-by-case review of proposals regarding advance notice, ISS revised its view on a reasonable deadline for shareholder notice of a proposal/nomination to align with the advance notice window in most bylaws. These typical advance notice provisions provide a 90-120 day window prior to the anniversary of the previous year’s meeting, and have the window open for at least 30 days. The policy does not apply to shareholder proposals submitted under Rule 14a-8 of the Exchange Act or to nominations via proxy access bylaws. ISS’ view reflects its recognition of the need for a balance between allowing shareholders flexibility to address developing concerns relatively close to a meeting through the proposal process while also providing sufficient time for shareholders to review the proposals prior to a meeting.
In response to the Sciabacucchi case in the Delaware Supreme Court that upheld the validity of federal forum selection clauses with respect to federal securities law claims, ISS will generally recommend a vote for proposals that specify the district courts of the United States as the exclusive forum for federal securities law claims, but will vote against proposals that designate a particular federal district court. In addition, ISS will generally recommend votes for charter or bylaw provisions specifying Delaware as the exclusive forum for state law matters, but will review provisions specifying states other than the state of incorporation as an exclusive forum on a case-by-case basis, including the company’s rationale for the forum, disclosure of past harm for duplicative lawsuits in multiple jurisdictions, the breadth of the provision, such as its applicability to various types of lawsuits, and other company governance provisions.
ISS will recommended withhold votes for directors at companies that adopt poison pills with a deadhand or slowhand feature, designed, in each case, to limit the ability of a future board to amend or redeem a poison pill and prevent shareholders who replace the board from accepting an offer that would otherwise trigger the pill. ISS noted that this change was made in consideration of the handful of companies that adopting short-term poison pills during the COVID-19 pandemic. While ISS was fairly lenient last year in its approach to recently-adopted poison pills, it noted this year that it may make withhold vote recommendations even if the pill has expired at the time of the annual meeting.
After the 2020 proxy season where many companies switched to a virtual meeting on short notice with limited impact on shareholder engagement, ISS will support virtual shareholder meetings and recommend voting for management proposals allowing virtual shareholder meetings, so long as the proposals do not preclude in-person meetings. Such proposals retain flexibility for a company to hold shareholder meetings by either virtual-only, in-person or hybrid. However, companies are encouraged to provide disclosure regarding the reasons and circumstances to hold virtual-only meetings and provide information on comparable shareholder rights and participation opportunities of virtual meetings compared with in-person meetings. Shareholder proposals for virtual-only meetings will be evaluated on a case-by-case basis.
ISS updated its existing policy regarding proposals to provide reports regarding a company’s gap policies and initiatives on the basis of gender, race or ethnicity to clarify that ISS compares such information against a company’s industry peers and to account for considerations related to jurisdictional restrictions on the categorization of employees by race and/or ethnicity.
While ISS is still, in principle, against the idea of arbitrarily limiting service on a board due to age or tenure, it recognizes that these mechanisms can assist boards in refreshment, and as a result, will review proposals to implement term limits on a case-by-case basis. ISS will consider a number of factors in its decision-making for management proposals, including (i) the rationale for the proposed term limit, (ii) the robustness of the company’s board evaluation process, (iii) whether the limit permits a range of director tenures, (iv) whether the limit would disadvantage independent directors against non-independent directors, and (v) whether the board will impose the limit evenly, without the option to waive in a potentially discriminatory manner. With respect to shareholder proposals on the topic, ISS will consider (i) the scope of the proposal and (ii) evidence of problematic board issues and governance failures combined with, or contributed to by, the lack of board turnover.
ISS will not consider employees, including employee representatives, to be an “executive director”. Only executives will be considered executive directors. ISS does not expect this change to affect any voting recommendations, but noted that there is the potential to interplay with overboarding policies and how investors think about assessing executive roles.
ISS will consider directors who receive pay that is on par with pay for Named Executive Officers for multiple years to be classified as non-independent.
