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On Nov. 4, Institutional Shareholder Services (ISS) released details of draft policy proposals and policy changes for 2022, and the organization is currently soliciting feedback from the governance community through Nov. 16. As it relates to the North America market, the focus largely continues to be on environmental, social and governance (ESG) issues, rather than the historical focus on executive compensation-related topics.
As climate change continues to be a global issue that has drawn significant interest from investors around the world, ISS is proposing a board climate accountability policy. The proposed policy, which could still be further amended or not even implemented, currently focuses solely on those companies that are “significant greenhouse gas (GHG) emitters.”
This is defined as the current Climate Action 100+ Focus Group, which is currently comprised of 167 companies (think typical industries of manufacturing, oil and gas, electric utilities, airlines). The proposed policy would generally vote against or withhold from the responsible incumbent director, committee, or even full board when ISS determines the 100+ companies aren’t taking the minimum steps to understand, assess and mitigate climate related risk. As a starting point for 2022, the minimum expectations would be:
- Detailed disclosure of climate-related risks:
o Board governance measures
o Corporate strategy
o Risk management analyses
o Metrics and targets
- Appropriate GHG emissions reduction targets
o To begin, this means “any well-defined” reduction target covering a “significant” (significant not clearly defined at this time) portion of the company’s direct emissions. Scope 3 targets are not required initially, but the proposed language seems to suggest the policy would be progressively iterative and this may be coming (dependent upon investor sentiment and consensus, which is not present at this time).
While it is possible that many of the companies in the 100+ group are already taking the minimum required steps under this proposed policy, the implication is clear that they will need to review what they have in place, demonstrate that risk analysis has been completed and ensure that future disclosure is clear and concise, yet detailed. For those in the group that haven’t stepped up to the minimums, the clock is now ticking before the votes on directors begin.
Advisory Vote on Executive Compensation (Canada)
Canadian Boards of Directors take note: to encourage greater board responsiveness to low say-on-pay shareholder support, ISS has proposed a policy to increase the threshold for addressing poor voting results from 70% to 80%. The implication going forward is that any say-on-pay vote results below 80% will require board responsiveness. This responsiveness generally includes shareholder engagement efforts, actions taken to address areas of concern and clear disclosure providing these actions taken and rationale around pay practices. Absent sufficient responsiveness, Canadian companies will be at risk for continuing negative vote actions for say-on-pay.
Board Diversity (U.S.)
ISS’ current gender diversity policy recommends against/withhold votes for 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.
The proposal expands the application of this policy in response to feedback from institutional investors, heightened disclosure expectations for NASDAQ-listed companies and broader market interest in seeing greater gender diversity on corporate boards.
Effective for meetings on or after Feb. 1, 2023, the policy will apply to most listed U.S. companies, rather than only those in the Russell 3000 or S&P 1500 indices. In its update, ISS also notes that, as planned, its policy requiring corporate boards to have at least one racially/ethnically diverse director will go into effect in 2022 for companies in the Russell 3000 and S&P 1500 indices (following the conclusion of the one-year grace period in 2021).
The implication is clear that boards must be diversely comprised from gender and racial/ethnic perspectives (and this must be publicly disclosed), or they will face negative vote actions from the proxy advisor and shareholders.
Board Gender Diversity (Canada)
a one-year grace period and beginning with the 2022 proxy season, the proposed
policy implements minimum threshold of women comprising 30% of the board for
S&P/TSX Composite issuers.
ISS will generally vote withhold for the chair of the nominating committee (or other responsible chairs/directors), if women comprise less than 30% and/or if the company has not provided a formal, publicly disclosed commitment to achieve at least 30% female representation by the next annual shareholder meeting. For TSX companies (non-S&P/TSX Composite Index), ISS will generally vote withhold if the company has not disclosed a formal written gender diversity policy and there are zero women on the board.
Unequal Voting Rights (U.S.)
In response to investor sentiment regarding problematic governance provisions, ISS is proposing two changes to its policy on unequal voting rights (defined by ISS as classes of common stock that have additional votes per share than other shares; classes of shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights).
The first change is to eliminate the grandfathered status of companies with legacy unequal voting rights provisions. Effective Feb. 1, 2023, the proposed policy recommends withhold/against votes for directors individually, committee members or the entire board (except new nominees, who are considered case-by-case), if the company employs a common stock structure with unequal voting rights.
While ISS details some exceptions to this policy — such as for some newly-public companies, or situations where minority shareholders have sufficient protections — this policy change is expected to impact many prominent U.S. companies that currently reside under the grandfathered status upon the 2023 effective date.
The second change applies to companies that become public through “SPAC transactions.” Effective in 2022, ISS will subject these companies to its “Newly Public Company” problematic capital structure evaluation, whereby ISS will generally recommend withhold/against votes for the entire board (except new nominees, who are considered case-by-case), if, prior to or in connection with the company's public offering, the company or its board implemented a multi-class capital structure in which the classes have unequal voting rights without subjecting the multi-class capital structure to a reasonable time-based sunset. ISS also clarified that these vote recommendations will continue into future years, unless the structure is reversed, removed, or becomes subject to a reasonable sunset provision.
ISS is accepting comments on its draft policy updates until 5 p.m. EST, Tuesday, Nov.16. Comments can be submitted by emailing email@example.com. Final policy updates, which may include changes beyond those in the draft release, are typically released later in November and, unless otherwise noted, are effective for annual shareholder meetings beginning Feb. 1, 2022.
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About the Authors
Brian Myers is director, executive compensation and governance team lead, North America, Willis Towers Watson.
Ryan Beger is director, executive compensation, Willis Towers Watson.
Ming Young is associate director, executive compensation, Willis Towers Watson.