In the past few weeks, both major proxy advisory firms, Institutional Shareholder Services ("ISS") and Glass Lewis & Co. LLC ("Glass Lewis"), have issued their updated proxy voting guidelines for the 2022 proxy season.1 These policy updates provide us with early insight into the upcoming 2022 proxy season, as they will significantly influence the votes of public shareholders and help dictate the level of shareholder support for key proxy agenda items. Six key policy updates and take-aways are described below.
1. Heightened Focus on Environmental and Social Issues:
From board oversight to accountability, the proxy advisory firms focus squarely on environmental and social ("E&S") issues, with particular emphasis on climate change. It is therefore crucial for public companies to assess their disclosures of board oversight on E&S and climate change.
Disclosure on Board Oversight of E&S: Beginning in 2022, Glass Lewis will note as a concern when boards of companies in the Russell 1000 index do not provide clear disclosure concerning the board oversight of environmental and/or social issues and will generally recommend voting against the governance committee chair of a company in the S&P 500 index that fails to provide explicit disclosure concerning the board's role in overseeing these issues. In light of this policy change, as companies prepare for the upcoming proxy season, there should be consideration of current processes and disclosures on board oversight of E&S issues, including disclosure of such oversight in board committee charters and proxy statements. Glass Lewis notes that companies should determine the best structure for such oversight, which can be effectively conducted by specific directors, the entire board, a separate committee, or combined with the responsibilities of a key committee.
Say on Climate Proposals: "Say-on-Climate" proposals are one of the hottest trends from 2021, with these proposals calling on public companies to publish a climate action plan and, similar to a "Say-on-Pay" proposal, put this plan to a shareholder vote. Under its new policy, beginning in 2022, ISS will make voting recommendations on "Say-on-Climate" shareholder and management proposals2 on a case-by-case basis based on a number of factors, including a company's disclosure and actual GHG emissions performance.3
Board Accountability: Recommendations "Against" Directors of "Significant Emitters": The ISS policy updates for 2022 introduce a board accountability policy for the assessment of companies that ISS identifies as "significant GHG emitters."4 For such companies, ISS will recommend against the incumbent chair of the responsible committee or other directors on a case-by-case basis where it determines that the company is not taking the following "minimum steps" to address climate change:
(a) Disclosure: Detailed disclosure of climate-related risks faced by the company, such as according to the framework established by the TCFD; and
(b) Appropriate GHG emissions reduction targets: For 2022, this will mean any well-defined GHG reduction targets, and while targets for Scope 3 emissions5 will not be required 2022, the targets should cover at least a significant portion of the company's direct emissions.
ISS's new policy further notes that these expectations about what constitutes "minimum steps" to mitigate risks related to climate change will increase over time.
2. Focus in on Board Composition:
Ahead of the 2022 proxy season, the proxy advisory firms are tightening their requirements with respect to board diversity, thereby emphasizing the importance of greater board diversity.
ISS on Racial/Ethnic Board Diversity: Moving beyond its previous policy of highlighting boards of companies with no apparent racial or ethnic diversity, effective in 2022, for Russell 3000 or S&P 1500 companies, ISS will generally recommend voting against from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members.6 Note that ISS considers racial and ethnic diversity to be broader than Nasdaq. See Appendix 1 for more information.
Glass Lewis on Racial/Ethnic Board Diversity: Beginning in 2022, for companies in the S&P 500 index with "particularly poor disclosure" on racial/ethnic diversity, Glass Lewis may recommend voting against the chair of the nominating and/or governance committee.7 "Particularly poor disclosure" means a failure to provide any disclosure on each of the following:
- the board's current percentage of racial/ethnic diversity;
- whether the board defines diversity explicitly to include gender and/or race/ethnicity;
- whether the board has adopted a "Rooney Rule" policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees; and
- board skills disclosure.
ISS on Gender Diversity: Currently and for the upcoming proxy season (and through meetings held up to January 31, 2023), for companies in the Russell 3000 or S&P 1500 indices, ISS will generally recommend voting against 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.8 Effective for meetings on or after February 1, 2023, this policy will also apply to companies that are not in the Russell 3000 or S&P 1500.9
Glass Lewis on Gender Diversity: Glass Lewis policy plans to increase the requirements with respect to gender diversity as follows:10
Glass Lewis Policy Overview on Gender Diversity
||Current Glass Lewis Policy (since 2021)
||Glass Lewis Policy Beginning in 2022
||Glass Lewis Policy Beginning in 2023
|Outside of Russell 3000
||At least One Gender Diverse Director: Voting recommendations against the chair of the nominating committee if the board does not have at least one female director.
||Same as above.
||At Least Two Gender Diverse Directors: Glass Lewis will generally recommend voting against the chair of the nominating committee of a board with fewer than two gender diverse directors, or the entire nominating committee of a board with no gender diverse directors.11
||At Least 30 Percent Gender Diverse: Glass Lewis will transition to a percentage-based approach and will generally recommend voting against the nominating committee chair (or other members of the committee if the chair is not up for reelection) of a board that is less than 30 percent gender diverse.
When making these voting recommendations, Glass Lewis notes that it will carefully review a company's disclosure of its diversity considerations and may refrain from recommending that shareholders vote against directors of companies when boards have provided a sufficient rationale or plan to address the lack of diversity on the board.
3. Diversity Beyond the Board:
Beyond the board, the proxy advisory firms are echoing investor focus and scrutiny of public companies' actions on diversity, equity and inclusion, with shareholder proposals on such issues receiving notable support in 2021 and ISS' policy expanding to assess the public statements and actions by public companies on these issues.
ISS on Shareholder Proposals on Racial Equity: Shareholder proposals requesting independent racial equity audits of public companies' impacts on civil rights, equity, diversity and inclusion emerged in 2021 on the heels of the 2020 Black Lives Matter protests and related social movements. The proposals garnered significant levels of shareholder support (averaging more than 30% support) and are expected to be on ballots again in the coming years due to growing pressure for progress on diversity, equity and inclusion efforts.
Under a new policy, beginning in 2022, ISS will recommend voting on independent racial equity and/or civil rights audit shareholder proposals on a case-by-case basis, considering, among other things: the company's framework for addressing racial inequity; whether the company has issued a public statement related to their racial justice efforts; whether the company has been the subject of recent controversy, litigation, or regulatory actions related to racial inequity or discrimination; and whether the company's actions are aligned with market norms on civil rights, and racial or ethnic diversity.
4. Age and Tenure Policies:
Proxy advisory firm and investor approaches with respect to age and tenure limits remain varied. In general, ISS and Glass Lewis do not favor strict policies that arbitrarily cut off the tenure of potentially valuable board members. However, in light of Glass Lewis's new policy, companies should take care to follow through with the limits they adopt.
Glass Lewis Policy Change: Beginning in 2022, in cases where the board has waived its term/age limits for two or more consecutive years, Glass Lewis will generally recommend shareholders vote against the nominating and or governance committee chair, unless a compelling rationale is provided for why the board is proposing to waive this rule, such as consummation of a corporate transaction.
Generally, Glass Lewis disfavors mandatory term limits and notes that "the long-term impact of age limits restricts experienced and potentially valuable board members from service through an arbitrary means." The only exception for Glass Lewis is in extreme instances, where the average tenure of non-executive directors is ten years or more and no new directors have joined the board in the past five years.
ISS Policy: ISS' current policy is to generally vote against management and shareholder proposals to limit the tenure of independent directors through mandatory retirement ages, and to vote for proposals to remove mandatory age limits.
5. Growing Opposition to Dual Class Stock:
Proxy advisory firms continue to increase pressure on public companies to end dual class share structures altogether or to adopt clear sunsets that collapse a dual class into a single class after seven years or less. It is still unclear, however, when such policies will become a significant consideration for private company decision-makers going public when they are not facing the scrutiny of public investors.
ISS on Dual Class Shares: In 2015, ISS adopted a policy to vote against directors of newly public companies that retained multi-class capital structures with unequal voting rights (absent a reasonable sunset period of no more than seven years); however, ISS grandfathered companies that already had these provisions.
Under its amended policy, starting February 1, 2023, ISS will generally vote against directors at any company (including the previously grandfathered companies) that employs a common stock structure with unequal voting rights, and will continue to vote against incumbent directors in subsequent years, unless the problematic capital structure is removed or subject to a newly added reasonable sunset.
Exceptions to this policy will generally be limited to newly public companies with a sunset provision of no more than seven years from the date of going public.12
Glass Lewis on Dual Class Shares: Beginning in 2022, Glass Lewis will recommend voting against the chair of the governance committee at companies with a multi-class share structure and unequal voting rights when the company does not provide for a reasonable sunset of the multi-class share structure (generally seven years or less).
A vote against directors of a dual-class stock company is ultimately nothing more than a protest vote given the ability of the high voting stock in such companies to achieve the requisite majority to elect directors irrespective of any other shareholder votes.
6. Governance in SPACs:
Governance has and will continue to play a central role in the special purpose acquisition company ("SPAC") market—both in the IPO phase for SPAC insiders when it comes to overboarding, and for the increasing number of companies that go public via SPACs.
Glass Lewis on Overboarding: Glass Lewis's current policy is to recommend that shareholders vote against a director who serves as an executive officer of any public company while serving on more than two public company boards and any other director who serves on more than five public company boards. However, in a newly announced policy for SPACs, when the executive officer in question serves only as an executive at a SPAC, Glass Lewis will generally apply the higher threshold of five public company directorships to such executive.
Glass Lewis on Governance Following a deSPAC: Glass Lewis views a business combination with a SPAC as a private company's de-facto IPO. Therefore, in cases where Glass Lewis determines that a company that has completed a deSPAC within the past year has adopted overly restrictive governing documents (such as a multi-class share structure or classified board), Glass Lewis will generally recommend voting against all members of the board who served at the time of the company becoming publicly traded if the board: (i) did not also submit these provisions to a shareholder vote on an advisory basis at the meeting where shareholders voted on the business combination; (ii) did not also commit to submitting these provisions to a shareholder vote at the company's first shareholder meeting following the company becoming publicly traded; or (iii) did not provide for a reasonable sunset of these provisions (generally three to five years in the case of a classified board or poison pill; or seven years or less in the case of a multi-class share structure). For this reason, it is important for companies going public pursuant to a deSPAC transaction to include separate advisory proposals relating to the company's restrictive governance provisions in the SPAC's proxy statement for its shareholder meeting to approve the business combination.
Ethnic and Racial Categories Used in ISS' Database13
|Asian (exclude Indian/South Asian)
||A person with origins in any of the original peoples of Central Asia or the Far East, including Afghanistan, Cambodia, China, Japan, Korea, Malaysia, Myanmar, the Philippine Islands, Thailand, and Vietnam
||A person with origins in any of the Black racial groups of Africa
||A person that does not fit any of the other categories
||A person of Cuban, Mexican, Puerto Rican, South or Central American, or other Spanish culture or origin, regardless of race
||A person with origins in India or other South Asian country, including Bangladesh, Bhutan, the Maldives, Nepal, Pakistan, and Sri Lanka
||A person with origins in any of the Persian or Arab countries in the Middle East or North Africa
|Native American/Alaskan Native
||A person with origins in any of the original peoples of North, Central and South America
|Native Hawaiian/Other Pacific Islander
||A person with origins in any of the original peoples of Guam, Hawaii, Samoa, or other Pacific Islands
*Considered non-diverse for ISS policy application.
1 ISS' Americas Policy Updates are available here and Glass Lewis's 2022 policy guidelines are available here.
2 "Say-on-Climate" proposals sponsored by management generally request that shareholders approve a company's climate transition action plan, climate transition related ambitions, or commitment to reporting on the implementation of a climate plan.
3 Factors that ISS will consider for these shareholder proposals include: the company's climate-related disclosure; the company's actual GHG emissions; whether the company has been the subject of recent, significant violations, litigation, or controversy related to its GHG emissions; and whether the proposal's request is unduly burdensome (i.e., in scope or timeframe).
Factors that ISS will consider for say-on-climate management proposals go into more detail, focusing on the extent to which the company's disclosures are in line with Task Force on Climate-related 5 Financial Disclosures (“TCFD”) recommendations, disclosure of operational and supply GHG emissions (Scopes 1, 2 and 3), and the completeness and rigor of the company's targets for reducing GHG emissions in line with Paris Agreement goals.
4 For 2022, companies defined as "significant GHG emitters" will be those on the current Climate Action 100+ Focus Group list available at: Climate Action 100+.
5 Scope 3 emissions result from activities not directly controlled by a company but which result from the company's value chain (e.g., carbon emissions from the use of products sold by the company, emissions from employee travel and commuting).
6 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 racial and/or ethnic diverse member within a year.
Glass Lewis will generally recommend in line with applicable state laws mandating board composition requirements for underrepresented community diversity or other diversity measures beyond gender when they come into effect.
7 In addition, beginning with annual meetings held after August 8, 2022, for Nasdaq-listed companies that do not comply with the applicable Nasdaq board diversity disclosure rules, Glass Lewis will recommend voting against the chair of the nominating committee (or other members of the committee if the chair is not up for reelection). Beginning in 2023, for S&P 500 companies that have not provided any disclosure of individual or aggregate racial/ethnic minority demographic information, Glass Lewis will generally recommend voting against the chair of the nominating committee (or other members of the committee if the chair is not up for reelection)
8 An exception will be made if there was a woman on the board at the preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within one year.
9 In addition, ISS updated its Foreign Private Issuers' policy for US tax havens in the Russell 3000 or S&P 1500 indices to require at least one female director. See the ISS Americas Regional Proxy Voting Guidelines.
10 Glass Lewis has replaced references in its guidelines to female directors with "gender diverse directors," defined as women and directors that identify with a gender other than male or female.
For any company subject to mandatory board composition requirements under state law with which it has failed to comply, Glass Lewis will also issue an against voting recommendation.
11 This does not apply to a Russell 3000 company with six or fewer directors, to which the 2021 policy continues to apply.
12 Other exceptions include: (i) Limited Partnerships and the Operating Partnership unit structure of REITs; (ii) situations where the unequal voting rights are considered de minimis; or (iii) where the company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular binding vote on whether the capital structure should be maintained
13 ISS' US Procedures and Policies FAQ, available here.