Among its newly announced benchmark policy updates for 2019, Institutional Shareholder Services (ISS) unveiled a new voting policy designed to push boards to increase gender diversity. Subject to a year-long grace period and mitigating factors, ISS may issue an adverse voting recommendation against nominating committee chairs at boards with no gender diversity. Other U.S. policy updates include recommendations relating to director attendance and performance evaluations, board responsiveness, and reverse stock splits.
Gender diversity has been a particularly hot topic for companies recently with the passage of California Senate Bill 826 requiring female directors on public company boards. SEC Commissioner Hester Peirce has criticized the legislation, saying it effectively forces corporations to consider all women as stakeholders, introducing uncertainty and political influence into corporate operations.
Gender diversity. Under the new policy, for meetings on or after February 1, 2020, and applicable for companies in the Russell 3000 or S&P 1500 indices, ISS will generally recommend a vote against or withhold from the chair of the nominating committee (and other directors on a case-by-case basis) at companies when there are no women on the company's board. The recommendation will be subject to mitigating factors, including a firm commitment to appoint at least one female director to the board in the near term, the presence of a woman on the board at the preceding annual meeting, and other relevant factors.
ISS explained that having women on boards brings several benefits to companies, including sought-after skillsets and, according to some studies, better company performance. Gender diverse boards are the market norm. Only three S&P 500 companies lack a female director, and 84 percent of Russell 3000 Index companies have at least one woman on the board.
Further, investors favor gender diverse boards. In an ISS survey, over 80 percent of investor respondents said they found an absence of gender diversity at the board level problematic. During the 2017 and 2018 proxy seasons, investors increasingly targeted companies with little or no female representation on their boards. Where the board has not responded to this engagement, a number of large investors have cast votes against directors.
Other U.S. policy updates. ISS also updated other U.S. voting policies, including:
- Director attendance at board and committee meetings. In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, ISS will generally recommend a vote against or withhold from appropriate members of the nominating/governance committees or the full board.
- Director performance evaluation. ISS added five-year total shareholder returns and other metrics to the measurement of sustained poor performance.
- Ratification of existing charter or bylaw provisions. ISS recommended a vote on a case-by-case basis if the board failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. In addition, ISS recommended an adverse vote where boards ask shareholders to ratify existing charter or bylaw provisions unless these governance provisions align with best practice, considering a number of factors.
- Reverse stock splits. ISS will recommend a vote for management proposals to implement a reverse stock split if the number of authorized shares will be proportionately reduced, or the effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS' Common Stock Authorization policy. ISS will recommend an adverse vote if neither of these conditions is met, subject to a consideration of several factors.
- Global approach. In examining whether shareholder proposals should be implemented, ISS added to the list of factors that should be considered the question of whether there are significant controversies, fines, penalties, or litigation associated with the company's environmental or social practices.
Regarding pay-for-performance, during the 2019 annual meeting season, ISS research reports on companies in the U.S. and Canada will feature Economic Value Added (EVA) data as a supplement to GAAP-based measures. Beginning in 2020, ISS will consider the inclusion of EVA-based measurements as part of its Financial Performance Assessment methodology.
Non-U.S. updates. Highlights of updated policies for non-U.S. jurisdictions include:
- Canada: recommendations relating to gender diversity, overboarding, and consideration of negative environmental or social practices;
- Brazil and Americas Regional: recommendations relating to director independence and compensation, share issuance requests, and charitable donations;
- UK/Ireland and Continental Europe: ISS will track significant audit quality issues, with a focus on accounting controversies, at the lead engagement partner level. Where information is available, ISS research reports will note any lead audit partners who have been linked with significant auditing controversies, and a negative vote recommendation on auditor ratification may be applied in the most serious cases;
- Japan: In a new independence criterion for Japanese company directors and statutory auditors, ISS will classify both directors and statutory auditors who work (or worked) at companies whose shares are held by the company in question as "cross-shareholding shares," as non-independent directors.
Learn more. ISS will hold an informational webcast on the 2019 policy updates and other developments on November 29 at 4 pm GMT (11 am EST/8 am PST). Participants may register on the ISS website.
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