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Article | Executive Pay Memo North America

ISS launches comment period for draft 2022 policy changes 

Governance Advisory Services |Executive Compensation
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By Ryan Beger and Ming Young | November 11, 2021

Institutional Shareholder Services seeks comments from issuers, investors and the broader governance community on draft proposals for 2022.

On November 4, Institutional Shareholder Services (ISS) released details of draft policy proposals and policy changes for 2022 and are currently soliciting feedback from the governance community through November 16. As it relates to the North America market, the focus largely continues to be on environmental, social and governance (ESG) issues rather than the historical focus on executive compensation-related topics.

Draft policy proposal: Advisory Vote on Executive Compensation (Canada)

To encourage greater board responsiveness to low say-on-pay shareholder support, the proposed policy will increase the threshold for addressing poor voting results from 70% to 80%. ISS may evaluate ballot items related to executive pay if the Board fails to demonstrate responsiveness to say-on-pay proposals receiving less than 80% of the votes cast taking into account the ownership structure of the company. Board responsiveness generally includes disclosure of shareholder engagement efforts, actions taken to address areas of concern, and clear disclosure providing rationale around pay practices. While the change in threshold brings Canada in line with the U.K., Continental Europe and Australia, the U.S. remains at 70%.

Draft policy proposal: Board Diversity (U.S.)

ISS’ current Gender Diversity policy recommends against/withhold votes for 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. The proposal expands the application of this policy in response to feedback from institutional investors, heightened disclosure expectations for NASDAQ-listed companies, and broader market interest in seeing greater gender diversity on corporate boards. Effective for meetings on or after February 1, 2023, the policy will apply to most listed U.S. companies, rather than only those that are in the Russell 3000 or S&P 1500 indices.

In its update, ISS also notes that as planned, its policy requiring corporate boards to have at least one racially/ethnically diverse director will go into effect in 2022 for companies in the Russell 3000 and S&P 1500 indices (following the conclusion of the one-year grace period in 2021).

Questions posed by ISS for public comment:
  • Should board size be a consideration? For example, the similar proposed policy for Canada exempts boards with four or fewer directors. Should the U.S. policy similarly include a board size exemption, and if so, what is the appropriate board size?
  • Are there other exemptions that should apply?

Draft policy proposal: Board Gender Diversity (Canada)

Following a one-year grace period and beginning with the 2022 proxy season, the proposed policy implements a minimum threshold of women comprising 30% of the board for S&P/TSX Composite Index issuers. ISS will generally vote withhold for the chair of the nominating committee, (or other responsible chairs/directors if there is no such committee), if women comprise less than 30% and/or the company has not provided a formal, publicly-disclosed commitment to achieve at least 30% female representation by the next annual general meeting. For TSX companies (non- S&P/TSX Composite Index) ISS will generally vote withhold if the company has not disclosed a formal written gender diversity policy and there are zero women on the board. The gender diversity policy should not contain boilerplate or contradictory language, and should include measurable goals and/or targets for increasing board gender diversity at or prior to the next AGM.

This policy does not apply to:

  • New publicly-listed companies within the current or prior fiscal year,
  • Companies that have transitioned from the TSXV within the current or prior fiscal year, or
  • Companies that have four or fewer directors

Draft policy proposals: Unequal Voting Rights (U.S.)

In response to investor sentiment regarding problematic governance provisions, ISS is proposing two changes to its policy on unequal voting rights (defined by ISS as classes of common stock that have additional votes per share than other shares; classes of shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights).

Grandfathered status

The first change is to eliminate the grandfathered status of companies with legacy unequal voting rights provisions. Effective February 1, 2023, the proposed policy recommends withhold/against votes for directors individually, committee members, or the entire board (except new nominees, who are considered case-by-case), if the company employs a common stock structure with unequal voting rights.

While ISS details some exceptions to this policy – such as for some newly-public companies, or situations where minority shareholders have sufficient protections – this policy change is expected to impact many prominent U.S. companies upon the 2023 effective date.

SPAC transactions

The second change applies to companies that become public through “SPAC transactions.” Effective in 2022, ISS will subject these companies to its “Newly Public Company” problematic capital structure evaluation whereby ISS will generally recommend withhold/against votes for the entire board (except new nominees, who are considered case-by-case), if, prior to or in connection with the company's public offering, the company or its board implemented a multi-class capital structure in which the classes have unequal voting rights without subjecting the multi-class capital structure to a reasonable time-based sunset. ISS also clarified that these vote recommendations will continue into future years, unless the structure is reversed, removed, or becomes subject to a reasonable sunset provision.

Questions posed by ISS for public comment:
  • Which directors do you consider the appropriate ones to recommend against for unequal voting rights?
  • Should ISS reconsider this policy application, perhaps recommending against only the governance committee chair for one poor governance provision, and against the governance committee for both? Should this change in policy application be considered whether or not the grandfathering of these poor provisions is ended?
  • Are there any other types of unequal voting rights that should be excluded from the policy? What threshold(s) would you consider sufficiently minimal to not materially impact voting rights?
  • Should ISS therefore accept disclosed commitments to unwind a multi-class capital structure? Are there other company specific factors that ISS should consider?

Draft policy proposals: Climate-Related

As climate change continues to be a global issue that has drawn significant interest from investors around the world, ISS is proposing three climate-related policies for 2022:

Policy: Greenhouse Gas Emitters (U.S. and other select markets)

The proposed policy, which could still be further amended or even not implemented, at this time focuses solely on those companies that are “significant greenhouse gas (GHG) emitters.” This is defined as the current Climate Action 100+ Focus Group, which is comprised of 167 companies (across typical industries such as manufacturing, oil & gas, electric utilities, and airlines). The proposed policy generally recommends against/withhold votes for the responsible incumbent director, committee, or even full board when ISS determines the Climate Action 100+ companies aren’t taking the minimum steps to understand, assess and mitigate climate related risk. As a starting point for 2022, the minimum expectations would be:

  • Detailed disclosure of climate-related risks:
    • Board governance measures
    • Corporate strategy
    • Risk management analyses
    • Metrics and targets

    • The proposed policy specifically mentions the Task Force on Climate-related Financial Disclosures (TCFD). Mention of the TCFD, absent other frameworks (i.e., SASB, GRI ) is interesting as it could be a signal that ISS is pointing to the TCFD as their preferred framework in lieu of the trio they typically triangulate against.
  • Appropriate GHG emissions reduction targets
    • To begin, this means “any well-defined” reduction target covering a “significant” (significant not clearly defined at this time) portion of the company’s direct emissions. Scope 3 targets (emissions related to products and supply chains) are not required initially, but the proposed suggests the ISS policy would be progressively iterative and this may be forthcoming (dependent upon investor sentiment and consensus, which is not present at this time).

While it is possible that many of the companies in the Climate Action 100+ group are already taking the minimum required steps under this proposed policy, the implication is clear that they will need to review what they have in place, demonstrate that risk analysis has been completed, and ensure that future disclosure is clear and concise, yet detailed. For those in the group that haven’t stepped up to the minimums, and assuming the proposed policy is indeed implemented for 2022, the clock is now ticking before the against/withhold votes on directors begin.

Policy: Say on Climate (SoC) Management Proposals (Global policy)

ISS will recommend votes on a case-by-case basis for management proposals that request shareholders approve a company’s climate transition action plan, taking into account the completeness and rigor of the plan (primarily based on company disclosure, targets, and associated commitments/reductions).

Policy: Say on Climate (SoC) Shareholder Proposals (Global policy)

ISS will recommend votes on a case-by-case basis for shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to regularly express approval or disapproval of its GHG emissions reduction plan. ISS notes that recommendations will take into account information such as the company’s disclosure rigor/completeness, GHG emissions performance, whether the company is subject to violations, fines, litigation, or controversy related to GHG emissions; and whether the proposal’s is unduly burdensome (scope or timeframe) or overly prescriptive.

Question posed by ISS for public comment:
  • Among the criteria identified as such for the assessment of the climate transition plan, are there any that should weigh more than others?

ISS is accepting comments on its draft policy updates until Tuesday, November 16 (5:00 p.m. ET). Comments can be submitted by emailing policy@issgovernance.com. The draft policies can be found here. Final policy updates, which may include changes beyond those in the draft release, are typically released later in November and unless otherwise noted are effective for annual shareholder meetings beginning February 1, 2022.

A version of this article appeared in Workspan Daily on November 11, 2021. All rights reserved, reprinted with permission.

Authors

Director, Executive Compensation (Chicago)

Associate Director, Executive Compensation (Toronto)

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