ISS has finalized its 2021 policy updates that cover board composition, shareholder proposals and more. The updates do not include executive compensation topics, which the firm will likely cover in updated FAQs next month.
Institutional Shareholder Services (ISS) has released 2021 policy updates as part of its annual process. The key topics covered align with those that ISS sought input on during the recent open comment period. The updates do not touch on executive compensation; however, ISS tends to include pay-related updates when they revise their FAQs, which is expected by December 2020.
Full details of the policy changes can be accessed on ISS’ website here. There are three key topics relevant to companies in the U.S. market, as described below.
Board Diversity, Race and Ethnicity (U.S.)
ISS is adopting a policy that will apply to companies where the board has not publicly identified any racially or ethnically diverse directors. Similar to ISS’ policies on board gender diversity, the firm is using a one-year implementation delay, meaning the policy will not be effective until February 2022. However, beginning in 2021, ISS research reports will identify boards that do not meet these criteria.
This proposed new policy will apply to all companies in the Russell 3000 and S&P 1500 indices. When the policy becomes effective in 2022, ISS will recommend votes against the chair of the nominating committee or other relevant directors at companies that don’t meet the new standards on a case-by-case basis. ISS will consider aggregate diversity statistics that are disclosed if they are specific to racial and/or ethnic diversity. ISS will also make an exception if there was racial and/or ethnic diversity on the board at the preceding annual meeting and a firm commitment is made to appoint at least one racial and/or ethnic diverse board member within a year.
Director Accountability (All global policies, including U.S.)
ISS is clarifying an existing policy related to the election of directors. The firm is specifically noting that significant risk oversight failures related to environmental and social concerns (including climate change) may be considered material governance failures. This will be reviewed on a case-by-case basis and may trigger vote recommendations against board members. As noted in ISS’ open comment period, they expect the proposed change would impact only a small number of directors annually.
Exclusive Forum Bylaws (U.S.)
With exclusive venue provisions remaining an area of focus, ISS is updating existing policies from a case-by-case approach to one that looks more favorably on certain charter or bylaw provisions. ISS will generally support provisions that specify Delaware or the Delaware Court of Chancery for companies incorporated in Delaware, or U.S federal courts for claims arising under federal securities law. ISS will generally vote against provisions that restrict the forum to a particular U.S. district court. During the open comment period, ISS noted that they expect the proposed changes to impact only a limited number of vote recommendations.
Other Policy Updates (U.S.)
ISS made adjustments to other policies that were not previewed during the open comment period, including:
- Board Refreshment – ISS is amending its policy on management and shareholder proposals related to director term limits from generally recommending against to a case-by-case approach. ISS will continue to recommend against age limits.
- Classification of Directors – ISS will limit the “Executive Director” classification to officers and not employees. The stated reason for this change is to assist institutional investors in monitoring their overboarding policies with greater accuracy.
- Board Gender Diversity – ISS is removing the language that refers to the transition period of this policy, as it becomes effective in 2021.
- Pay Equity/Pay Gap Shareholder Proposals – ISS is adding language to affirm that it will consider local laws and acknowledge that definitions of racial and ethnic minorities may differ from region to region.
- Sexual Harrassment Shareholder Proposals – ISS is defining the criteria of it’s analysis for these types of proposals and affirming they will review such proposals on a case-by-case basis for requests for reporting of company actions to strengthen such policies or oversight to prevent workplace sexual harassment.
- Virtual Annual Meetings – ISS will generally support management proposals allowing for the convening of hybrid shareholder meetings (virtual and in-person), provided the intention is not to hold virtual-only meetings. ISS notes that health and safety concerns, such as the pandemic, can impacts a company’s ability to hold in-person meetings. (Click here for our alert on how ISS amended its virtual meeting policy for the pandemic.)
Additional policy clarifications address deadhand poison pill provisions, advance notice requirements, closed-end funds and mandatory arbitration.
On the Horizon
These policies (with the exception of the board diversity update) are effective for shareholder meetings taking place on or after February 1, 2021. In the near term, ISS expects to publish updated proxy voting guideline documents in late November. Updated FAQs are expected to be published by December 2020.
For questions about the policy updates, their potential impact or other corporate governance inquiries, please contact the author or write to firstname.lastname@example.org.