ISS Benchmark Voting Policies updated effective February 1, 2022 – board gender diversity and ESG provisions of key interest.
Introduction
Institutional Shareholder Services (ISS) recently published its 2022 updates to its benchmark proxy voting policies. The policies will govern ISS’ voting recommendations for shareholder meetings held on or after February 1, 2022. The updates include changes to a number of policies for issuers listed on Canadian exchanges, including with respect to gender diversity and environment, social and governance (ESG) issues.
New ESG Provisions
The updates add two new policies which provide a framework for analyzing both management and shareholder proposals with respect to a company’s climate transition action plans and related disclosure.
Say-on-Climate (SoC) Management Proposals
ISS will make recommendations on a case-by-case basis for management proposals that request shareholders to approve the company’s climate transition action plan, considering the completeness and rigor of the plan. ISS will consider a wide range of information when assessing a proposal, including, but not limited to:
- the extent to which climate related disclosures are in line with the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations (notably, the Canadian Securities Administrators (CSA) have also proposed new climate-related disclosure requirements based on the TCFD recommendations, which we recently discussed here);
- disclosure of the company’s operational and supply chain GHG emissions and the completeness and rigor of company’s targets for reducing GHG emissions;
- whether the company has sought and approved third-party approval that its targets are science-based;
- whether the company has made a commitment to be “net zero” for operational and supply chain emissions by 2050; and
- whether the company discloses a commitment to report on the implementation of its plan in subsequent years.
ISS will also apply this policy to climate transition related ambitions, or commitment to reporting on the implementation of a climate plan.
According to ISS, in 2021, there were over two dozen SoC proposals on ballot across the globe, including in Canada and the United States, along with France, South Africa, Spain, Switzerland, the United Kingdom and Australia. These proposals varied, sometimes requesting an approval of a company’s climate transition plan or its climate reporting. All were advisory votes, and some were isolated votes while others were to become regularly occurring. Currently, there is no requirement under Canadian securities law or corporate law that a reporting issuer hold an SoC vote.
Say-on-Climate Shareholder Proposals
Similarly to management proposals, ISS will make recommendations on a case-by-case basis for shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of these measures.
The disclosure of GHG emissions as well as other climate-related disclosure targets is in line with emerging climate-related guidance trends. Recently, the Canadian Securities Administrators (CSA) proposed climate-related disclosure requirements in National Instrument 51-107 Disclosure of Climate-related Matters (Proposed Climate Disclosure). The Proposed Climate Disclosure focuses on four core disclosure elements: governance, strategy, risk management and metrics and targets. Proposed Climate Disclosure related to governance would be required to be included annually in the issuer’s management information circular, or AIF or annual management’s discussion and analysis (MD&A) where the issuer does not send a management information circular to its securityholders. Proposed Climate Disclosure related to strategy, risk management and metrics and targets would be included in the issuer’s AIF (or annual MD&A if no AIF is filed). In the Proposed Climate Disclosure, the CSA is currently considering two approaches to the disclosure of GHG emissions. The first would not require the disclosure of Scope 1, Scope 2 and Scope 3 GHG emissions and their related risks, provided reasons for not providing this information are disclosed. The second, alternate, proposal would require issuers to disclose only Scope 1 GHG emissions, with disclosure of Scope 2 and Scope 3 GHG emissions being voluntary on a comply-or-explain basis. For further discussion on Proposed Climate Disclosure, please see here.
In evaluating an SoC shareholder proposal, ISS will take into consideration a variety of information including, among other things:
- the completeness and rigor of the company’s climate-related disclosure;
- the company’s actual GHG emissions performance;
- whether the company has been the subject of recent, significant violations, fines, litigation or controversy related to its GHG emissions; and
- whether the proposal’s request is unduly burdensome (in scope or timeframe) or overly prescriptive.
SoC shareholder proposals are relatively new, emerging in late 2020 and increasing in 2021. These proposals typically ask companies to publish a climate action plan and put it to a regular shareholder vote. ISS believes the new provisions provide a transparent framework of analysis that will allow for consistency across markets.
Gender Diversity
ISS has updated its gender diversity policy and will make the following voting recommendations effective February 2022:
*If no nominating committee or committee designated with nominating responsibility, withhold for the Chair of the Board.
ISS will evaluate on a case-by-case basis whether a withhold recommendation is warranted for additional directors at companies that fail to meet the gender diversity policy that would apply to the issuer’s constituent group over two years or more. Gender diversity policies should include measurable goals and/or targets denoting a firm commitment to increasing board gender diversity at or prior to the next AGM.
Exceptions to this policy will be available for non-S&P/TSX Composite Index issuers that are:
- newly public companies;
- companies that have recently transitioned from the TSXV; or
- companies with four or fewer directors.
As part of its rationale for these updated policy positions, ISS cites the fact that gender diversity has remained a high-profile corporate governance issue in the Canadian market. According to ISS, the diversity disclosure required by National Instrument 58-101 Disclosure of Corporate Governance Practices has been a catalyst for the addition of women to the boards of TSX-listed issuers. ISS reports that based on their data, TSX-listed company boards with no female directors appear to be outliers.
In addition, in November 2021, the CSA published Multilateral Staff Notice 58-313 Review of Disclosure Regarding Women on Boards and in Executive Officer Positions (the Review) representing the 7th consecutive year of data being published regarding women on boards and in executive officer positions since the comply and explain rules came into force. The Review found a correlation between issuers adopting board refreshment and/or renewal measures and the proportion of board seats held by women. Where issuers had adopted targets with respect to the representation of women on their boards (32%), a greater proportion of the board (28%) was comprised of women as compared to issuers without board targets (18%).
The results of board representation indicate:
Further detailed discussion of the Review can be found here.
Existing ISS’ Governance QualityScore (GQS) factors also highlight the importance of female representation. The number of women on the board is a factor scored in all regions. The GQS suggests that better long-term financial performance is correlated with increases in the number of women on boards. Full credit of this factor is earned when three or more women are on the board. As of November 2017, nine board members is the average number of members across all GQS coverage companies – this equates to the typical company receiving full credit with one-third of the board comprised of women. The percentage of women is another factor that is scored in all regions. Full credit is received when women hold at least 50% of board seats. Lastly, in considering the number of women in leadership roles, including board chair, the majority of relevant ISS policy survey respondents indicated that they considered overall diversity when evaluating boards.
Glass Lewis has also recently published its updated Policy Guidelines for 2022 which provide for an expanded policy on board gender diversity (as we recently discussed).
Other Notable Changes to ISS’ Policies Applicable to Non-Venture Issuers
ISS implemented a number of other changes to its policies applicable to non-venture issuers, including:
Coverage. ISS is updating its policy coverage of TSX-listed issuers to explicitly state that the guidelines will apply to companies listed on the TSX and the NEO Exchange.
Board Communications and Responsiveness – Advisory Vote on Executive Compensation (Say-on-Pay) Management Proposals. ISS has amended its considerations for evaluating a say-on-pay votes. Under the current policy, ISS will evaluate board responsiveness following cases where a company’s previous say-on-pay proposal received support of less than 70% of votes cast. For 2022, ISS is moving that threshold up to 80% based on Canadian market expectations. This change was supported by the ISS’ major clients participating in a 2021 roundtable, and by the fact that other major ISS markets all have thresholds of 70% or higher. In addition, the Canadian Coalition for Good Governance recommended in its comment letter of March 2021 that where a say-on-pay vote receives low support (below 80%) the board should report back in a reasonable time on its efforts to understand shareholder concerns. Say-on-pay resolutions are not yet mandated for reporting issuers, with approximately 30% of TSX issuers under ISS coverage providing these resolutions.
Notable Changes to Venture-Only Guidelines
ISS also addressed the following policy changes applicable to venture-listed issuers only:
Overboarded Directors.
For meetings of venture issuers on or after February 1, 2023, ISS will generally vote withhold for individual director nominees who:
- are non-CEO directors and serve on more than five public company boards; or
- are CEOs of public companies who serve on the boards of more than two public companies besides their own (withhold only at their outside boards). Guidance with respect to ISS’ expectations for how directors should transition has been provided.
This policy is now aligned with the ISS’ existing policy for non-venture issuers (TSX and NEO).
Equity-Based Compensation Plans.
For venture issuers, ISS will now generally vote withhold for the continuing compensation committee members (or, where no compensation committee has been identified, the board chair or full board), if the company maintains an evergreen plan (including those adopted prior to an initial public offering) and has not sought shareholder approval in the past two years and does not seek shareholder approval of the plan at the meeting. This policy update is aimed at addressing venture issuers who are not required to obtain shareholder approval of existing plans. Currently, issuers listed on the TSX and TSX-V are required to obtain shareholder approval in certain circumstances. We note that proposed new CSE policies will impose new shareholder approval requirements for certain CSE-listed issuers, if adopted.
