ISS Releases Proposed Changes to its Proxy Voting Guidelines for 2022

5 min

November 8, 2021 Update:

We are supplementing our client memo to address subsequent questions about ISS's position on board diversity, even though there were no changes in its diversity policies for U.S. companies in 2022.  (The original memo is included after this supplement.)

For racial and ethnic diversity, ISS did not announce any proposed changes to its existing policy for U.S. companies, which is that, beginning with annual meetings held on or after February 1, 2022, ISS will recommend against the chair of the nominating committee (or other directors case by case) at companies that do not have at least one racially or ethnically diverse board member.  This policy will apply to U.S. companies in the Russell 3000 or S&P 1500 indices.

For gender diversity, ISS is not changing its existing policy for 2022 but is expanding the U.S. companies to which it will apply this policy, after a one-year phase-in period.  Starting with annual meetings held on or after February 1, 2023, ISS will recommend against the chair of the nominating committee (or other directors case by case) at all U.S. companies that ISS covers and that do not have at least one female director.  Currently, this policy is in effect only for U.S companies in the Russell 3000 or S&P 1500 indices.

ISS makes an exception to each diversity requirement if there was a qualifying director at the prior annual meeting and the company "makes a firm commitment" to add a qualifying replacement director "within a year."

Finally, as we have previously advised, each Maryland stock corporation "with total sales exceeding $5,000,000" must include the number of its female directors and the total number of directors in its annual report that is required to be filed by April 15 of each year with the State Department of Assessments and Taxation of Maryland.  This is a reporting requirement only and does not impose any substantive requirements regarding the composition of the board of directors of any Maryland corporation.

November 5, 2021 Memo:

Yesterday, Institutional Shareholder Services Inc. ("ISS") released its proposed annual update (the "Proposed Update") to its Proxy Voting Guidelines (the "Guidelines") outlining its proposed changes for annual meetings beginning February 1, 2022.  These changes follow ISS's recent annual policy survey of its institutional shareholder clients and other market participants.  Although we do not agree with some of its positions, we continue to commend ISS for soliciting and considering the views of stakeholders each year.  Companies may submit comments to ISS until November 16, 2021.  The final update is likely to be released late this month or in early December.

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 follows the voting recommendations of ISS (and/or other proxy advisers).  Proxy solicitors can usually provide important advice in this regard.

Some of the more important proposed changes contained in the Proposed Update that would affect U.S. companies are the following:

1.  Unequal Voting Rights.  ISS currently recommends against directors at companies with unequal shareholder voting rights (also known as dual-class voting structures), except that ISS grandfathers companies that had their IPOs prior to 2015.  ISS is considering changing the Guidelines so the policy would be applied to all companies with unequal voting rights.  ISS has proposed a one-year grace period for this policy change, so affected companies would not be penalized until 2023 annual meetings.

2.   Greenhouse Gas Emissions.  ISS is proposing a policy that would only be applicable to the "highest GHG (greenhouse gas) emitting companies."  ISS would recommend "against the re-election of relevant directors . . . at companies that have not made appropriate climate-related disclosures . . . or that have not set quantitative GHG reduction targets."  ISS did not disclose which companies would be part of the policy or what level of disclosure or action would be sufficient to avoid any negative vote recommendations.

3.  Climate Change.  ISS has noted, as we have also, that there has been an increase in "management proposals seeking approval of climate transition plans and progress, and of shareholder proposals requesting climate reporting and, often, regular shareholder votes on companies' climate transition plans and progress."  The Proposed Update includes a framework for how ISS will evaluate these proposals.  When management proffers a "say on climate" proposal, ISS will evaluate "a number of the key criteria that will be taken into account in the assessment, including the quality of disclosures, the rigor of targets, whether targets are science-based, external verification, and a range of other information."  When shareholders request that the company hold a "say on climate" vote, ISS will "analyze each request case-by-case, taking into account the details of the request and the company's current climate-related disclosures and performance."

We urge interested companies and other stakeholders to review the Proposed Update.  We would be happy to review with you ISS's policies as they relate to your company's current corporate governance profiles.  We can also assist you if your company is interested in submitting a comment to ISS regarding the Proposed Update.

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As always, our colleagues and we are available at any time to discuss these or other matters of Maryland law.

Jim Hanks
Michael Sheehan