Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”), the leading proxy advisory firms in the United States, influence many institutional investors and play an important role in voting outcomes of shareholder meetings for public companies. Both ISS and Glass Lewis have updated their voting guidelines for this proxy season, with a focus on board accountability for diversity, racial equity audit proposals, and climate-related proposals, among other matters. Generally, ISS guidelines (found here) will apply for shareholder meetings held on or after February 1, 2022 and Glass Lewis guidelines (found here) will apply for shareholder meetings held on or after January 1, 2022. Certain key ISS and Glass Lewis voting policy updates are described below.
Board Accountability For Diversity. ISS and Glass Lewis are implementing stricter board diversity composition and disclosure requirements as follows:
Gender Diversity. For annual meetings held this year and through January 31, 2023, for companies in the Russell 3000 or S&P 1500 indices, ISS will generally recommend a vote against the nominating committee chair (or other directors on a case-by-case basis) where there are no women on the company’s board. This policy extends to all companies after February 1, 2023.
Glass Lewis will recommend a vote against the nominating committee chair at Russell 3000 companies when there are fewer than two gender diverse directors on the board or against the entire nominating committee when a board has no gender diversity, starting with shareholder meetings held this year. For companies outside of the Russell 3000, and boards with six or fewer directors, Glass Lewis expects at least one gender diverse director beginning this year. After January 1, 2023, Glass Lewis will transition to a percentage-based diversity measure for all companies.
Racial/Ethnic Diversity. Beginning this year, for companies in the Russell 3000 or S&P 1500 indices, ISS will recommend a vote against the nominating committee chair (or other directors on a case-by-case basis) where the board has no apparent racial or ethnic diversity.
Glass Lewis generally will recommend in line with applicable state laws (such as in California and Washington) mandating board composition requirements from diverse communities.
Diversity Disclosure. Glass Lewis expects companies to disclose (1) the board’s current percentage of racial/ethnic diversity, (2) whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity, (3) whether the board has adopted a policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees, and (4) board skills disclosure. Beginning this year, for companies in the S&P 500 with “poor disclosure” on board composition, Glass Lewis may recommend that shareholders vote against the nominating committee chair. For shareholder meetings held after August 6, 2022, Glass Lewis will recommend voting against the nominating/governance committee chair of Nasdaq-listed companies that do not comply with Nasdaq’s newly adopted diversity disclosure rule (summarized here).
Retirement or Tenure Policies. Beginning this year, if the board waives a retirement age or term limit for two or more years in a row, Glass Lewis generally will recommend voting against the nominating/governance committee chair. ISS does not have an analogous policy.
Racial Equity Audits. Shareholder proposals asking companies to oversee an independent racial equity or civil rights audit are expected to return again this year. ISS will recommend votes case-by-case on these proposals, taking into account several factors, including the company’s processes for addressing racial inequity and discrimination internally, its public statements and track record on racial justice, and whether the company’s actions are aligned with market norms on civil and racial/ethnic diversity.
Say-on-Climate Proposals. ISS has codified its framework for analyzing proposals on climate transition plans. ISS will recommend on a case-by-case basis on management and shareholder say-on-climate proposals, based on specified factors. Glass Lewis generally will recommend against shareholder proposals on say-on-climate, and will evaluate management proposals on say-on-climate on a case-by-case basis taking into account specified factors.
Board Oversight of E&S Issues. Beginning this year, for S&P 500 companies, Glass Lewis generally will recommend against votes for the nominating/governance committee chair if a company does not provide explicit disclosure about the board’s role in overseeing environmental and social issues.
Common Stock/Preferred Stock Authorization. ISS now will apply the same dilution limits to all companies, eliminating prior ratios applicable to companies in the bottom 10% of total share return performance. ISS also will recommend against proposed increases in authorized shares of common stock if the company has unilaterally adopted a poison pill of any length.
Equity-Based and Other Incentive Plans. Beginning February 1, 2023, ISS will move from the multiplier-based adjusted burn rate method to a “Value-Adjusted Burn Rate” calculation for increases to stock plan pools based on the actual stock price for full-value awards and the Black-Scholes value for stock options.
Pandemic-Related Compensation Policies. Beginning this year, ISS will return to its pre-pandemic approach on mid-year changes to metrics, targets and measurement periods, and on company responsiveness where a say-on-pay proposal gets less than 70% support.
Written Consent Shareholder Proposals. ISS generally supports shareholder proposals asking companies to lower the ownership threshold required for shareholders to act by written consent, particularly if companies do not have unfettered special meeting rights at a 10% or lower ownership threshold and other “good” governance practices. Glass Lewis has now documented its approach to these shareholder proposals and generally will recommend in favor of written consent shareholder proposals if a company has no special meeting right or the special meeting ownership threshold is over 15%.
Donald R. Reynolds and S. Halle Vakani co-chair the Capital Markets practice group of Wyrick Robbins, which represents public company clients across a broad range of industries in connection with their SEC reporting and corporate matters, and significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.