On Nov. 12, 2020, Institutional Shareholder Services (ISS) released its executive summary of its 2021 benchmark policy updates. The ISS 2021 global policy updates will be effective for meetings that occur on or after Feb. 1, 2021, except for those, as noted, that are being announced now with a one-year transition period and will become effective in 2022. The updates highlighted by the ISS are summarized below.
Board Racial/Ethnic/Gender Diversity. ISS will adopt, subject to a one-year transition period, a new voting policy with respect to U.S. boards that appear to lack racial and ethnic diversity. For 2021, ISS benchmark research reports for companies in the Russell 3000 or S&P 1500 indexes will highlight boards that lack racial and ethnic diversity (or lack disclosure of such) to help investors identify companies with which they may wish to engage and foster dialogue on this topic. For 2022, for companies in the Russell 3000 or S&P 1500 indexes where the board has no apparent racially or ethnically diverse members, ISS will recommend a vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis). An exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racially and/or ethnically diverse member within a year.
In addition, under ISS’ newly implemented policy regarding gender diversity on boards, a transitional year (2020) was provided so that a company that previously had not had a female director could make a commitment to add one by the following year. ISS has now changed the policy to remove the transitional language.
Board Independence. The updated policy increases the minimum independence threshold for all markets covered by such policy to the greater of one-third of the board or two independent directors. This represents an increase from the existing thresholds, which range from one director to 25 percent of the board, depending on the market. Therefore, for bundled elections, ISS would recommend a vote against the election of all directors if the company does not have at least one-third of the board or two directors, whichever is higher, classified as independent under ISS policy. For unbundled elections, if the board falls below the updated minimum independence levels, ISS would recommend votes against the nonindependent candidates. In making the above vote recommendations, in the absence of other governance concerns, ISS generally will not recommend against the election of the board chair, due to the relevance of the board leadership position.
Shareholder Litigation Rights. ISS will generally recommend a vote for federal forum selection provisions in the charter or bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters and will recommend a vote against provisions that restrict the forum to a particular federal district court. In addition, under the updated policy for exclusive forum provisions for state law matters, in the absence of concerns about abuse of the provision or about poor governance more generally, ISS will generally recommend in favor of charter or bylaw provisions designating courts in Delaware as the exclusive forum for state corporate law matters at companies incorporated in that state.
Director Elections: Material E&S Risk Oversight Failures. Where appropriate, ISS is clarifying global ISS benchmark policies by explicitly noting that significant risk oversight failures related to environmental and social (E&S) concerns may constitute material governance failures and, as such, may trigger vote recommendations against board members.
Other Policy Updates. ISS is also making a number of other policy updates that were not included in the public comment period, including bringing into effect policies that were announced previously but delayed for a transition period (including the board gender diversity policy mentioned above). These include the following.
Advance Notice Requirements. ISS will now recommend for advance notice provisions that require notification 120 days prior to the meeting rather than no earlier than 60 days prior to the meeting.
Board Refreshment (Age/Term Limits). ISS is changing its policy on management and shareholder proposals for term limits from generally against to a case-by-case approach. ISS will continue to recommend against age limits.
Closed-End Funds. ISS policy will now recommend a vote against directors at closed-end management investment companies that have not provided a compelling rationale for opting in to a control share acquisition statute or submitted a bylaw amendment to a shareholder vote.
“Dead Hand” Poison Pill Provisions. While ISS generally recommends on a case-by-case basis on directors who adopt a short-term pill without a shareholder vote, the inclusion of a dead hand or a slow hand feature will result in a withhold/against recommendation on directors.
ISS’ Classification of Directors. The primary change being made to the ISS classification of directors is to limit the “executive director” classification to only officers, not other employees. This change will not result in any vote recommendation changes under the ISS benchmark policy. However, for institutional investors whose overboarding policies consider each executive director position a mandate, this change will result in a more accurate assessment of the number of executive positions.
Gender Pay Gap Shareholder Proposals. ISS will consider local laws and the fact that definitions of racial and ethnic minorities differ from region to region, so a “global race/ethnicity” statistic is not meaningful.
Mandatory Arbitration. ISS will recommend on a case-by-case basis on requests for a report on a company’s use of shareholder proposals for mandatory arbitration on employment-related claims, and it defines some criteria for analysis.
Sexual Harassment Shareholder Proposals. ISS will recommend on a case-by-case basis on requests for a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment or a report on risks posed by a company’s failure to prevent workplace sexual harassment. It also defines some criteria for analysis.
Virtual Meetings. ISS has established a policy in the U.S. benchmark guidelines regarding the format of the annual meeting. The policy will be to generally support management proposals allowing the convening of hybrid shareholder meetings as long as the intention – in the absence of health or safety concerns – is not to hold virtual-only meetings to the preclusion of in-person meetings.
