The Business Roundtable Statement on the Purpose of a Corporation and the annual CEO letter penned by BlackRock Chairman and Chief Executive Officer Larry Fink made waves in the discourse on good corporate governance when each challenged the long-standing principle of shareholder primacy. While not nearly enough time has passed to assess the impact of these statements, the proxy advisory firm Institutional Shareholder Services (ISS) is making a move to provide customized voting guidance to institutions focused on issues other than maximizing shareholder value and good corporate governance.

For 2020, ISS launched the following six sets of “specialty” proxy voting guidelines – each geared toward a specific special interest group:

• Taft-Hartley Advisory Services.
• Public Fund.
• Socially Responsible Investment (SRI).
• Catholic Faith-Based.
• Sustainability.
• Climate.[1]

At first glance, you may think that several of these specialty guidelines overlap, if not duplicate, each other. If you made that assumption, you’re correct at least for now. The Taft-Hartley Advisory Services guidelines, which are geared toward private pension plans, provide guidance nearly identical to the Public Fund guidelines, which are geared toward state and other government-sponsored pension plans. The Sustainability guidelines and the Climate guidelines provide the same voting guidance to groups that differ only due to the slightly broader scope of issues of concern for the Sustainability guidelines as opposed to the carbon emissions-focused Climate guidelines. Finally, the SRI guidelines and the Catholic Faith-Based guidelines provide nearly the same guidance, with the exception of some specific shareholder proposals that a faith-based investor might elect to vote against rather than abstain from. For now, the specialty guidelines depart from each other and the general voting guidelines only on guidance relating to shareholder proposals. For example, while the general 2020 proxy voting guidelines state that ISS will recommend shareholders vote against proposals to reduce greenhouse gas emissions, the Climate guidelines and the Sustainability guidelines both state that ISS will recommend shareholders vote for such proposals. Additionally, where the general 2020 proxy voting guidelines state that ISS will recommend shareholders vote against proposals requesting that the subject company invest in renewable energy resources, the Climate guidelines and the Sustainability guidelines state that ISS will recommend shareholders vote for such proposals. Similarly, the Climate guidelines and the Sustainability guidelines are silent on guidance regarding shareholder proposals calling for the adoption of renewable energy goals, rather than generally recommending a vote against such proposals, as stated in the general 2020 proxy voting guidelines.

Recipients of specialty guidelines for 2020 will receive the same voting guidance as those who receive the general region-based voting guidance on proposals most likely introduced by management, such as director elections, say-on-pay and frequency, and equity compensation plans. However, this movement indicates that public companies may soon need to familiarize themselves with the particular concerns and values of their institutional shareholders in order to evaluate the chances of ISS recommending that shareholders vote for certain annual meeting proposals. One could envision a future when ISS may recommend that Climate-focused investors vote against a company’s executive compensation if performance-based compensation is not sufficiently linked to the company’s reduction of carbon emissions (while at the same time ISS recommends that all investors not having a Climate focus vote for the company’s executive compensation).

Two takeaways from ISS introducing specialty proxy advisory services are that (1) environmental, social and governance (ESG)-based voting criteria are not going away, and management teams should familiarize themselves with the ESG landscape and the various standards currently in use, and (2) it will become increasingly important for management to maintain lines of communication with institutional shareholders and to understand their unique interests and concerns. Particularly in today’s volatile market conditions, continuous shareholder outreach is a strategy that will reinforce shareholder confidence and potentially ward off the threat of activist intervention.

[1] Each specialty policy is available on ISS’s 2020 Voting Policies webpage at https://www.issgovernance.com/policy-gateway/voting-policies/.