Last week, ISS released for public comment its proposed benchmark policy changes for 2022. If adopted, the proposed policy changes would apply to shareholder meetings held on or after February 1, 2022. The proposed changes for U.S. companies relate to board diversity, board accountability for unequal voting rights, board accountability for climate disclosure by high GHG emitters and say-on-climate proposals.
Board diversity. Currently, for companies in the Russell 3000 or S&P 1500, ISS policy is generally to 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 company’s board. ISS proposes to expand the application of that policy to companies beyond the Russell 3000 and S&P 1500, after a one-year grace period, for meetings on or after February 1, 2023. Noting the strong preference expressed by institutional investors, as well as the recent Nasdaq listing rule change on board diversity, ISS believes that this policy change “will align U.S. benchmark policy with client and market expectations on gender diversity.” One question ISS poses is whether board size should be a consideration.
With regard to racial and ethnic diversity, note that ISS adopted a policy in 2021 that provided a one-year grace period. However, for 2022, for companies in the Russell 3000 or S&P 1500, ISS “will issue adverse vote recommendations, generally voting 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 ethnically or racially diverse members.” An “exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.”
Board accountability for unequal voting rights. In 2015, ISS adopted a policy to vote against directors of newly public companies that retained certain governance provisions that ISS disapproved, including multi-class capital structures with unequal voting rights (in the absence of a reasonable sunset of of no more than seven years), classified boards and companies with supermajority vote requirements to amend governing documents. However, ISS grandfathered companies that already had those provisions. As indicated in the results of ISS’s recent benchmark policy survey (see this PubCo post), among investors, 94% advocated that ISS revisit the grandfathering policy, and 57% of non-investors had the same view. The vast majority of both investors and non-investors ranked multi-class capital structures with unequal voting rights first on the list to be reconsidered. ISS contends that “[e]ach additional year subsequent to the initial policy implementation creates a discernable schism between recently-public companies that are impacted by the policy and long-standing grandfathered public companies that are not.” Similarly, during the ISS 2021 policy roundtable, “both investor and director participants expressed an understanding of the desire by some companies to initially go public with certain protections, including a classified board, in place. However, there was a recognition that the benefits of the protections wane over time as companies mature and grow and their shareholder base stabilizes.” It should come as no surprise then that ISS is now proposing to remove the differential policy application that arose out of that grandfathering. Companies will have a one-year grace period in 2022. Other changes include identifying SPACs as “newly public.”
Under the proposed new policy, beginning with meetings on and after February 1, 2023, ISS would generally recommend a withhold or against vote for directors individually, committee members or the entire board (except new nominees, who would be considered on a case-by-case basis), if the company has a multi-class common stock structure with unequal voting rights (or variations on same, such as time-phased voting). There would be some exceptions, including for newly public companies that have a sunset provision of no more than seven years from the date of going public, circumstances where the unequal voting rights are considered de minimis or where the “company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular binding vote on whether the capital structure should be maintained.”
ISS observes that, assuming this policy is adopted, “starting in 2023, ISS will likely be recommending against directors at many large or iconic U.S. companies that have unequal voting rights structures.” ISS asks whether its policy should be limited to recommendations against a subset of directors, such as the governance committee.
Climate. As we all know, climate change and climate-related risk disclosure are top of mind for many investors. ISS is proposing policy changes for 2022 that focus on companies that are the highest GHG emitters, as well as policies related to say-on-climate votes. In responses to ISS’s 2021 Climate Policy survey, the vast majority of investors (>85%) supported “clear and detailed disclosure as a minimum criterion for companies strongly contributing to climate change,” while more than 70% supported declaring a “long-term ambition to be in line with Paris Agreement goals.” Over half wanted disclosure of various types of GHG reduction targets. There were apparently mixed views in discussions of responsibility for Scope 3 targets, and ISS is proposing to “focus on Scope 1 and 2 targets for 2022 but to provide additional climate-related data in reports for information for clients who may wish to take different approaches.”
What did the survey show about companies that are not considered strong contributors to climate change? Should they be held to the same minimum standards? The survey showed that one-third of investor respondents and a majority of non-profits thought they should, but most often, investors and corporate responders set their expectations lower. (See this PubCo post.)
More specifically, the proposed policy would provide that, for companies that, through their operations or value chain, were significant GHG emitters—meaning companies identified on the current Climate Action 100+ Focus Group—ISS would generally recommend a vote against or withhold from the responsible incumbent director, committee or full board “where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy.” What does that mean? It means providing detailed disclosure of climate-related risks, such as disclosure aligned with the TCFD framework, including board governance, corporate strategy, risk management analyses and metrics and targets—particularly appropriate GHG emissions reduction targets. According to the proposed policy, for 2022, “appropriate GHG emissions reductions targets” will mean “any well defined GHG reduction targets. Targets for Scope 3 emissions will not be required for 2022 but the targets should cover at least a significant portion of the company’s direct emissions. Expectations about what constitutes ‘minimum steps to mitigate risks related to climate change’ will increase over time.”
Say on climate. The policy proposals differentiate between management proposals and proposals submitted by shareholders. In both cases, proposals would be evaluated on a case-by-case basis, but the factors taken into account would differ. ISS indicates that its proposed policy for management proposals represents a codification of the framework it developed last year, adjusted for relevant feedback. For management proposals that request shareholders to approve the company’s climate transition action plan (or variations of same), ISS would take into account the completeness and rigor of the plan, along with (where available) the extent to which the company’s climate-related disclosures align with TCFD and other market standards; disclosure of the company’s scope 1, 2 and 3 GHG emissions; the completeness and rigor of the company’s short-, medium-, and long-term targets for reducing GHG emissions; whether the company has obtained third-party assurance; how the company’s lobbying activities and its capital expenditures align with company strategy and a number of other factors.
Shareholder say-on-climate proposals generally include requests for the company “to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to regularly express approval or disapproval of its GHG emissions reduction plan.” In evaluating those proposals, ISS would take into account information such as the completeness and rigor of the company’s climate-related disclosure; the company’s actual GHG emissions performance; whether the company has been the subject of “recent, significant violations, fines, litigation, or controversy related to its GHG emissions”; and whether the proposal is “unduly burdensome” or “overly prescriptive.”
The public comment period for these new policy proposals ends at 5:00 p.m. ET on November 16, 2021.