December 8, 2021
ISS Issues 2022 Policy Updates
Yesterday, ISS announced its policy updates for next year. Here’s the policy document. Here are highlights from the 17-page executive summary:
Say-on-Climate Management Proposals: ISS is codifying the framework developed over the last year for analyzing management-offered climate transition plans put up for shareholder approval, incorporating feedback received during this year’s policy development process including from the Climate Survey. For transparency, page 4 of the policy lists the main criteria that will be considered when analyzing these plans (a non-exhaustive list).
Say-on-Climate Shareholder Proposals: “Say-on Climate” shareholder proposals emerged late in 2020 and increased in 2021, generally asking companies to publish a climate action plan and to put it to a regular shareholder vote. This policy establishes a case-by-case approach toward such proposals and provides a framework of analysis that will allow for consistency of assessment across markets. (See page 5 of the policy for factors that ISS will consider.)
Board Accountability on Climate: In response to the 2021 Climate Policy survey, high percentages of investor respondents supported establishing minimum criteria for companies considered to be strongly contributing to climate change. Therefore, ISS is for 2022 focusing on the 167 companies currently identified as the Climate Action 100+ Focus Group, and will recommend against incumbent directors – usually the appropriate committee chair in the first year – in cases where the company does not have both minimum criteria of disclosure such as according to the Task Force on Climate-related Financial Disclosures (TCFD) and quantitative GHG emission reduction targets covering at least a significant portion of the company’s direct emissions. (Page 12 of the policy lists the “minimum criteria” and more details.)
Board Gender Diversity: ISS adopted a U.S. board gender diversity policy in 2019, which went into effect in February 2020, for companies in the Russell 3000 or S&P 1500 indices. Based on institutional investor feedback in 2021, after a one-year transition period, the current U.S. board gender diversity policy will be extended to all companies covered under U.S. policy, taking effect beginning in 2023.
Board Racial & Ethnic Diversity: ISS’s previously adopted policy on board racial & ethnic diversity will go into effect this year. That means that for companies in the Russell 3000 or S&P 1500 indices, ISS will generally recommend a vote 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 racially 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.
Unequal Voting Rights: Due to the strong support expressed through the survey results and roundtable discussions, ISS will remove the safe harbor for older companies with unequal voting rights. After a one-year grace period, starting in 2023, ISS will generally recommend against relevant directors at all companies with unequal voting rights, irrespective of when they first became public companies.
Shareholder Proposals on Racial Equity and/or Civil Rights Audits: ISS will take a case-by-case approach on shareholder proposals asking companies to conduct an independent racial equity and/or civil rights audit. Page 23 of the policy provides criteria for assessing whether such an audit would likely be beneficial to shareholders. Factors include whether the company has developed a process or framework for addressing inequalities internally, whether the company has engaged with stakeholders and made racial justice efforts, and whether the company has been the subject of recent controversy.
ISS also updated its policy on proposals authorizing additional common or preferred stock and on its burn rate calculations for equity plans. In addition, the proxy advisor updated its FAQs about compensation policies and the COVID-19 pandemic. We’ll be posting memos about the policy changes in our “Proxy Advisors” Practice Area.
– Liz Dunshee