On November 4, Institutional Shareholder Services (ISS) released details of draft policy proposals and policy changes for 2023 and is currently soliciting feedback from the governance community through November 16. As it relates to the North America market, the focus continues to be almost exclusively on environmental, social and governance (ESG) issues rather than the historical focus on executive compensation-related topics.
ISS’ current gender diversity policy recommends against/withhold votes for the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the company's board. The proposal removes the transition provision grace period included in last year’s policy guidelines. Effective for meetings on or after February 1, 2023, the policy will apply to most listed U.S. companies rather than only those that are in the Russell 3000 or S&P 1500 indices. A one-year grace period will continue to be applied where there are no women on the board but at least one director identifies as nonbinary. Exceptions to the active policy will be made for companies that had at least one woman on the board at the prior annual shareholder meeting and provide a commitment to regaining gender diversity within a year.
Following implementation of a gender diversity policy beginning in the 2022 proxy season, Canadian boards will also be expected to foster racial/ethnic diversity. For meetings on or after February 1, 2024, (following a one-year grace period) for companies in the S&P/TSX Composite Index, the proposed policy would be generally to vote against or withhold from the nominating committee chair (or the board chair if none present) where the board has no apparent racially or ethnically diverse members. Racial/ethnic diversity will be defined as aboriginal peoples and members of visible minorities. An exception will be made if a racially diverse and/or ethnically diverse member of the board existed at the preceding meeting and the board makes a firm public commitment to appoint at least one racially and/or ethnically diverse member at or prior to the next shareholder meeting.
In response to investor sentiment regarding problematic governance provisions, ISS is proposing one change to its policy on unequal voting rights (defined by ISS as classes of common stock that have additional votes per share than other shares, classes of shares that are not entitled to vote on all the same ballot items or nominees, or stock with time-phased voting rights) to remove the one-year grace period.
The change is to implement the elimination of the grandfathered status of companies with legacy unequal voting rights provisions. Effective February 1, 2023, the proposed policy recommends withhold/against votes for directors individually, committee members or the entire board (except new nominees, who are considered case by case), if the company employs a common stock structure with unequal voting rights.
While ISS details some exceptions to this policy — such as for some newly public companies or in situations where minority shareholders have sufficient protections — this policy change is expected to impact many prominent U.S. companies upon the 2023 effective date.
ISS is considering altering the targeted adverse director vote recommendations under this policy. Currently, a newly public company with an unequal vote rights structure and without a reasonable sunset provision generally results in adverse vote recommendations for the full board. Going forward, ISS is considering reducing the targeted adverse director recommendations to members of the governance committee and, where applicable, any director holding supervoting shares, which gives them controlling ownership. Is this change in targeted director vote recommendations appropriate?
The new ISS proposed policy focuses on defining “reasonable” sunset provisions in place for newly public companies (e.g., bankruptcy emergence, spin-offs, initial public offerings), with the following bylaw or charter provisions that are viewed as problematic:
The proposed policy sets a seven-year period for sunset provisions of problematic practices to be considered as a mitigating factor for companies. ISS will recommend votes against or withhold from directors (to include potentially the full board) if these provisions exist for companies that held their first annual meeting after February 1, 2015. Unless the adverse provision is reversed or removed, ISS will vote case by case on director nominees in subsequent years.
Current ISS policy is to recommend votes on a case-by-case basis on proposals on director and officer indemnification and liability protection. In August 2022 the Delaware General Corporation Law (DGCL) was amended to permit corporations to limit or eliminate the personal liability of officers for claims of breach of the fiduciary duty of care. The DGCL previously allowed corporations to exculpate directors from breach of fiduciary duty claims, and the amendment expanded the authority to corporate officers.
ISS new policy would generally recommend a vote for proposals providing for exculpation provisions in a company’s charter to the extent permitted by applicable state law.
As climate change continues to be a global issue that has drawn significant interest from investors around the world, ISS is proposing to expand to a global focus (previously only select markets) the following climate-related policy for 2023:
The proposed policy continues to focus solely on those companies that are “significant greenhouse gas (GHG) emitters.” This is defined as the current Climate Action 100+ Focus Group, which is composed of companies (across typical industries such as manufacturing, oil and gas, electric utilities and airlines). The proposed policy generally recommends against/withhold votes for the responsible incumbent director, committee or even full board when ISS determines the Climate Action 100+ companies Are not adequately disclosing climate risk disclosure information, such as according to the Task Force on Climate-related Financial Disclosures (TCDF), and do not have either medium-term GHG emission reductions targets or Net Zero-by-2050 GHG reduction targets for at least the company’s operations (Scope 1) and electricity use (Scope 2). Emission reduction targets should also cover the vast majority (95%) of the company’s operational (Scope 1 and 2 emissions).
For 2023, ISS will apply differentiated implementation of any negative votes depending on the market and relevant market and company factors.
ISS is accepting comments on its draft policy updates until Wednesday, November 16 (5:00 p.m. ET). Comments can be submitted by emailing policy@issgovernance.com. The draft policies can be found here. Final policy updates, which may include changes beyond those in the draft release, are typically released later in November and unless otherwise noted are effective for annual shareholder meetings beginning February 1, 2023. ISS generally releases additional FAQ documents in December to provide further policy details.
