The policies aim to provide crucial guidance to public companies amid the growing importance of ESG in proxy voting.
By Paul A. Davies, Michael D. Green, Andra Troy, and James Bee
In late 2021, Institutional Shareholder Services (ISS) and Glass, Lewis & Co (Glass Lewis), the two leading proxy advisory firms, released updated policy documents for the 2022 proxy season.
Notably, both ISS and Glass Lewis have given considerable attention to environmental, social, and governance (ESG) matters, reflecting the rapidly increasing importance of ESG to shareholder relations at public companies. The Glass Lewis policies will apply from January 1, 2022, and the ISS policies will apply from February 1, 2022.
This blog post reviews the major updates in the ISS and Glass Lewis policies as they relate to key ESG issues, and considers the similarities and differences of each firm’s policies in certain areas.
“Say on Climate” Votes
In 2021, “Say on Climate” proposals were increasingly popular. ISS has responded by including frameworks in its policies to analyse and review both proposals brought by management and those introduced by shareholders in 2022. Pursuant to its policies, ISS will recommend votes on a case-by-case basis, taking into consideration certain factors listed in its policies. In relation to management-backed Say on Climate votes, ISS will focus on factors including “the completeness and rigor of the plan,” and whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050. For shareholder Say on Climate proposals (or similar matters), ISS will take into account information such as whether climate-related disclosure is complete and rigorous and the company’s actual greenhouse gas (GHG) emissions performance.
Glass Lewis is taking a somewhat different approach than ISS in relation to Say on Climate votes, expressing concerns with Say on Climate votes and citing that a company’s long-term strategy, including climate strategies, should be the responsibility of the Board and not shareholders who may lack requisite information. In relation to management-proposed Say on Climate votes, Glass Lewis indicated that it will review the proposed oversight of the vote by the Board, including the level of control the Board will have in implementing the results. Glass Lewis noted that it expects companies to identify their climate plans in a “distinct and easily understandable” document, which should ideally align with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Diversity, Equity, and Inclusion
In 2022, ISS will usually recommend “against” or “withhold” votes for the chair of a company’s nominating and governance committee if the Board has no “apparent racially or ethnically diverse members.” ISS noted that such a requirement will be subject to an exception for companies that had a director from an underrepresented racial or ethnic group at the prior annual general meeting (AGM), and the Board has made a commitment to appoint at least one such new director over the course of the upcoming year.
ISS also indicated that, beginning in 2023, it will develop its gender diversity policy to apply to all companies, and not just companies in the S&P 1500 and Russell 3000, as is currently the case. Similarly, ISS will recommend “against” or “withhold” votes for the chair of the nominating and governance committee if the Board has no women representation. This policy is subject to a similar exception as identified in relation to the racial diversity policy.
Glass Lewis previously announced that it planned to begin tracking companies’ diversity disclosures in four categories: (1) the percentage of racial/ethnic diversity represented on the Board; (2) whether the Board’s definition of diversity explicitly includes gender and/or race/ethnicity; (3) whether the Board has a policy requiring women and other individuals from underrepresented groups to be part of the director candidate pool; and (4) Board skills disclosure. Glass Lewis indicated that, beginning in 2022, it may recommend “against” or “withhold” votes for the chair of the nominating and governance committee for S&P 500 companies if a company fails to provide disclosure in each of these four categories. Beginning in 2023, it will generally oppose election of the chair of the nominating and governance committee at those companies if they have not provided any aggregate or individual disclosure about the racial/ethnic demographics of the Board.
Glass Lewis indicated that, beginning in 2022, it will recommend “against” or “withhold” votes for the chair of the nominating and governance committee at Russell 3000 companies that do not have at least two gender-diverse (a term that includes non-binary persons) directors, or the entire committee if the Board has no gender diversity at all. From 2023 onwards, this policy is expected to evolve, as Glass Lewis indicated that it will recommend against the chair of the nominating and governance committee if the Board is not at least 30% gender diverse.
ISS adopted a new policy in relation to the somewhat vaguely defined notion of companies that are “significant GHG emitters” through their operations or value chain (initially defined as companies that Climate Action 100+ has identified as primarily responsible for GHG emissions). In 2022, ISS will generally recommend “against” or “withhold” votes for the responsible committee chair when ISS determines a company is not taking the minimum steps needed to understand, assess, and mitigate climate risks to the company and wider economy. These minimum steps include: (1) detailed disclosure of climate-related risks, and (2) “appropriate GHG emissions reduction targets”, which ISS defines as “any well-defined GHG reduction targets”. Notably, such a requirement for “appropriate GHG reduction targets” does not include Scope 3 emissions, which are a company’s indirect emissions from sources other than heating and cooling.
Glass Lewis indicated that, beginning in 2022, it will generally recommend “against” or “withhold” votes for the chair of the nominating and governance committee of companies that do not provide “explicit disclosure” on those companies’ ESG management processes and Board oversight of ESG. Glass Lewis did not provide any indication of its preferences in terms of which oversight structures are most appropriate, a decision that is left to the companies themselves.
Given the increasing importance of ESG in proxy voting (as discussed as one of our Top 10 Things to Look Out For in ESG in 2022), and the ever-growing importance of proxy advisory firms, knowledge of the way these firms view and analyse ESG issues is significant for public companies.
Latham & Watkins will continue to monitor developments in this area.