Last week, Institutional Shareholder Services (“ISS") proposed and published for comment voting policy changes for the 2021 proxy season. These include three proposed updates that would apply to U.S. companies.
The proposed U.S. policy changes are available here and are summarized below. Comments on the proposals can be submitted by e-mail to [email protected] until 5 p.m. ET on October 26, 2020. ISS will take the comments into account as part of its policy review and expects to release final changes to its voting policies during the first half of November 2020. It is important to note that ISS's final 2021 proxy voting policies may reflect additional changes, beyond those on which ISS is soliciting comment. The final voting policies will apply to shareholder meetings held on or after February 1, 2021, except for policies subject to transition periods.
Comments submitted to ISS may be published on its website, unless requested otherwise.
Board Diversity
For companies in the S&P 1500 and Russell 3000 indices, ISS is proposing a change to its director elections policy to address boards “with no apparent racial and/or ethnic diversity." Under the proposed policy, beginning in 2022, ISS would generally recommend “against" or “withhold" votes for the chair of the nominating/governance committee (or other directors, on a case-by-case basis) where a board “has no apparent racially or ethnically diverse members" and there are no “mitigating factors" disclosed. Mitigating factors would include the presence of a diverse director on the board at the prior annual meeting and a firm commitment to appoint a least one diverse director.
In 2021, ISS would highlight boards that lack racial and ethnic diversity (or disclosure on this topic) in its proxy voting analyses to help investors identify companies where it may be appropriate to engage about diversity. ISS would not issue negative voting recommendations in 2021 based on a lack of diversity. ISS has specifically requested feedback on whether the one-year transition period for this proposed policy is too short or too long.
Exclusive Forum Clauses
ISS is proposing to update its voting policy on exclusive forum clauses to address federal forum clauses, in response to the Delaware Supreme Court's March 2020 decision in Salzberg v. Sciabacucchi (the “Blue Apron" case). In that case, the court unanimously confirmed the validity of federal exclusive forum clauses requiring that actions arising under the Securities Act of 1933 be filed exclusively in federal district courts. The proposed updates also articulate a more favorable approach to Delaware exclusive forum clauses where companies submit them for shareholder approval, moving away from a case-by-case evaluation to an approach where ISS would generally recommend “for" these provisions.
ISS's current voting policy on exclusive forum clauses addresses two situations: (1) the impact on voting recommendations for directors where the board adopts an exclusive forum clause on its own, without shareholder approval, by amending the bylaws; and (2) the less common scenario where a company seeks shareholder approval of an exclusive forum clause in the certificate of incorporation or bylaws.
Under its existing policy, ISS has evaluated situations where the board adopts an exclusive forum bylaw on its own under its policy on “unilateral bylaw/charter amendments." Under this policy, ISS recommends “against" or “withhold" votes for the board if the board unilaterally adopts changes to the company's bylaws in a manner that ISS believes “materially diminishes shareholder rights." ISS generally has not treated unilateral adoption of a state law exclusive forum bylaw as materially diminishing shareholder rights as long as the forum is the company's state of incorporation, which is typically the case. Accordingly, directors generally have not faced negative voting recommendations from ISS for adopting an exclusive forum bylaw. In contrast, for those companies that have sought shareholder approval of an exclusive forum clause, ISS has evaluated it on a case-by-case basis.
Under the proposed policy updates, the circumstances in which ISS would issue adverse voting recommendations for directors based on the board's adoption of an exclusive forum bylaw would continue to be limited.
ISS would treat the board's unilateral adoption of a federal or state exclusive forum clause as a “one-time failure" under its policy on unilateral bylaw and charter amendments, and this would trigger “against" or “withhold" recommendations, only if the forum chosen is: (1) a particular federal district court, in the case of securities law claims; or (2) either a state other than the state of incorporation, or a particular local court, in the case of state exclusive forum clauses. To date, most companies adopting federal exclusive forum clauses have designated the federal district courts generally (the formulation upheld in the Blue Apron decision). For Delaware companies, as a result of 2015 amendments to the Delaware General Corporation Law authorizing exclusive forum clauses, companies may not select a non-Delaware forum as the exclusive forum for state corporate law claims, although a non-Delaware forum can be designated as an additional forum. (See S.B. 75, 148th Gen. Assem. (Original Synopsis) (Del. 2015), available here).
Where a company decides to submit an exclusive forum clause for shareholder approval, ISS would support federal forum clauses that select the U.S. federal district courts generally as the exclusive forum for securities law claims, but would oppose provisions that designate a particular federal court. In the case of state exclusive forum clauses, at Delaware companies, ISS would generally support provisions that select Delaware or the Delaware Court of Chancery, “in the absence of serious concerns about corporate governance or board responsiveness to shareholders." For companies incorporated in other states, if the provision designates the state of incorporation, ISS would take a case-by-case approach, considering a series of factors, including disclosure about harm from duplicative shareholder litigation. ISS would oppose the provision if it selects a jurisdiction other than the state of incorporation.
Oversight Failures Related to E&S Issues
ISS is proposing to add oversight failures involving E&S (environmental and social) issues to the list of “material failures" of risk oversight that may trigger adverse voting recommendations for directors. Under its current voting policy on “governance failures," in “extraordinary circumstances" ISS may recommend “against" or “withhold" votes for individual directors, committee members, or the full board based on “material failures" of governance, stewardship, risk oversight, or fiduciary responsibilities at a company. The policy contains a non-exclusive list of risk oversight failures.
For 2021, ISS is proposing to expand this list by adding “demonstrably poor risk oversight of environmental and social issues, including climate change." The explanation for the proposed change suggests that ISS will be focusing on climate-related risks at companies where these risks “are likely to have a large negative impact on future company operations." ISS notes that historically, it has applied the governance failures policy retrospectively, but it requests comment on whether stakeholders would support a policy that allows ISS to “proactively identify boards that fail to prepare for foreseeable future risks."