Institutional Shareholder Services Inc. (“ISS”) recently released its annual update (the “Update”) to its Proxy Voting Guidelines (the “Guidelines”) announcing changes in its voting recommendations for annual meetings of shareholders held on or after February 1, 2021. These changes follow ISS’s recent annual policy survey of its institutional shareholder clients and other market participants. Although we do not agree with all of the Guidelines, we continue to commend ISS for soliciting and considering the views of stakeholders each year. As always, in guiding a company’s engagement with its shareholders and in determining the potential impact of ISS’s recommendations, we urge each company to review (a) the voting policies of each of its major shareholders and (b) the extent to which each of those holders relies on ISS (and other proxy advisers) in making its voting decisions.
Among the changes to ISS’s Guidelines for 2021 are the following:
1. Diversity. Unlike the rest of ISS’s policy changes, this change will not be effective until annual meetings held on or after February 1, 2022. At that time, ISS will begin to generally recommend against the governance committee chair if the board has no “racial and/or ethnic diversity.” ISS expects at least one member of the board to be diverse, but has not provided any additional information as to what it considers “racial and/or ethnic diversity.”
2. Director Independence. The Update clarifies that ISS may not consider a director independent if the director’s fees are “comparable to [the compensation of] named executive officers.”
3. Shareholder Rights Plans. Earlier this year, in the initial market turbulence caused by the pandemic, there was a noticeable increase in companies adopting shareholder rights plans, including several Maryland REITs. Some of the rights plans featured either (a) a “dead hand” provision, preventing directors other than continuing directors (directors at the time of adoption of the plan or directors nominated by such directors) from voting to modify the plan in the future, or (b) a “slow hand” provision, preventing non-continuing directors from voting to modify the plan for some limited period of time (typically 180 days). Slow hand provisions are specifically authorized by the Maryland General Corporation Law (the “MGCL”). However, ISS will now recommend against all directors if the board approves any shareholder rights plan that “has a dead hand or slow hand feature.” Previously, ISS had said it would consider supporting a shareholder rights plan if it had a term of one year or less, but did not specifically mention dead hands or slow hands.
4. Director Retirement Policies. ISS previously recommended against stockholder proposals for either retirement ages or term limits for directors. ISS will continue recommending against policies to adopt mandatory retirement ages but it will now consider proposals on term limits case by case. The Update states that ISS will look for “well-designed management proposals that provide appropriate balance” and includes some examples of poorly-designed term limits, such as those with too “short a limit and thus not allowing a range of director tenures to provide a balance of experience with new perspectives.” ISS also noted that a short term limit imposed “on only the independent directors further limits their power vis-à-vis that of the insiders.” Finally, policies that permit discretionary waivers lessen the policy’s “credibility and creat[e] unequal treatment of supposedly equal boardroom participants.”
5. Exclusive Forum Provisions. ISS has revised its exclusive forum policies. ISS will now recommend against directors for one year if the board unilaterally adopts a forum selection bylaw that limits federal securities law claims to a specific state’s federal district court. Forum selection clauses that limit such claims to all U.S. District Courts, wherever located, will not be penalized. ISS will also recommend against directors for one year if the board adopts a forum selection bylaw that limits state law claims to a “particular local court” within the state of incorporation. Forum selection clauses that limit state law claims just to the state of incorporation will be evaluated case by case (except for Delaware-incorporated companies, for which Delaware-designated forum selection bylaws are generally acceptable “in the absence of serious concerns about corporate governance or board responsiveness to shareholders”).
We hope that ISS will not penalize Maryland-incorporated companies with an exclusive forum provision limiting state law claims to Maryland courts. We do not see any rational basis for supporting such a provision for Delaware-incorporated clients but not a similar one in Maryland. Maryland is a major chartering jurisdiction and more than 100 Maryland public companies already have an exclusive forum provision and, so far as we are aware, this type of provision has not been controversial with these companies’ stockholders. Companies that may be interested in adopting an exclusive forum bylaw that designates a “particular local court” should consider doing so prior to February 1, 2021 as ISS generally grandfathers a non-compliant bylaw so long as it is adopted prior to the effective date of the policy change (in this case, February 1, 2021).
6. Fee-Shifting Bylaws or Charter Provisions. ISS will now recommend against directors on an ongoing basis if the board unilaterally adopts a fee-shifting bylaw that “require[s] that a shareholder who sues a company unsuccessfully pay all litigation expenses of the defendant corporation and its directors and officers.” The MGCL was amended in 2017 to prohibit fee-shifting charter and bylaw provisions for internal corporate claims.
7. Virtual Stockholders Meetings. Prior to the pandemic, ISS did not have a policy regarding virtual stockholders’ meetings. ISS now states that it will “generally recommend a vote for management proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings.” The MGCL already authorizes virtual stockholders’ meetings. The Update states that companies “are encouraged to disclose the circumstances under which virtual-only meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting.” We are already advising clients in this regard for their annual meetings in 2021.
8. Social and Environmental Issues. Currently, ISS will consider recommending against directors in “extraordinary circumstances” in the event of a “material failure … of risk oversight.” Examples of risk-oversight failure have included “bribery,” “sanctions from regulatory bodies” or “hedging of company stock.” ISS has now added “demonstrably poor risk oversight of environmental and social issues, including climate change,” to the list of risk oversight failures. ISS does not elaborate further on the types of issues or failure that would cause it to recommend against directors for this reason. In our experience, ISS does not recommend against directors for risk oversight failures very frequently and does indeed reserve a negative recommendation for “extraordinary circumstances.”
9. Bylaws. ISS has made no change in its previously announced voting policy on bylaws.
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As always, our colleagues and we are available to discuss these or other matters of Maryland law.