Last week, Institutional Shareholder Services Inc. ("ISS") released its annual update (the "Update") to its Proxy Voting Guidelines (the "Guidelines") outlining its changes for annual meetings beginning February 1, 2023. These changes follow ISS's recent annual policy survey of its institutional shareholder clients and other market participants. Although we disagree with some 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 stockholders 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/or other proxy advisers). ISS's proxy voting recommendations are not always followed by major shareholders.
Among other important changes to the Guidelines are the following:
- Greenhouse Gas ("GHG") Reduction Targets. ISS will continue to recommend against the chair of the responsible committee (or other directors on a case-by-case basis) at companies that are significant GHG emitters, unless those companies provide "detailed disclosure of climate-related risks" and set "appropriate GHG emissions reduction targets." For 2023, the definition of "appropriate GHG emissions reduction targets" has been strengthened to require more robust targets, namely, "medium-term GHG reduction targets or Net-Zero-by 2050 GHG reduction targets."
- Multi-Class Voting Structure. The Update expands ISS's policy regarding public companies with a multi-class voting structure. ISS will generally recommend against directors unless the multi-class structure is subject to a sunset provision of no more than seven years from the date of its initial public offering ("IPO"), regardless of when the company had its IPO.
- Problematic Governance Structures. Since 2015, ISS has generally recommended against director nominees at companies that have a classified board or supermajority voting requirements at the time of their IPO. ISS stated that a "reasonable sunset provision" would be one consideration when making the recommendation. The Update clarifies that a "reasonable sunset provision" means no more than seven years from the date when the company had its IPO. Companies with classified boards or supermajority voting requirements that had their IPO prior to 2015 are not affected by the Update, as ISS will continue to grandfather these companies.
- Equity-Based Incentive Plans. When an equity-based incentive plan is proposed to stockholders, one factor ISS considers is the company's historic "burn rate," or how many shares have been issued in the past relative to the number of shares outstanding. ISS is changing the methodology for evaluating a company's burn rate to a method called "value adjusted burn rate," which will differentiate between a company's use of options and full-value awards.
- Racial Equity Audits. ISS will continue to evaluate proposals for companies to engage in racial equity audits on a case-by-case basis. However, whether racial equity audits are "aligned with market norms on civil rights, and racial or ethnic diversity" has been removed from the factors that ISS will consider when evaluating the proposal. This may make ISS more likely to recommend in favor of such proposals, which may be significant since, according to ISS, such proposals already received an average of 46% support across the 2022 proxy season.
- Quorum. ISS will now recommend case by case on proposals seeking to lower the quorum for a stockholders' meeting to less than a majority. Previously, ISS generally recommended against these proposals. ISS stated that previous difficulty in obtaining a quorum at a stockholders meeting would be a mitigating factor in evaluating these proposals. ISS further provides that a quorum threshold kept as close to a majority of shares outstanding as achievable is its preference.
- Political Spending. ISS created a new policy for proposals seeking disclosure of the alignment of a company's political contributions with its stated values. ISS will evaluate such proposals case by case, and weigh factors such as the company's "level of disclosure related to political contributions" and "disclosure regarding the reasons for its support of candidates."
- Bylaws. ISS has not modified its bylaw policy, first announced in 2016, that it will recommend against incumbent members of the nominating and governance committee if the company does not grant stockholders the unilateral right to amend the company's bylaws. However, it is our observation that ISS's recommendations in this regard have resulted in the support of less than a majority of votes cast in the election of only a small handful of several hundred affected incumbent director nominees.
* * *
As always, our colleagues and we are available at any time to discuss these or other matters of Maryland law.
This memorandum is provided for informational purposes only and is not intended to provide legal advice. Such advice may be provided only after analysis of specific facts and circumstances and consideration of issues that may not be addressed in this document.