Nominating/Governance committee chairs at many S&P 500 companies will be busy next year, based on revised voting recommendations put forward by proxy advisors Glass Lewis and ISS, both of which are intensifying their scrutiny on board diversity and environmental issues.
Both proxy advisors recently released their 2021 Proxy Voting Policy Guidelines, with key changes summarized below:
Board Gender Diversity: Beginning in 2021, Glass Lewis will note as a concern boards consisting of fewer than two female directors. For shareholder meetings held after January 1, 2022, Glass Lewis will generally recommend voting against the nominating committee chair of a board with fewer than two female directors. For boards with six members or less, the existing policy requiring a minimum of one female director will remain in place.
- According to the 2019 U.S. Spencer Stuart Board Index, 92% of S&P 500 company boards had two or more female board directors last year. Among Russell 3000 boards, 13% have no female directors, according to data published by The Conference Board and analytics firm ESGauge.
- State Laws on Diversity: In addition to the standard policy on board diversity, Glass Lewis will recommend in accordance with board composition requirements set forth in applicable state laws when they come into effect. For example, California law requires boards of companies headquartered in the state to have at least one female director by the end of 2019, with that number increasing to two or three by the end of 2021 based on the size of the board. Similarly, California passed Assembly Bill 979 this year requiring boards to include at least one member from an underrepresented community such as Black, Latino, Native American, Asian American, Pacific Islander, native Hawaiian, native Alaskan or LGBT by the end of 2021, with that number increasing to two or three, depending on the size of the board, by the end of 2022.
Disclosure of Director Diversity and Skills: Beginning with the 2021 proxy season, Glass Lewis’ report for each S&P 500 company will include Glass Lewis’ assessment of the proxy statement disclosure regarding matters such as board diversity, board skills and the director nomination process. Glass Lewis will not be making voting recommendations solely on this basis in 2021, however insufficient disclosure on director diversity and skills may be considered when additional board-related concerns have been identified.
Board Refreshment: Beginning in 2021, Glass Lewis will note as a potential concern instances where the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board in the past 5 years. Glass Lewis will not be making recommendations in 2021 solely on this basis, however insufficient board refreshment may be a contributing factor in recommendations when additional board-related concerns have been identified.
Environmental and Social Risk Oversight: Beginning in 2021, Glass Lewis will note as a concern when S&P 500 company boards fail to provide clear disclosure regarding board-level oversight on E&S issues. For shareholder meetings held after January 1, 2022, Glass Lewis will generally recommend voting against board governance committee chairs of S&P 500 companies for inadequate disclosure regarding board oversight of E&S issues.
Special Purpose Acquisition Companies: Glass Lewis added a new section detailing its approach to common issues associated with special purpose acquisition companies (“SPACs”), including its generally favorable view of proposals seeking to extend business combination deadlines, as well as its approach in determining the independence of board members at a post-combination entity who previously served as executives of the SPAC. Absent any evidence of an employment relationship or continuing material financial interest in the combined entity, Glass Lewis will generally consider such directors to be independent.
Short-Term Incentives: Glass Lewis codified additional factors it will consider in assessing company short-term incentive plans. Specifically, Glass Lewis expects clearly disclosed justifications to accompany any significant changes to a company’s short-term incentive plan structure, as well as any instances in which performance goals have been lowered from the previous year. Additionally, Glass Lewis’ description of the application of upward discretion has been expanded to include instances of retroactively prorated performance periods.
Long-Term Incentives: Glass Lewis codified additional factors it will consider in assessing long-term incentive plan structure. Specifically, Glass Lewis defined inappropriate performance-based award allocation as a criterion which may, in the presence of other major concerns, contribute to a negative recommendation. Additionally, any decision to significantly roll back performance-based award allocation will be reviewed as a regression of best practices, that outside of exceptional circumstances, may lead to a negative recommendation. Additionally, Glass Lewis defined that clearly disclosed explanations are expected to accompany long-term incentive equity granting practices, as well as any significant structural program changes or any use of upward discretion.
Virtual-Only Shareholder Meetings: Glass Lewis clarified several other existing policies, including reverting back to its standard policy on virtual shareholder meetings. Specifically, it removed a section describing the temporary exception to its policy on virtual shareholder meeting disclosure that was in effect for meetings held between March 1, 2020 and June 30, 2020, due to the extenuating circumstances caused by the COVID-19 pandemic.
For companies choosing to hold their meeting in a virtual-only format, robust disclosure in the company’s proxy statement addressing the ability of shareholders to participate in the meeting is expected. Where such disclosure is not provided, Glass Lewis will generally hold the governance committee chair responsible.
Material Environmental & Social Risk Oversight Failures: ISS’ current policy provides that, in extraordinary circumstances, it will recommend votes against or withhold from board members in the event of “material” failures of governance or risk oversight, failure to replace management as appropriate, or other egregious actions related to a director’s service. This policy has been updated to specifically include “demonstrably poor risk oversight of environmental and social issues, including climate change” as an example of potential material risk oversight failures.
Gender Diversity: For 2021, ISS will generally vote against the chair of the nominating committee (or other directors on a case by case basis) at Russell 3000 or S&P 1500 companies where there are no women on the company’s board. An exception will be made if there was a woman on the board at the preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.
Racial/Ethnic Diversity: For meetings on or after February 1, 2022, ISS will generally recommend a vote against the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially and/or ethnically 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. For 2021, ISS will “highlight” boards of directors of Russell 3000 or S&P 1500 companies that lack apparent racial and/or ethnic diversity.
Classification of Directors: The primary change to the Classification of Directors policy is to limit the “Executive Director” classification to only officers, not other employees, to help assist investors that have executive director overboarding policies to better assess those positions. With respect to “Non-Independent Non-Executive Directors” classification, ISS currently looks at the pay of directors, and in some cases, where the pay is considerable and on par with NEO pay for multiple years, the director has been classified as non-independent under “Other material relationships with the company”. To better ensure data capture and categorization of material relationships, this factor is being made explicit. The other changes to the Classification of Directors policy are generally to arrange and consolidate the classifications and to simplify the language where possible.
Poison Pills: ISS is maintaining its existing policy to recommend votes against or withhold votes from all director nominees where the company has a poison pill that was not approved by shareholders or the company makes a material adverse modification to an existing poison pill without obtaining shareholder approval. For 2021, ISS will now also recommend votes against or withhold votes where a company has a poison pill with a “deadhand” or “slowhand” feature.
Board Refreshment (Age/Term Limits): ISS revised its policy on director term/tenure limits to recommend case-by-case on management and shareholder proposals based on factors specific to the two contexts. ISS also added a new policy that it will recommend for proposals to remove mandatory age limits.
Advance Notice Bylaws: ISS revised its policy on advance notice proposals to clarify that a 90-120 day window before the anniversary of the prior year’s meeting is reasonable.
Federal Forum Selection Provisions: In the absence of serious concerns about corporate governance or board responsiveness to shareholders, ISS will generally vote in favor of federal forum selection provisions in the charter or bylaws that specify the “district courts of the United States” as the exclusive forum for federal securities law matters. ISS will recommend a vote against provisions that restrict the forum to a particular federal court.
Exclusive Forum Provisions for State Law Matters: ISS will recommend a vote in favor of charters or bylaws that specify Delaware courts as the exclusive forum for corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders. For states other than Delaware, ISS will maintain a case-by-case analysis for exclusive forum provisions. Going forward, ISS generally will recommend votes against any provision that specifies a state other than the state of incorporation as the exclusive forum for corporate law matters.
Virtual Stockholders Meetings: Under its new 2021 policy, ISS will generally vote for management proposals allowing for virtual meetings, so long as they do not preclude in-person meetings. ISS will consider shareholder proposals on virtual meetings case-by-case, taking into account (i) the scope and rationale of the proposal and (ii) any concerns identified with the company’s prior meeting practices.
Mandatory Arbitration/Sexual Harassment: ISS has issued new guidance on shareholder proposals requesting “reports” on a company’s use of mandatory arbitration on employment-related claims and “reports” on company actions to strengthen policies and oversight to prevent workplace sexual harassment or risks posed by a failure to prevent workplace sexual harassment. ISS will consider these items on a case-by-case basis, taking into account the company’s current polices and disclosures, and whether the company has been the subject of a recent controversy, litigation or regulatory action related to these matters.