The two dominant proxy advisory firms — Institutional Shareholder Services (ISS) and Glass Lewis (GL) — have issued their policy updates for the 2022 proxy season. These updates reflect the continuing trend of institutional investors, shareholder advisory firms, and other stakeholders pushing companies to increase representation of women and historically underrepresented groups on their boards. In addition, there is a heightened expectation that boards will take a more active role in overseeing management of environmental and economic sustainability risks, including climate change risks, and disclose to shareholders the controls and procedures the company has in place to do so. Finally, there is more specific focus on dual class share structures and other governance provisions that the firms have historically disfavored. This alert summarizes the principal changes applicable to U.S. companies for the 2022 proxy season and into 2023.
In December 2021, Institutional Shareholder Services (ISS) announced its governance policy updates for 2022. For U.S. issuers, there are three primary focus areas: climate change and related risks, board diversity, and what ISS calls “board accountability.” The ISS policy updates will generally be applicable to shareholder meetings taking place on or after February 1, 2022. Below is an overview of key 2022 policy changes and clarifications adopted by ISS.
Board Diversity. In its policy updates for 2021, ISS stated that beginning with annual meetings after February 1, 2022, it would generally recommend against the nominating committee chair (or other directors on a case-by-case basis) of companies in the S&P 1500 Index and the Russell 3000 Index if there were no apparent racially or ethnically diverse members. The 2022 policies will extend this position requirements to all companies for meetings after February 1, 2023.
For gender diversity, the ISS 2021 policies continued its previous policy of generally recommending against the chair of the nominating committee (or other directors on a case-by-case basis) for companies in the Russell 3000 Index or the S&P 1500 index if there were no women on the board. The 2022 policies will extend this policy to all companies for meetings held on or after February 1, 2023.
Climate Change. For companies that are on the Climate Action 100 Focus List (167 companies – mostly airlines and companies involved in the chemical, energy, automobile, and very large consumer products industries), ISS will recommend voting against “responsible incumbent directors,” which will usually mean the relevant committee chair or board chair in the first year, if the company has not taken ISS’s “minimum steps” to understand, assess and mitigate climate change risks. To meet this test, companies must:
- Provide detailed disclosure of risks under the Task Force on Climate-Related Financial Disclosures (TCFD) framework including board governance measures, corporate strategy, risk management analyses, and metrics and targets; and
- Issue appropriate greenhouse gas (GHG) emission reduction targets. For 2022, “appropriate GHG emissions reductions targets” will be any well-defined GHG reduction targets (ISS is not requiring specific Scope 3 emissions targets).
ISS indicated that companies can expect these “minimum steps” to increase in future years.
For all other companies, ISS has codified its broad case-by-case framework for evaluating climate-related proposals submitted by shareholders and by management. For shareholder proposals requesting “say on climate” votes and other climate-related actions, ISS will analyze each request on a case-by-case basis, taking into account the details of the request and the company’s current climate-related disclosures and performance. ISS will focus on:
- The completeness and rigor of the company’s climate-related disclosure;
- The company’s actual greenhouse gas (GHG) emissions performance;
- Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions; and
- Whether the proposal’s request is unduly burdensome in its scope or timeframe or is overly prescriptive.
In analyzing a management-proposed climate transition or similar plan presented for shareholder approval, ISS will assess the completeness and rigor of the plan on a case-by-case basis when it formulates its voting recommendation. The ISS review will include the following factors:
- The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other market standards;
- Disclosure of the company’s operational and supply chain GHG emissions (Scopes 1, 2, and 3);
- The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply chain GHG emissions in line with Paris Agreement goals (Scopes 1, 2, and 3 if relevant);
- Whether the company has sought and received third-party approval that its targets are science-based;
- Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050;
- Whether the company discloses a commitment to report on the implementation of its plan in subsequent years;
- Whether the company’s climate data has received third-party assurance;
- Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy;
- Whether there are specific industry decarbonization challenges; and
- The company’s related commitment, disclosure, and performance compared to its industry peers.
Dual Class Shares. ISS will target companies with dual class share structures (what they call “unequal voting rights”) more aggressively in 2023, removing the grace period for newly public companies and the “grandfathering” exception for other companies. This includes structures where some classes of common stock afford shareholders differential rights on:
- Which nominees they can elect;
- Which ballot items they are allowed to vote on; or
- Time-phased voting rights that allow shares held for a certain number of years to have more votes per share than shares held for a shorter period.
ISS will recommend voting against all nominees for director of the applicable companies.
Note that this policy update means that, starting February 1, 2023, ISS will likely be recommending against directors at many large or iconic U.S. companies that have unequal voting rights structures. This group includes Alphabet Inc., Meta Platforms, Inc. (formerly Facebook, Inc.), Ford Motor Company, Berkshire Hathaway Inc., and The New York Times Company, among others.
ISS has held off on extending this approach to classified boards and similar “poor” governance practices but expects to revisit this topic in future years.
In November 2021, GL announced that it had released its 2022 Policy Guidelines for the United States. Noteworthy updates center on gender and racial/ethnic diversity on boards of directors; environmental, social and governance (ESG) issues; and governance practices for companies that have become public as a result of a combination with a special purpose acquisition company (SPAC). Below is an overview of key GL policy changes and clarifications for 2022 shareholder meetings.
Board Gender Diversity. For 2022 shareholder meetings of companies in the Russell 3000 Index, GL will generally recommend voting against the chair of the nominating committee of a board with fewer than two gender diverse directors or the entire nominating committee of a board with no gender diverse directors. For companies that are not included in the Russell 3000 Index and all boards with six or fewer total directors, GL will continue its policy that requires a minimum of one gender diverse director.
Beginning with shareholder meetings held after January 1, 2023, GL will apply a percentage-based approach, rather than the fixed numerical approach described in the previous paragraph. For Russell 3000 Index companies, GL will generally recommend voting against the nominating committee chair of a board that is not at least 30% gender diverse.
GL will review a company’s disclosure about diversity matters before making voting recommendations. If the company’s disclosure includes a rationale or plan to address a lack of board diversity, the 2022 GL policy updates indicate that GL may refrain from issuing negative voting recommendations. GL guidelines now refer to “gender diverse” directors, rather than female directors. “Gender diverse” includes both women and directors who identify their gender as other than male or female.
GL has published a separate paper that describes the methodology that GL will use to assess director diversity and skills disclosure when it evaluates proxy statement disclosure in connection with preparation of its Proxy Paper reports for Russell 1000 companies. The paper does not replace GL voting policies.
Nasdaq Board Diversity Disclosure. For annual meetings held after August 8, 2022, GL will recommend voting against the chair of the governance committee of Nasdaq companies that fail to make the disclosure required by Nasdaq board diversity disclosure rules approved by the U.S. Securities and Exchange Commission in August 2021. As described in an earlier Goodwin alert, the Nasdaq rules mandate disclosure of specified board diversity statistics annually in a standardized format in the proxy statement or on the company’s website.
State Law Gender and Demographic Board Diversity. The 2022 GL updates include new sections on state gender and demographic diversity laws. These policies supplement the other GL policies on board diversity. For state laws relating to director gender diversity, the 2022 updates provide that GL will make recommendations in accordance with applicable state law gender diversity mandates. In instances where state laws relating to gender diversity do not mandate board composition requirements, are non-binding, or impose only disclosure or reporting requirements, the 2022 updates indicate that GL will generally refrain from recommending against directors on the basis of the GL state law diversity policies. With respect to state laws on demographic diversity, the 2022 updates provide that, for meetings held after December 31, 2021, GL will generally recommend voting against the chair of the nominating committee of a company headquartered in California if the company does not have at least one director from one of the demographic groups identified in the applicable California law.
Disclosure of Director Diversity and Skills. GL has revised its policies regarding disclosure of director diversity and skills. Beginning in 2022, GL may recommend voting against the chair of the nominating and/or governance committee of companies in the S&P 500 index if the company’s disclosure is “particularly poor,” which means the company has failed to provide any disclosure in each of the categories set forth in the GL policies. Beginning in 2023, GL will generally recommend voting against the chair of the nominating and/or governance committee if a company in the S&P 500 index has not provided any individual or aggregate demographic diversity disclosure.
Board Oversight of Environmental and Social Matters. Beginning in 2022, GL will note as a concern in its research reports when boards of Russell 1000 companies do not provide clear disclosure concerning board-level oversight of environmental and/or social issues. Furthermore, GL will generally recommend voting against the governance committee chair of any S&P 500 company that fails to provide explicit disclosure about role of the board in overseeing these environmental and social issues. The GL policy states that effective board oversight can be conducted in various formats, as determined by the specific board, and may include a designated ESG committee, another board committee that is also responsible for other key matters, specific directors, or the full board.
Dual Class Shares. Beginning in 2022, GL will recommend voting against the chair of the governance committee at any company with a dual (or multi-) class share structure and unequal voting rights if there is not a sunset in place for this structure over a period generally equal to seven years or less.
Dual Class Structures, Anti-Takeover Provisions and Classified Boards. For companies that have become public companies through a business combination with a SPAC, GL has added a new policy under which it will recommend voting against all directors who were serving as board members when the company became publicly traded if the company has adopted overly restrictive governing documents or, before the company became publicly traded, the board adopted a multi-class share structure under which voting rights are not aligned with economic interest or an anti-takeover provision, such as a poison pill or classified board, if the board: (i) did not submit these provisions to a shareholder vote on an advisory basis at the meeting at which shareholders voted on the business combination, (ii) did not commit to submitting these provisions to a shareholder vote at the company’s first shareholder meeting following the company becoming publicly traded, or (iii) did not provide a reasonable sunset of these provisions, generally equal to three to five years in the case of a classified board or poison pill and seven years or less in the case of a dual or multi-class share structure.
SPAC Director Overboarding. In applying its overboarding tests for directors, GL will take into account whether a director’s only executive role is at a SPAC that has not yet completed a business combination. For those individuals, the test will be whether he or she serves on more than four public company boards.
Waivers of Age and Tenure Policies. Beginning in 2022, in cases where the board has waived its term or age limits for two or more consecutive years, GL will generally recommend that shareholders vote against the nominating and/or governance committee chair, unless the company discloses a compelling rationale for waiver of this policy, such as consummation of a corporate transaction.
Virtual-Only Shareholder Meetings. For 2022 shareholder meetings, GL has returned to its pre-pandemic policy on virtual-only meetings and will expect robust proxy statement disclosure about how shareholders can participate in a virtual-only meeting. GL expects that this disclosure will include shareholders’ ability to ask questions at the meeting; procedures, if any, for posting appropriate questions received during the meeting and the company’s answers on its public website; and logistical details for meeting access and technical support. If a company is planning to hold a virtual only shareholder meeting and does not provide this disclosure, GL will generally recommend voting against the governance committee members. GL has published a supplemental document that essentially describes what GL believes are best practices for virtual meetings. This document provides GL guidance rather than voting policies.
Clarifications of Other Governance Matters
Overall Approach to ESG Matters. The 2022 updates include a separate section titled Overall Approach to Environmental, Social & Governance. This section expands and clarifies prior GL guidance on how it evaluates company policies and disclosure and notes that its perspective is long-term shareholder value. GL believes that companies should consider material environmental and social factors in all aspects of their business and should provide shareholders with disclosure that allows them to understand how the company considers these factors and how the company is mitigating risks related to these issues.
ESG and Executive Compensation Linkage. GL does not maintain a policy on whether companies should include ESG metrics as part of their short- or long-term compensation programs for named executive officers. However, when a company does so, GL expects the company to provide robust disclosure on the metrics selected, the rigor of performance targets, and the determination of payout opportunities. For qualitative ESG metrics, GL expects companies to provide shareholders with a thorough understanding of how these metrics will be or were assessed.
Authorizations/Increases in Authorized Preferred Stock. For authorizations of increases in authorized preferred stock, GL has clarified that it will generally recommend voting against preferred stock authorizations or increases, unless the company discloses (i) a commitment to not use such shares as an anti-takeover defense or in a shareholder rights plan or (ii) a commitment to submit any shareholder rights plan to a shareholder vote prior to its adoption.
Federal Forum Provisions. If a company has adopted exclusive federal forum provisions for claims that arise under the Securities Act of 1933 without seeking shareholder approval, GL will generally take the same approach it takes when a board has adopted exclusive forum provisions designating state courts as the exclusive venue for certain matters and will generally recommend voting against the chair of the governance committee.
Lauren Visek was a contributing author to this alert.