Institutional Shareholder Services (ISS) and Glass Lewis (GL) have published their updated proxy voting policies for shareholder meetings held on or after February 1, 2023 (ISS) or January 1, 2023 (GL).
ISS key policy updates relate to board accountability in the case of problematic governance structures and officer exculpation article amendments under Delaware law. The “2023 Americas Proxy Voting Guidelines Updates”, which summarizes the changes being made, as well as the rationale therefor, is available now on the ISS Policy Gateway. ISS’s complete 2023 policy voting guidelines, which will incorporate these updates, will likely be available from ISS later in December 2022.
GL key policy updates relate to board diversity, board accountability for climate-related issues and officer exculpations provisions. The 2023 policy voting guidelines including the summary of changes are available here. Additionally, GL released its 2023 Environmental, Social & Governance (ESG) Initiatives Policy Guidelines addressing ESG-related shareholder proposals and the summary of changes are available here.
The key changes are summarized below with a comparison of ISS and GL policy guidelines on key updated issues provided in the appendix.
Key ISS and Glass Lewis Guideline Changes
Board Gender Diversity
As ISS announced in 2021, the application of its policy to require at least one female director on the board will now expand from Russell 3000 and S&P 1500 companies to all US companies starting February 2023.
Also, as GL announced last year, starting in 2023 they will now require boards of the Russell 3000 companies to have at least 30 percent gender diversity. For companies outside of the Russell 3000, GL policy requiring at least one female director will continue. GL in its guidelines states that it may refrain from adverse voting recommendation, if the board has provided a sufficient rationale or plan to address the shortfall including a timeline to appoint the required diverse director(s) (generally by the next annual meeting).
According to their policies, both ISS and GL generally recommend against or withhold from the chair of the nominating committee if a company’s board fails to meet the applicable gender diversity requirement.
Board Racial/Ethnic Diversity
GL has adopted a policy to require at least one director from the underrepresented communities (for definition, see footnote 2 in the Appendix) on the boards of Russell 1000 companies, failing which it will recommend against the chair of the nominating committee. Previously, GL policy requiring at least one director from an underrepresented community applied only to the companies headquartered in California in accordance with mandatory board composition requirements set forth under California’s law. Given that California’s board gender and “underrepresented community” diversity laws are currently in the appeals process, GL has indicated that it will refrain from providing recommendations pursuant to these state board composition requirements until further notice.
Note, ISS has an existing similar policy that requires at least one racially or ethnically diverse board member that applies to a larger universe of companies in the Russell 3000 or S&P 1500 indices.
In addition to requiring minority representation on the board, GL has also toughened its position on disclosure of director diversity and skills in company proxy statements. Whereas the previous policy stated that GL may recommend against the chair of the nominating and/or governance committee for failure to provide any disclosure in each of its tracked categories, the revised policy says that GL will generally recommend against. Also, the revised policy expands the scope of its application from S&P 500 to Russell 1000 companies.
Board Accountability for Climate-related Issues
Last year ISS adopted a policy to hold directors responsible for climate-related issues at the world’s highest greenhouse gas (GHG) emitting companies as reflected in the Climate Action 100+ Focus Group list. ISS’s policy is to generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy. When adopting the policy, ISS indicated that its expectations about what constitutes “minimum steps to mitigate risks related to climate change” will increase over time. For 2023, ISS has specified that in addition to requiring disclosure according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD), it considers the “appropriate GHG emissions reductions targets” for the companies to be medium-term GHG reduction targets or Net Zero-by-2050 GHG reduction targets for a company's operations (Scope 1) and electricity use (Scope 2).
For 2023, GL has adopted a new policy to recommend against the chair of the responsible committee at companies whose GHG emissions represent a financially material risk, such as those companies identified by groups including Climate Action 100+, for failure to provide:
- disclosure of board oversight responsibilities for climate-related issues and
- climate-related disclosure in line with TCFD framework.
Officer Exculpation Amendments under Delaware Law
As a result of the August 2022 amendment to The Delaware General Corporation Law (“DGCL”) permitting corporations to limit or eliminate the personal liability of officers for claims of breach of the fiduciary duty of care, a few Delaware corporations have submitted management proposals to amend their certificate of incorporation to include officer exculpation provisions.
Both ISS and GL have adopted a case-by-case policy that would consider the stated rationale for the proposed change as well as the extent to which the proposal would eliminate directors' and officers' liability. Thus far, both the firms have been supportive of these proposals that have sought to align officer exculpation with the newly amended Delaware law. Their adopted policy guidelines indicate that they are likely to recommend against the proposal if it were to provide for exculpation that goes beyond what is allowed under the Delaware law.
Problematic Governance Structures
Unequal Voting Rights
Effective Feb. 1, 2023, ISS will generally recommend withhold or against votes for certain directors at all companies that maintain a multi-class capital structure with unequal voting rights, including companies that were previously exempted from adverse vote recommendations based on the date they went public. The policy provides certain limited exceptions including newly public companies with a sunset provision of no more than 7 years from the date the company went public, and where the super-voting shares represent less than 5 percent of total voting power.
Sunset Provision for Problematic Practices
ISS has an existing policy to generally recommend vote against or withhold from certain directors at newly public companies with problematic governance structures that are considered materially adverse to shareholder rights (such as classified boards, supermajority vote requirements or other egregious provisions). Under the policy, ISS considers a reasonable sunset provision to be a mitigating factor but does not define what the reasonable period is. In its policy updates, ISS has specified that for the problematic provision a sunset period within 7 years of the date of going public will be considered reasonable. ISS has also clarified that that a "newly public company refers to a company with first annual shareholder meeting held after Feb. 1, 2015.
Cyber Risk Oversight
GL has included a new discussion in its policy guidelines about its approach to cyber risk as it considers cyber security to be a material risk for all companies. GL encourages companies to disclose how their boards provide oversight and keep themselves fully versed of this issue. GL’s policy will be to generally not make recommendation if a company fails to meet its disclosure expectations, unless significant harm was caused to shareholders due to cyber-attacks and such disclosure or oversight is lacking.
GL has raised the minimum threshold of performance-based equity. GL now expects companies to include in long-term incentives from 33% to 50%. Beginning in 2023, GL will raise concern in its analysis but will generally not recommend against the say-on-pay proposal if less than half of long-term incentive grants are performance-based unless such awards are significantly rolled back or eliminated.
Amend Quorum Requirements
Recognizing the difficulty many companies face in achieving quorum, notably due to large brokers no longer providing discretionary or proportionate broker votes, ISS has changed its voting guidelines from generally recommending against to case-by-case for management proposals requesting reduction in quorum for shareholder meetings. Among the factors that will be taken into consideration are the new quorum threshold requested, rationale for the request and previous voter turnout or attempts to achieve quorum.
Share Issuance for U.S.-Listed Issuers Incorporated Outside the U.S.
ISS has adopted a new policy for share issuance by U.S. domestic issuers incorporated outside the U.S. and listed solely on a U.S. exchange. ISS will generally support authorization for issuance of common shares up to 20 percent of currently issued common share capital. For pre-revenue or other early-stage companies, ISS will allow for up to a 50 percent increase, but it will incumbent upon the company to justify the higher need.
Disclosure of Shareholder Proponents
GL has adopted a new policy to generally recommend against the chair of the governance committee if a company does not disclose the identity of the shareholder proposal proponent in its proxy statement. As noted in our recent proxy season review, there was a significant increase in the number of anti-ESG shareholder proposals in 2022, which we expect will continue in 2023. Typically, anti-ESG proposals do not receive much support as shareholders seemingly account for the intent behind the proposal based on the shareholder proponent. However, often the proposal language is difficult to distinguish between the pro- and anti-ESG proposals. The new GL policy, therefore, would push companies to disclose proponent information as it has become an important consideration in assessing the proposal. GL, however, has indicated that identity of the proponent will not affect its analysis of the proposal, but such information might be useful for its investor clients.
Racial Equity and/or Civil Rights Audit
ISS has updated its case-by-case policy to evaluate shareholder proposals on racial equity/civil rights audit to add a factor as to whether the company adequately discloses workforce diversity and inclusion metrics and goals as it allows for quantitative assessment of progress.
Codification and Clarification of Existing Policies
Both ISS and GL have made explicit certain existing policy approaches for completeness and clarity.
In light of the increase in the number of shareholder proposals requesting company transparency on the congruency of its political contributions to its public commitments and/or of its climate lobbying to its climate goals, ISS has added a new case-by-case policy codifying its existing practice in evaluating such proposals. Among codification of other policy factors, ISS has:
- added unilateral adoption of fee-shifting provision to its list of egregious provisions considered under its “Board Accountability – Unilateral Bylaw/Charter Amendments” policy;
- added poison-pill trigger and the company’s market capitalization as factors in evaluating short-term pills;
- included severance payments made when the termination is not clearly disclosed as involuntary to the list of egregious pay practices;
- clarified that relating to ESG compensation-related shareholder proposals, the company’s board or compensation committee is in the best position to determine the appropriate performance metrics and encouraging improved disclosure about the rationale and considerations of pay metrics.
GL has codified its approach relating to shareholder proposals requesting that companies adopt a policy whereby shareholders must approve severance payments exceeding 2.99 times the amount of the executive’s base salary plus bonus. While GL will continue to be supportive of such proposals, it may recommend against in instances where companies (e.g., Gen Digital Inc., Sep 13, 2022 meeting) have adopted policies to seek shareholder approval for any cash severance payments exceeding 2.99 times the sum of an executives’ salary and bonus. While shareholder proposals require equity to be included in determining whether severance payments exceed the 2.99x threshold, GL in its policy allows for a company to consider only cash in making such determination.
GL has clarified that while its overboarding policy allows for a total of 2 boards for an executive officer, but in case of an executive chair it allows for an additional board for a total of 3 public company boards. GL considers the role of an executive chair to require less time commitment compared to an executive officer.
GL has provided the following additional clarifications:
- expects the board to show some initial level of responsiveness when 20% of more shareholders vote contrary to management;
- will generally recommend against the chair of the compensation committee in case of “mega-grants” that are outsized, lack sufficient performance-conditions, or are excessively dilutive;
- expanded the discussion of what it considers robust disclosure in case of responsiveness to low support on say-on-pay proposals;
- indicated that reasonable disclosure in case of one-time awards should include discussion about the determination of quantum and structure for such awards;
- added to the discussion relating to front-loaded awards;
- made clear that its pay-for-performance methodology will not be impacted by the SEC’s new pay-for-performance rules, and the additional disclosure may be reviewed as part of its qualitative analysis of the pay programs;
- codified its existing view on expecting thorough disclosure of how compensation committee considered the use of discretion in its pay decisions;
- revised its discussion on clawback policies to reflect new regulatory developments;
- codified its approach to shareholder proposals requesting that companies undertake racial equity or civil rights audits.
Comparison of Proxy Advisory Firms Policy Guidelines on Key Updated Issues
|Key Policy Issues||ISS||Glass Lewis|
|Gender Diversity||Generally recommend against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the company's board||Effective January 1, 2023, will generally recommend voting against the nominating committee chair of a board that is not at least 30 percent gender diverse at companies within the Russell 3000 index|
|Racial/Ethnic Diversity||Generally recommend vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at Russell 3000 or S&P 1500 companies where the board has no apparent racially or ethnically diverse members1||Will generally recommend against the chair of the nominating committee of a board with fewer than one director from an underrepresented community2 at companies within the Russell 1000 index|
|Disclosure of Board Diversity and Skills||No existing policy||Will recommend against the nominating committee chair of Russell 1000 companies that have not provided any disclosure in each of its tracked categories3|
|Officer Exculpation Amendment Proposals||
Vote case-by-case considering the stated rationale for the proposed change, as well as among other factors, the extent to which the proposal would:
|Will evaluate proposals on a case-by-case basis. Will generally recommend voting against such proposals eliminating monetary liability for breaches of the duty of care for certain corporate officers, unless compelling rationale for the adoption is provided by the board, and the provisions are reasonable|
For companies that are significant greenhouse gas (GHG) emitters,4 generally recommend vote against the incumbent chair of the responsible committee in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy.
Minimum steps required will be both of the following:
For 2023, “appropriate GHG emissions reductions targets” will be medium-term GHG reduction targets or Net Zero-by-2050 GHG reduction targets for a
For companies with material exposure to climate risk stemming from their own operations,5 may recommend voting against the chair of the committee (or board) charged with oversight of climate-related issues if:
a) disclosure of explicit and clearly defined board oversight responsibilities for climate-related issues and
b) thorough climate-related disclosure in line with TCFD framework is significantly lacking or absent
Generally recommend vote against or withhold in case of:
Generally recommend vote against in case of:
|Unequal Voting Rights||
Generally vote withhold or against directors individually, committee members, or the entire board, if the company employs a common stock structure with unequal voting rights.
Exceptions to this policy will generally be limited to:
Generally recommend voting against the chair of the governance committee when the company does not provide for a reasonable sunset of the multi-class share structure (generally seven years or less).
In the case of a board that adopts a multi-class share structure in connection with an IPO, spin-off, or direct listing within the past year, generally recommend voting against all members of the board who served at the time of the IPO if the board:
(i) did not also commit to submitting the multi-class structure to a shareholder vote at the company’s first shareholder meeting following the IPO; or
(ii) did not provide for a reasonable sunset of the multi-class structure (generally seven years or less).
|Problematic Governance Structures – Newly Public Companies||
For companies that hold or held their first annual shareholder meeting after Feb. 1, 2015, generally vote against or withhold from directors individually, committee members, or the entire board if, prior to or in connection with the company's public offering, the company adopted the following bylaw or charter provisions:
A provision which specifies that the problematic structure(s) will be sunset within seven years of the date of going public will be considered a mitigating factor.
In cases where, preceding an IPO, the board adopts a multi-class share structure where voting rights are not aligned with economic interest, or an anti-takeover provision, such as a poison pill or classified board, will generally recommend voting against all members of the board who served at the time of the IPO if the board:
(i) did not also commit to submitting these provisions to a shareholder vote at the company’s first shareholder meeting following the IPO; or
(ii) did not provide for a reasonable sunset of these provisions (generally three to five years in the case of a classified board or poison pill; or seven years or less in the case of a multi-class share structure).
|Racial Equity/Civil Rights Audit Proposals||
Case-by-case analysis taking into account:
Will assess: (i) the nature of the company’s operations; (ii) the level of disclosure provided by the company and its peers on its internal and external stakeholder impacts and the steps it is taking to mitigate any attendant risks; and (iii) any relevant controversies, fines, or lawsuits.
After taking into account these company-specific factors, will generally recommend in favor of well-crafted proposals requesting that companies undertake a racial or civil rights-related audit when we believe that doing so could help the target company identify and mitigate potentially significant risks.
|Severance Proposals||Recommend vote for shareholder proposals requiring that golden parachutes or executive severance agreements be submitted for shareholder ratification, unless the proposal requires shareholder approval prior to entering into employment contracts||Generally supportive of proposals requesting that companies adopt a policy whereby shareholders must approve severance payments exceeding 2.99 times the amount of the executive’s base salary plus bonus, but may recommend against these proposals in instances where companies have adopted policies whereby they will seek shareholder approval for any cash severance payments exceeding 2.99 times the sum of an executives’ salary and bonus|
|New Pay for Performance Rules||
ISS research reports will display certain elements from the company's disclosed pay-versus-performance table although the new information will not be incorporated into the quantitative screen.
The new disclosures may be considered during the qualitative evaluation, particularly for companies that exhibit a quantitative pay-for-performance misalignment.
Read about ISS and Glass Lewis policy updates for UK and Europe.
1 ISS considers the diverse racial/ethnic categories to be Black/African American, Asian (excluding Indian/South Asian), Hispanic/Latin American, Indian/South Asian, Middle-Eastern/North African, Native American/Alaskan Native, or Native Hawaiian/Other Pacific Islander.
2 GL defines “underrepresented community” as an individual who self-identifies as Black, African American, North African, Middle Eastern, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaskan Native, or who self-identifies as gay, lesbian, bisexual, or transgender.
3 GL’s tracked categories for disclosure of Disclosure of Director Diversity and Skills are: (i) the board’s current percentage of racial/ethnic diversity; (ii) whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity; (iii) 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 (aka “Rooney Rule”); and (iv) board skills disclosure.
4 Companies defined as “significant GHG emitters” will be those on the current Climate Action 100+ Focus Group list.
5 Such as those companies identified by groups including Climate Action 100+
6 The firms will not vote/recommend against the director at the company where he or she serves as a CEO or an NEO