Environmental, social and governance (“ESG”) matters, including both climate change and board-level diversity matters, is at the center of both ISS’s and Glass Lewis’s updated voting policies.  In summary:

• Climate accountability. For the U.S. companies that ISS considers to be among the highest greenhouse gas (“GHG”) emitters through their operations or value chain,¹ ISS has adopted a policy by which it will generally recommend against or withhold from the incumbent directors it deems responsible if the company has not taken the “minimum steps” to understand, assess, and mitigate risks related to climate change to the company and the larger economy. For 2022, these “minimum steps” are considered to be (1) detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD), including: (a) board governance measures; (b) corporate strategy; (c) risk management analyses; and (d) metrics and targets; and (2) appropriate GHG emissions reduction targets.  For 2022, “appropriate GHG emissions reduction targets” will be any well-defined GHG reduction targets, and while targets for Scope 3 will not be required quite yet, targets should cover a “significant portion” of a company’s direct emissions.  Expectations about what constitutes “minimum steps” will increase over time.  ISS has also added new policies for both shareholder and management proposals relating to “say on climate” votes, taking into account a broad range of factors.

Regarding ESG more broadly, beginning in 2022, Glass Lewis will note as a concern when boards of companies in the S&P 500 index do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. For shareholder meetings held on or after January 1, 2022, Glass Lewis will generally recommend voting against or withhold from the governance committee chair of a company in the S&P 500 index who fails to provide explicit disclosure concerning the board’s role in overseeing these issues.

• Board diversity. For U.S. companies, ISS is expanding is board gender diversity policy to apply beyond the Russell 3000 and S&P 1500, effective for meetings on or after February 1, 2023. As a reminder, ISS’s board gender diversity policy states that ISS will generally recommend votes against or withhold from the chair of a company’s nominating committee (or other directors on a case-by-case basis) if the board has no women. On racial and ethnic board diversity, ISS’s existing policy also requires that companies in the Russell 3000 and S&P 1500 have at least one racially/ethnically diverse director as of February 1, 2022, or risk a similar fate.

Glass Lewis has updated its board gender diversity policy so that, beginning in 2022, for U.S. companies in the Russell 3000, Glass Lewis will generally recommend votes against or withhold from the chair of the nominating committee if the board has fewer than two gender diverse directors, or the entire nominating committee if the board has no gender diverse directors. For companies outside of the Russell 3000, and all boards with six or fewer total directors, Glass Lewis’s existing policy requires a minimum of one gender diverse director. Beginning in 2023, for U.S. companies in the Russell 3000, Glass Lewis will transition from the foregoing fixed numerical approach to a percentage-based approach, generally recommending votes against or withhold from the chair of the nominating committee if the board is not at least 30 percent gender diverse. “Gender diverse directors” are defined as women and directors who identify with a gender other than male or female.

For companies in the S&P 500, beginning in 2022, Glass Lewis may recommend votes against or withhold from the chair of the nominating committee if the company fails to provide adequate board diversity disclosure (i.e., individual or aggregate racial/ethnic minority demographic information), and this policy will be more strictly enforced beginning in 2023.  Glass Lewis also updated its discussion regarding state laws on board diversity.

• Unequal voting rights. ISS is doing away with the grandfathering provision that applied to companies with unequal voting structures in place prior to 2015.  Following a grace period of one year, in 2023, ISS will recommend against directors it deems responsible at all U.S. companies with unequal voting rights, regardless of when the structure was adopted.

Beginning in 2022, Glass Lewis will generally recommend voting against or withhold from 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).

• SPAC governance. Glass Lewis has included a new section to address governance concerns of special purpose acquisition companies (“SPACs”). In cases where Glass Lewis determines that the company has adopted overly restrictive governing documents (including where, preceding the company becoming publicly traded, the board adopts a multi-class share structure where voting rights are not aligned with economic interest, or an anti-takeover provision, such as a poison pill or classified board), Glass Lewis will generally recommend voting against or withhold from 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 prior 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).  Glass Lewis also updated its overboarding policy to permit directors who serve in an executive role only at a SPAC to serve on up to five public company boards.
• Other changes. 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 or withhold from 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.

Other than the obvious takeaways here — that climate change-related disclosures are becoming increasingly less “voluntary” in the U.S. even outside of the SEC weighing in, that ESG governance needs to be addressed in some fashion, and that the board diversity push is likely to continue to grow — companies should also be aware that ISS may continue on do away with its grandfathered policies (i.e., grandfathered staggered boards could be in their sights), and ESG-related policies, including those regarding climate change disclosures, are likely to grow both with respect to the types and level of disclosure expected and the companies expected to comply.

¹ For 2022, companies defined as “significant GHG emitters” will be those on the current Climate Action 100+ Focus Group.