By Anne Sherry, J.D.
The latest benchmark proxy voting policies from Institutional Shareholder Services incorporate feedback from a climate survey that also informed ISS’s specialty policies. Most of the updated voting policies will go into effect beginning with meetings taking place in February 2022, though some become effective in 2023. Along with “say on climate” and board accountability for climate-related risks, the update includes expanded board diversity policies, accountability on unequal shareholder voting rights, and international policies on executive compensation.
ISS conducted two global policy surveys in August. The Benchmark Policy Survey included questions about the use of non-financial ESG performance metrics in executive compensation, racial equity audits, and the continued use of virtual-only shareholder meetings. The Climate Survey, a first for ISS, solicited feedback on what criteria are important for determining proper board oversight of climate-related risks, for determining views on regular shareholder votes on climate transition plans, and for assessing the quality of management climate transition plans. The climate survey was also designed to garner feedback relevant to ISS’s specialty climate policy, which launched in 2020 and incorporates ISS’s proprietary climate research.
Based on investors’ support of minimum criteria for companies considered to be strongly contributing to climate change, the new benchmark board accountability policy will focus on those companies currently identified as Climate Action 100+ Focus companies. In cases where the company does not have adequate disclosure, such as according to the Task Force on Climate-related Financial Disclosures, or where it does not have quantitative greenhouse gas reduction targets covering a significant portion of its direct emissions, ISS policies will recommend voting against the responsible incumbent director.
ISS is also establishing policies on say-on-climate (SoC). It recommends case-by-case voting on management proposals that request shareholders to approve the company’s climate transition action plan. Its recommendations on SoC shareholder proposals are also case-by-case. The policy updates list factors that voters should consider, including the completeness and rigor of the company’s action plan and disclosure.
The policy updates also affect board diversity policies both in the U.S. and abroad. In the U.S. and Japan, ISS will extend gender diversity requirements to more companies in each market from 2023, following a one-year grace period. In Canada, the policy expects at least one woman on the board of most listed companies, while in the U.K. and Ireland FTSE 100 boards should have at least one director from an ethnic minority background. Other diversity policies announced in 2020 will take effect next year.
ISS is also scrapping its unequal treatment of unequal voting rights. Previously, companies whose first public shareholder meeting occurred before 2015 were exempt from the policy on unequal voting rights. Due to strong investor support, ISS is removing the differential application that arose from this grandfathering and will, beginning in 2023, generally recommend against the responsible director(s) at U.S. companies with unequal voting rights.