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E-MailBetty Moy Huber is counsel and Paula Simpkins is an associate at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.
On October 14, 2020, ISS released its proposed voting policy changes for 2021. The changes for the United States focus mainly in these three areas: (1) racial and ethnic board diversity, (2) board oversight of environmental, climate and social risks and (3) exclusive forum provisions.
ISS requests feedback on the proposed changes. Market participants can submit comments via email to [email protected] through 5:00 PM ET on Monday, October 26, 2020. ISS expects to release its final voting policies in the first half of November 2020.
Over the summer, ISS administered its annual benchmarking voting policy survey to market participants. It plans to use the survey results, which we discussed here, to inform its benchmarking policies. Two of the three topics covered by the proposed changes, diversity and board accountability for climate risk, were included in ISS’s survey. The proposed policies, however, do not update the following topics covered by the survey: ISS’s COVID-19-adjusted policies, independent board chair, and auditors and audit committees.
Historically, ISS’s inclusion or omission of a survey or proposed policy topic is not determinative of whether ISS will provide updates on the topic in its final policies. Moreover, the final policies may have updates on topics not included in the survey or proposed policies.
While ISS requests feedback on its proposed policy changes affecting multiple geographic markets, below are the highlights applicable to the U.S. benchmarking voting policies.
Racial/Ethnic Board Diversity
ISS’s 2020 benchmarking voting policies do not include a recommendation on racial/ethnic board diversity. ISS is contemplating adding a new policy that expressly addresses racial/ethnic board diversity because many investors have shown an interest in seeing more of this type of board diversity. ISS explains that interest in racial/ethnic diversity has recently grown largely because of the social unrest stemming from racial and ethnic injustices and inequalities.
If adopted, starting in 2022, ISS would generally recommend voting against or withholding from the chair of the nominating committee (or other relevant directors on a case-by-case basis) at any Russell 3000 or S&P 1500 company that has no apparent racial and/or ethnic board diversity. If adopted, ISS would consider mitigating factors, including whether the company had a racial or ethnic minority on the board at the preceding annual meeting and a firm commitment to appoint at least one racial or ethnic minority director on the board. For this purpose, ISS notes that it will consider board-provided aggregate diversity statistics only if they are specific to racial and/or ethnic diversity. ISS, however, does not define what qualifies as racial or ethnic diversity.
ISS policy survey results shows that 56% of investors responded that they would consider voting against members of the nominating committee (or other directors) where board racial and ethnic diversity is lacking. Only 11% of non-investors agreed.
Board Oversight—Material E&S and Climate Risk
ISS’s U.S. benchmark policy currently provides that under extraordinary circumstances ISS will hold individual directors, committee members or the whole board accountable when the company has governance failures due to the board’s material failure to oversee risk. To make its position clearer, the ISS proposed 2021 U.S. policy adds “demonstrably poor risk oversight of environmental and social issues, including climate change” as an example of a board’s material failure to oversee risk.
ISS expects directors of companies in “highly impactful” sectors to exercise their risk oversight role and take meaningful steps to increase the company’s resilience to environmental and social risks, particularly climate-related risks.
Exclusive Forum Provisions
Under the current benchmark policy, ISS generally recommends voting case-by-case. ISS’s proposed revised policy generally supports the inclusion of exclusive forum provisions in charters or bylaws, but differentiates between provisions for federal securities law claims and state corporate law claims. While ISS anticipates that the number of vote recommendations likely to be impacted by this proposed policy change is limited, the details are as follows:
Federal Forum Provisions (FFPs). ISS would generally recommend voting for a FFP in the charter or bylaws, which provision specifies a U.S. district court as the exclusive forum for federal securities law matters. If the provision, however, designates a specific federal court, ISS would generally recommend voting against since ISS believes that shareholders should have flexibility in choosing a court with a location that is convenient to the shareholders.
This proposed change was prompted by the Delaware Supreme Court March 2020 decision, Salzberg v. Sciabacucchi, resulting in some companies incorporating FFPs in their governing documents. We discussed that case previously here and here.
State Exclusive Forum Provisions. For Delaware companies, ISS proposes that it will generally recommend for charter or bylaw provisions designating Delaware or the Delaware Court of Chancery, as the exclusive forum for state corporate law matters.
For states other than Delaware, ISS will still recommend voting on a case-by-case basis, after considering a number of factors, such as the company’s rationale for the provision and the type of claims covered under the provision. ISS makes an exception for Delaware for several reasons, including that Delaware’s court system specializes in corporate law with a robust set of case precedents and the likelihood of judicial efficiency.
ISS proposes that ISS will generally recommend voting against provisions that require the designated forum be a local court within the state of incorporation or a state other than the state of incorporation.
A unilateral adoption of any exclusive forum provision without a shareholder vote, however, will still be considered a one-time failure under ISS’s Unilateral Bylaw/Charter Amendments policy.
