ISS has published its annual changes to its proxy voting policies:
Board Diversity, Race and Ethnicity (U.S.): Board diversity remains a critical issue for many investors, and concerns about racial inequality and injustice have put a spotlight on low levels of racial/ethnic diversity on boards and in C-Suites. For its U.S. Benchmark Policy, ISS proposes to adopt a new policy, to be effective from February 2022, at companies where the board has not identified any ethnically or racially diverse members. The proposed policy will be to generally recommend voting against the chair of the nominating committee (or other relevant directors on a case-by-case basis) where there are no identified ethnic or racially-diverse board members, beginning in 2022. Mitigating factors will be considered and the proposed coverage universe is all companies in the Russell 3000 and S&P 1500 indexes. ...
Mitigating factors include the presence of a racial and/or ethnic minority on the board at the preceding annual meeting and a firm commitment to appoint at least one racial and/or ethnic diverse member.
The ISS' existing policy has a similar rule with respect to gender diversity/
Director Accountability (All Global Policies): Under a proposed clarification related to the election of directors that will be made in the appropriate places in all ISS benchmark policies globally, we will explicitly note that significant risk oversight failures related to environmental and social concerns may, on a case-by-case basis, trigger vote recommendations against board members. ...
If a company is in a highly impactful sector and is not taking steps to reduce environmental and social risks that are likely to have a large negative impact on future company operations, ISS may recommend taking action against directors who fail to make their companies more resilient.
The proposed change makes it explicit that ISS has the flexibility to find that directors have failed in their risk oversight role if they have neglected to take meaningful steps to increase the resilience of companies to climate-related risks.
It's going to be interesting to see how ISS applies the new standard to firms in the energy sector, especially those in fossil fuels. I expect that this new policy will be seized upon by the fossil fuel divestment crowd as one more argument in their arsenal. I also expect we'll be seeing a lot of references to this new policy (and the preceding one) in ESG shareholder proposals next proxy season.
Shareholder Litigation Rights (U.S. and Canada): Litigation rights are in the news due to some recent court cases. ISS proposes modifications in the U.S. policy and addition of language codifying the Canadian policy regarding management proposals to establish exclusive forums. ...
When evaluating proposals to establish the state of incorporation as the exclusive forum for cases arising under state corporate law, shareholders must balance the advantages (potential cost savings from eliminating duplicative litigation in more than one forum; eliminating risks of unpredictable or incorrect outcomes from courts that are unfamiliar with the law of the state of incorporation, or even unfamiliar with corporate law generally) against the disadvantages (inconvenience to plaintiffs who must bring suit in another state and hire local counsel there). However, exclusive federal forum provisions seen to date generally require only that federal securities litigation be brought in the district courts of the United States, and generally do not specify a particular federal district. Plaintiffs are therefore free to file such suits in the district courts in their home states. Without the argument that an exclusive forum provision for federal law cases would seriously inconvenience plaintiffs, the benefits of eliminating duplicative litigation and ensuring that cases are heard by courts that are well-versed in the applicable law carry greater weight. However, it is acknowledged that separate exclusive forum provisions for state corporate law claims and federal securities law claims will likely prevent plaintiffs from bringing cases alleging both types of claims in the same court.
Because Delaware has a separate court system specializing in corporate law cases, with a large body of precedent stemming from Delaware's status as the most common state of incorporation in the US, the likelihood of a speedy and efficient resolution of Delaware corporate law cases, in particular, is considered to be greater if they are heard in Delaware courts. Therefore, in the absence of concerns about abuse of the provision or about poor governance more generally, ISS will generally recommend in favor of charter or bylaw provisions designating Delaware as the exclusive forum for state corporate law matters at companies incorporated in that state.
Charter and bylaw provisions designating US federal courts as the exclusive forum for cases arising under federal securities law (the Securities Act of 1933, as amended), which had previously been held to be impermissible by the Delaware Court of Chancery, were deemed to be facially valid under Delaware law in a March 2020 ruling by the Delaware Supreme Court. Some companies began incorporating such provisions into their governing documents almost immediately, either in the form of a bylaw amendment (which can be accomplished unilaterally by the board) or a charter amendment (which requires shareholder approval). This necessitates a new policy on these new voting items and provides an opportunity to re-examine the existing policy on exclusive forum provisions for state law matters and to reorganize the entire litigation rights section for clarity. The policy on fee-shifting remains unchanged.
Note that a board that unilaterally adopts an exclusive forum bylaw without shareholder approval will be marked down under ISS' policy against such changes.
In general, this is a positive change. It recognizes the excellence of Delaware courts and the need to control multiple fora litigation.
CooleyPubCo has posted a memorandum on the ISS changes that is quite helpful.
