ISS Publishes Proposed Benchmark Policy Changes for 2021

Wilson Sonsini Goodrich & Rosati

On October 14, 2020, Institutional Shareholder Services Inc. (ISS) published for comment its proposed voting policy changes for the 2021 proxy season. If adopted, these policy changes would generally apply to meetings that are held on or after February 1, 2021.

Of the 17 proposed voting policy changes, three would impact U.S. proxy voting guidelines. A summary of these three proposals follows.

  • Director Elections: Racial/Ethnic Board Diversity. ISS proposes a new policy for companies in the Russell 3000 and S&P 1500 indexes relating to racial and/or ethnic diversity on boards. Under the proposed new policy, ISS would generally recommend a vote against or withhold 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. Mitigating factors would include the presence of a racially or ethnically diverse member of the board at the preceding annual meeting and a firm commitment to appoint at least one racially and/or ethnically diverse member. ISS does not explain how it will judge an "apparent" lack of diversity.

    This policy would be effective for meetings on or after February 1, 2022. While a lack of racial or ethnic diversity on boards would not factor into vote recommendations for the 2021 proxy season, ISS stated that it would highlight a lack of racial and/or ethnic diversity (or lack of disclosure thereof) in its 2021 research reports on U.S. companies in order "to help investors identify companies with which to engage and that may foster dialogue between investors and issuers on this topic."

    According to ISS, as of September 21, 2020, 1,260 of Russell 3000 companies, 492 of S&P 1500 companies, and 71 of S&P 500 companies, do not have minority ethnic and/or racial board representation. ISS' proposed policy follows the recent signing of Assembly Bill 979 by California Governor Gavin Newsom, which mandates representation of underrepresented communities on the boards of publicly held corporations based in California (discussed in our prior Client Alert).

  • Director Elections: Governance Failures, E&S Risks. Under its current voting policy, in extraordinary circumstances ISS will generally recommend a vote against or withhold from directors individually, committee members or the entire board, due to, among other things, material failures of governance, stewardship, risk oversight, or fiduciary responsibilities at the company.

    In its list of examples of failures of "risk oversight," ISS proposes to add "demonstrably poor risk oversight of environmental and social issues, including climate change" in addition to the existing examples of bribery, large or serial fines or sanctions from regulatory bodies, significant adverse legal judgments or settlement, and hedging of company stock.

    In the commentary, ISS explains that this policy change would make explicit that "it has the flexibility to find that directors have failed in their risk oversight role if they have neglected to take meaningful steps to increase the resilience of companies to climate-related risks."

  • Shareholder Litigation Rights: Exclusive Forum Proposals. Under its current voting policy, ISS will generally recommend a vote 1) case-by-case on bylaw provisions that impact shareholders' litigation rights (such as exclusive venue and fee-shifting provisions), taking into account a non-exhaustive list of factors, and 2) against bylaws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits.

    ISS proposes to update its policy to 1) include vote recommendations for federal forum selection provisions and 2) bifurcate and update its existing voting policies relating to exclusive forum provisions for state law matters and fee-shifting provisions.

    • Federal forum selection provisions. Federal forum selection provisions generally provide that the U.S. federal courts are the sole forum for shareholders to litigate claims arising under the Securities Act of 1933, as amended. Under the proposed new policy, ISS would 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. However, ISS would generally recommend a vote against provisions that restrict the forum to a particular federal district court; unilateral adoption (i.e., without a shareholder vote) of such a provision would generally be considered a one-time violation of its policy against unilateral bylaw or charter amendments and potentially result in a negative vote recommendation for directors.
    • Exclusive forum provisions for state law matters. Under existing policy, ISS generally recommends a vote case-by-case on bylaw provisions that impact shareholders' litigation rights, taking into account various factors. In its proposed changes to this policy, ISS would generally recommend a vote for charter or bylaw provisions that specify Delaware, or the Delaware Court of Chancery, as the exclusive forum for corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders. For any other state, ISS would generally recommend a vote case-by-case, taking into consideration a non-exhaustive list of factors, which includes disclosure of past harm from duplicative shareholder lawsuits in more than one forum.

      In addition, ISS would generally recommend a vote against provisions that specify a state other than the state of incorporation as the exclusive forum, or that specify a particular local court within the state. Unilateral adoption of such a provision would generally be considered a one-time violation of ISS' policy against unilateral bylaw or charter amendments and potentially result in a negative vote recommendation for directors.

    • Fee-shifting provisions. Fee-shifting provisions generally require that a shareholder who unsuccessfully sues a company pay all litigation expenses of the company and its directors and officers. Under existing policy, ISS generally recommends a vote against bylaw provisions that mandate fee-shifting whenever plaintiffs are not completely successful on the merits, including where the plaintiffs are partially successful. In its proposed changes to this policy, ISS would maintain its existing position to generally recommend a vote against fee-shifting but proposes to add that unilateral adoption of such a provision would generally be considered an ongoing violation of its policy against unilateral bylaw or charter amendments and potentially result in negative vote recommendations for directors.

What to Do Now?

Interested parties should submit comments to ISS no later than 5:00 p.m., ET, on Monday, October 26, 2020. Comments should be submitted via email to policy@issgovernance.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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