ISS and Glass Lewis Open Peer Group Submission Windows Soon
On November 12, 2020, Institutional Shareholder Services (ISS) published its Proxy Voting Guidelines Updates for 2021, which are effective for meetings on or after February 1, 2021. This alert briefly summarizes the key updates that will impact ISS' U.S. proxy voting guidelines for the 2021 proxy season, including the three policy changes initially proposed by ISS last month (and discussed in our previous alert).
Key Updates to ISS's Proxy Voting Guidelines for 2021 Proxy Season
The following changes relate to circumstances in which ISS may recommend a vote against or withhold from one or more directors in an uncontested election:
- Governance Failures, E&S Risk. Under its current voting policy, in extraordinary circumstances ISS will 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.
ISS updated its policy to include, as an example of a failure of risk oversight, "demonstrably poor risk oversight of environmental and social issues, including climate change," which is 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.
Gender Diversity. Under its current voting policy, ISS will generally recommend a vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the board of directors. The 2020 proxy season served as a transitional year for this policy, meaning that ISS would not make an adverse vote recommendation if the subject company included a firm commitment to appoint at least one woman to the board within a year. With this transitional year now complete, ISS has removed this mitigating factor from its policy; therefore, the only remaining exception to an adverse vote recommendation will be if the subject company had a woman on the board at the preceding annual meeting and the board makes a firm commitment to restore its gender diversity within a year.
Racial and/or Ethnic Diversity. ISS has added a new voting policy relating to racial and/or ethnic diversity on boards, applicable to companies in the Russell 3000 and S&P 500 indices. Under this new policy, ISS will 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. An exception to this policy will be 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.
This new policy will be effective for meetings on or after February 1, 2022. Given the delayed effective date for this voting policy, the 2021 proxy season will serve as a transitional year for this policy. However, ISS stated that it will 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."
Poison Pills. Under its current voting policy, ISS will recommend a vote against or withhold from all director nominees (except new nominees, who are considered case-by-case) if the company has a poison pill that was not approved by shareholders; however, it will make voting recommendations on director nominees on a case-by-case basis if the board adopts a pill with an initial term of one year or less, depending on the disclosed rationale and other factors. ISS will also recommend a vote against or withhold from all director nominees (except new nominees, who are considered case-by-case) if the board makes a material modification to an existing pill without shareholder approval, including an extension, renewal, or lowering the trigger.
In its 2021 policy changes, ISS will now also recommend a vote against or withhold from all director nominees (except new nominees, who are considered case-by-case) if the pill, whether short- or long-term, has a dead-hand or slow-hand feature. A ‘dead-hand' feature restricts the right to terminate or redeem the poison pill to the original directors who adopted it, and a 'slow-hand' feature is where the foregoing termination or redemption restriction applies only for a period time (e.g., 180 days) after a change in a majority of the directors. In its rationale for this change, ISS noted the uptick in the adoption of pills in light of market volatility caused by the COVID-19 pandemic, and it highlighted several companies that implemented short-term pills with a dead-hand or short-hand feature. ISS stated that the adoption of such a feature "is unjustifiable from a governance standpoint, as it is explicitly intended to thwart the will of shareholders in situations where they vote to replace the board in order to enable an offer to proceed." Of note, even if the pill expires before the next shareholder vote, ISS will still generally recommend a vote against or withhold from the director nominees at the next shareholder meeting.
Classification of Directors. In determining whether a director is independent for purposes of certain of its proxy voting policies, ISS classifies directors as either 1) executive directors, 2) non-independent non-executive directors, or 3) independent directors. Under its current classification system, an executive director is defined as a "current employee or current officer of the company or one of its affiliates." In its 2021 updates, ISS revised this definition by limiting the executive director classification to current officers, and by moving current non-officer employees (including employee representatives) to the non-independent non-executive director classification. While not resulting in changes to any voting recommendations, ISS stated that "for institutional investors whose overboarding policies consider each Executive Director position as a mandate, this change will result in a more accurate assessment of their executive positions."
In addition, ISS expanded its "non-independent non-executive directors" classification to include directors with pay comparable to named executive officers, making explicit what it cites as a historical practice of including these directors in such classification based on a finding of a "material relationship with the company."
The following changes relate to circumstances in which ISS may recommend a vote in favor of or against a management proposal or a shareholder proposal:
Term and Age Limits. Under its current voting policy, ISS will recommend a vote against management and shareholder proposals to limit the tenure of outside directors through mandatory retirement ages. In its 2021 policy changes, ISS added a separate stand-alone policy for management proposals and shareholder proposals relating to term limits and updated its existing policy for management and shareholder proposals relating to age limits.
Term Limits. In its new policy relating to term/tenure limits, ISS will make vote recommendations on a case-by-case basis on management proposals regarding director term/tenure limits, taking into consideration several listed factors, including, among others, the rationale provided for adoption of the limit and the robustness of the company's board evaluation process. In addition, ISS will make vote recommendations on a case-by-case basis on shareholder proposals asking the company to adopt director term/tenure limits, taking into consideration the scope of the proposal and any evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment.
Age Limits. In addition to its existing policy on age limits, ISS will recommend a vote for proposals to remove mandatory age limits.
Advance Notice Requirements for Shareholder Proposals/Nominations. Under its current voting policy, ISS makes vote recommendations on a case-by-case basis on advance notice proposals, giving support to proposals with reasonable deadlines and submittal windows. Prior to its 2021 policy changes, in order to be reasonable under this voting policy, the company's deadline for shareholder notice must not have been more than 60 days prior to the meeting, with a submittal window of at least 30 days prior to the deadline. In its 2021 policy changes, ISS revised the foregoing timing. Accordingly, in order to be reasonable under the revised voting policy, the company's deadline for shareholder notice must be no earlier than 120 days prior to the anniversary of the previous year's annual meeting, with a submittal window of at least 30 days from the beginning of the notice period. This policy relates to advance notice provisions in company governance documents, not shareholder proposals submitted under Rule 14a-8 or director nominations submitted under proxy access provisions.
Exclusive Venue and Forum Provisions; Fee Shifting Provisions. Under its current voting policy, ISS will 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 has updated 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 new policy, 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, in the absence of serious concerns about corporate governance or board responsiveness to shareholders. However, ISS will 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. Under the new policy, ISS will generally recommend a vote for charter or bylaw provisions that specify courts located within the state of Delaware 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 will 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 will 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.
The following changes are new voting policies adopted by ISS in light of the COVID-19 pandemic and investor support of certain social issues:
Virtual Shareholder Meetings. In light of the substantial increase in virtual meetings due to the COVID-19 pandemic, ISS added a policy relating to virtual shareholder meetings for the 2021 proxy season. ISS will generally recommend a vote for management proposals allowing for the convening of shareholder meetings by electronic means, so long as such proposals do not preclude in-person meetings. The policy encourages companies to 1) disclose the circumstances under which a virtual-only meeting would be held (that is, a meeting without an in-person option), and 2) allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting. In addition, the new policy provides that ISS will generally make vote recommendations on a case-by-case basis on shareholder proposals concerning virtual-only meetings, considering the scope and rationale of the proposal and any concerns identified with prior meeting practices.
Social and Environmental Issues. Citing several recent shareholder proposals on the following issues, and increasing shareholder support for those proposals that have gone to a vote, ISS is adding voting policies on the following matters:
Mandatory Arbitration. In its new voting policy, ISS will make vote recommendations on a case-by-case basis on requests for a report on a company's use of mandatory arbitration on employment-related claims, taking into account 1) the company's current policies and practices related to use of such provisions on workplace claims, 2) whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of such provisions on workplace claims, and 3) the company's disclosure of its policies and practices related to use of such provisions compared to its peers.
Sexual Harassment. In its new voting policy, ISS will make vote recommendations 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, taking into account 1) the company's current policies, practices, and oversight mechanisms related to preventing workplace sexual harassment, 2) whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace sexual harassment issues, and 3) the company's disclosure of its policies and practices regarding workplace sexual harassment policies and initiatives compared to its peers.
ISS and Glass Lewis Peer Group Submission Windows Open Soon
For companies with annual meetings that will be held between February 1, 2021, to September 15, 2021, ISS' peer group submission period will be open from November 16, 2020, to December 4, 2020. For companies filing proxy statements from February 1, 2021 to July 31, 2021, Glass Lewis' peer group submission period will open on December 14, 2020.
As background, each proxy season, ISS and Glass Lewis construct peer groups that are used to analyze companies' executive pay and related matters. These peer groups are constructed before new proxy disclosures are available, and thus are generally based on the company-selected peers in the prior year's proxy statement. Accordingly, those companies that have changed, or anticipate changing, their peer group from their prior year's proxy statement, may want to consider engaging in these peer group submission reviews with ISS and/or Glass Lewis during these open windows.