Proxy advisory services, Institutional Shareholder Services (ISS) and Glass Lewis, recently issued updates to their respective voting policies for the 2022 proxy season, with notable changes related to environmental, social, and governance (ESG) topics. Highlights include board diversity, climate accountability (including say-on-climate proposals), and board oversight of environmental and social risks. The ISS policy updates for US companies are available here and the Glass Lewis policy updates are available here. Glass Lewis also recently released its updated approach to ESG proposals for the upcoming proxy season. The Glass Lewis and ISS policy updates are generally effective for shareholder meetings held after January 1, 2022, and February 1, 2022, respectively, except as noted below.

ISS’s 2022 Key Policy Updates for US Companies

ISS’s noteworthy ESG-related policy updates include the following:

• Board Diversity.

• • Gender. Following a one-year grace period,^[1] ISS will extend its current board gender diversity policy to all companies covered under its US policy. The current policy only applies to Russell 3000 and S&P 1500 companies. ISS generally will recommend a vote against or withhold votes from the nominating committee chair (or other directors on a case-by-case basis) of boards entirely lacking gender diversity.^[2]

• • Racial/Ethnic. Effective for meetings on or after February 1, 2022, ISS will also recommend voting against the chair of the nominating committee (or other directors on a case-by-case basis) at Russell 3000 and S&P 1500 companies, including foreign private issuers listed on those indices, where the board has no apparent racially and/or ethnically diverse directors.^[3]

• Board Accountability on Climate for Significant Greenhouse Gas (GHG) Emitters. ISS will recommend a vote against or withhold votes from the responsible incumbent director, committee, or full board (generally, the relevant committee chair) at a company that is a significant GHG emitter through its operations or value chain^[4] if the company is not taking both of the following minimum risk mitigation steps:

• • Providing detailed disclosure of climate-related risks, such as pursuant to the Task Force on Climate-related Financial Disclosure (TCFD) framework, including:

• • • Board governance measures

    • Corporate strategy

    • Risk management analyses

    • Metrics and targets

• • Setting appropriate GHG emissions reduction targets^[5]

• Say-on-Climate Proposals.^[6] ISS will recommend voting on a case-by-case basis for say-on-climate shareholder and management proposals.

ISS will consider the following criteria for shareholder proposals:

• • The completeness and rigor of the company’s climate-related disclosure

  • The company’s actual GHG emissions performance

  • Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions

  • Whether the proposal’s request is unduly burdensome (scope or time frame) or overly prescriptive

The policy update also provides the following non-exhaustive list of factors for consideration of management say-on-climate proposals:

• • The extent to which the company’s climate-related disclosures are in line with TCFD recommendations and meet other market standards

  • Disclosure of the company’s operational and supply chain GHG emissions (Scopes 1, 2, and 3)

  • The completeness and rigor of the company’s short-, medium-, and long-term targets for reducing operational and supply chain GHG emissions in line with Paris Agreement goals (Scopes 1, 2, and 3, if relevant)

  • Whether the company has sought and received third-party approval that its targets are science-based

  • Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050

  • Whether the company discloses a commitment to report on the implementation of its plan in subsequent years

  • Whether the company’s climate data has received third-party assurance

  • Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy

  • Whether there are specific industry decarbonization challenges

  • The company’s related commitment, disclosure, and performance compared to its industry peers

• Shareholder Proposals on Racial Equity Audits. In the wake of the Black Lives Matter movement, a new shareholder proposal introduced in the 2021 proxy season relating to racial equity audits garnered significant levels of shareholder support (although none passed at any annual meetings in 2021) and is expected to be on company ballots again in coming years due to increased investor focus on a company’s diversity, equity, and inclusion efforts. As a result, ISS announced that it will take a case-by-case approach to shareholder proposals asking a company to conduct an independent racial equity and/or civil rights audit, taking into account various factors^[7] for assessing whether such an audit would be beneficial to shareholders.

Other notable ISS updates include:

• Board Accountability for Unequal Voting Rights. Following a one-year grace period,^[8] for all US companies with unequal voting rights, ISS will no longer maintain a differential policy toward companies based on time in the public market.^[9] Older companies, including many blue-chip companies, with unequal voting rights have been grandfathered in under the current ISS policy, whereas the boards of newly-public companies have been subject to ISS’s negative recommendation if ISS found them to have this problematic capital structure. Under the new policy, if a US company has unequal voting rights, ISS will generally recommend a vote against or withhold votes from directors individually, committee members, or the entire board (except new nominees, who will be considered on a case-by-case basis), with certain exceptions.^[10]

• Common and Preferred Stock Authorization for General Corporate Purposes. ISS’s policy revisions generally align its policies on share authorization limits for both common and preferred stock. Further, ISS is removing the limitations previously placed on the acceptable capital authorization for common and preferred stock to be used for general corporate purposes for companies in the bottom 10% of total shareholder returns decile. Although ISS was historically concerned about high levels of dilution from low-priced share issuances, such companies are often those that have suffered serious financial or operational setbacks, require financing, and have few options for raising funds other than issuing common stock or convertible bonds or warrants linked to common stock. Therefore, ISS has decided to apply the same dilution limits to underperforming companies as are applied to other companies.^[11] ISS is also implementing other clarifying and clerical changes to these policies.

• Common and Preferred Stock Authorization for Companies with Problematic Uses of Capital. ISS is expanding the lookback period beyond three years for common and preferred stock authorizations when a company has exhibited a problematic use of capital. ISS previously employed a three-year lookback to the problematic use of capital, including the adoption of a non-shareholder-approved poison pill in that time period. The policy update does not specify a lookback period, although ISS notes that the revised policy would potentially pick up 5- or 10-year non-shareholder-approved poison pills. ISS observes that a company that adopts a long-term poison pill without putting it to a shareholder vote will be considered a poor steward of capital, and ISS will accordingly recommend a vote against that company’s proposed share increase. This change also aligns ISS’s capital authorization policy with its director recommendations for a company that has a non-shareholder-approved poison pill.^[12] Because preferred stock also has numerous variations with convertibility into common stock and voting rights, the policy update clarifies which features are considered problematic.

• Three-Year Burn Rate for Evaluating Equity-Based Compensation Plans. Following a one-year grace period,^[13] ISS will move from its volatility-based adjusted burn rate methodology to a “Value-Adjusted Burn Rate”^[14] calculation when evaluating equity-based compensation plan proposals. The new calculation will be based on the actual stock price for full-value awards and the Black-Scholes value for stock options. According to ISS, although the current volatility-based adjusted burn rate calculation is beneficial as an approximation of the rate at which a company is granting new shares through equity-based compensation (using historic volatility to account for the difference in value between a stock option and a full-value award), the new Value-Adjusted Burn Rate calculation will more accurately measure the value of recently granted equity awards by providing a more precise measure of the value of option grants.

Glass Lewis’s 2022 Key Policy Updates

Glass Lewis’s noteworthy ESG-related policy updates include the following:

• Board Gender Diversity. Glass Lewis has expanded its policy related to board gender diversity and will generally recommend that shareholders of Russell 3000 Index companies vote against the chair of the nominating committee of a board with fewer than two gender diverse^[15] directors or the entire nominating committee of a board with no gender diverse directors. For companies outside the Russell 3000 Index and all boards with six or fewer directors, Glass Lewis maintains its existing recommendation that the board have a minimum of one gender diverse director. However, Glass Lewis notes that it will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending votes against directors when the board has provided a sufficient rationale for, or plan to address, its lack of diversity.

In addition to its standard policy on board diversity, Glass Lewis will generally make voting recommendations on a board’s gender diversity that are consistent with any mandatory board composition requirements set forth in a company’s applicable state law, and it has extended its guidelines to specifically include applicable state laws on underrepresented community diversity or diversity measures other than gender.^[16]

Further, beginning in 2023, Glass Lewis’s recommendations regarding board diversity will transition from a fixed numerical approach to a percentage-based approach. Glass Lewis will generally recommend voting against the nominating committee chair of a board that is not at least 30% gender diverse at companies within the Russell 3000 Index.

• Director Diversity and Skills Disclosure. Companies will also be required to have heightened disclosure of director diversity and skills in company proxy statements. Glass Lewis may recommend voting against the chair of the nominating and/or governance committee of those companies in the S&P 500 with particularly poor disclosure (i.e., failing to provide any disclosure with respect to each of the four categories listed below). Beginning in 2023, Glass Lewis will recommend voting against the chair of the nominating and/or governance committee for companies in the S&P 500 that have not provided any disclosure of individual or aggregate racial and/or ethnic minority demographic information. Glass Lewis will assess the quality of a company’s disclosure based on the presentation of:

• • The board’s current percentage of racial and/or ethnic diversity

  • Whether the board’s definition of diversity explicitly includes gender and/or race or ethnicity

  • The board’s adoption of the “Rooney Rule”^[17]

  • Disclosure of the board’s skills

Glass Lewis has also updated its policy to reflect the recent board diversity disclosure rule adopted by the Nasdaq Stock Market LLC, which we previously summarized here. For Nasdaq-listed companies holding annual meetings after August 8, 2022, Glass Lewis will recommend voting against the chair of a company’s governance committee if the required Nasdaq disclosure has not been made.

• Board Oversight of Environmental and Social Risks. For companies in the Russell 1000 Index, Glass Lewis will note as a concern if a company does not provide clear disclosure regarding board-level oversight of environmental and social issues. For companies in the S&P 500 index, Glass Lewis will recommend voting against the governance committee chair of a company that fails to provide explicit disclosure concerning the board’s role in overseeing these issues. Further, Glass Lewis has clarified the factors it considers when evaluating a company’s board-level oversight of ESG-related matters and its approach to holding directors accountable for ESG-related risks.^[18]

• Say-on-Climate Proposals.⁶ Glass Lewis has also updated its approach to management and shareholder say-on-climate proposals. Glass Lewis maintains concerns related to say-on-climate votes based on shareholders, rather than the board, approving a company’s business strategy, particularly if sufficient information (such as on operational changes and related costs necessary to effectuate long-term climate goals) is not available to shareholders. As a result, Glass Lewis will generally oppose shareholder proposals requesting that a company adopt a say-on-climate vote.^[19] However, when a company has already adopted a say-on-climate vote, Glass Lewis will evaluate a company’s climate transition plan on a case-by-case basis.^[20]

Other notable Glass Lewis updates include:

• Waiver of Age and Tenure Policies. Glass Lewis will generally recommend a vote against the nominating and/or governance committee chair where the board has waived either its term or age limits policy for two or more consecutive years, unless a company provides a compelling rationale for the board’s decision to waive the policy, such as consummation of a corporate transaction.

• Committee Chairs of a Staggered Board. Glass Lewis has updated its policy when there are recommendations against a designated committee chair who is not up for election due to a staggered board. If the chair is not up for election but Glass Lewis has identified multiple concerns, it will recommend, on a case-by-case basis, voting against other members of the committee who are up for election.

• Board Accountability for Unequal Voting Rights. Glass Lewis will generally recommend voting against the chair of the governance committee of a company that has a multi-class share structure with unequal voting rights^[21] if that company has not yet provided for a reasonable sunset^[22] of the multi-class share structure.

• Governance Concerns for Special Purpose Acquisition Companies (SPACs). Glass Lewis has expanded its guidelines to include companies that have recently combined with SPACs, which it sees as de facto initial public offerings (IPOs). According to Glass Lewis, voting against the board of a company that has combined with a SPAC may be warranted under certain circumstances, such as where the company, before going public, adopted overly restrictive governing provisions, including a multi-class share structure with unequal voting rights, or an anti-takeover provision (such as a poison pill or classified board), and the company does not submit or commit to submitting such provision(s) to a shareholder vote or provide for a reasonable sunset of the provision(s). With respect to director overboarding, when a director’s only executive role is at a SPAC, Glass Lewis will generally apply its higher limit for company directorships (i.e., Glass Lewis will generally recommend that shareholders vote against a director who serves only in an executive role at a SPAC while serving on more than five public company boards).

Glass Lewis has also clarified its existing policies related to, among others:

• Overall Approach to ESG. As noted above, Glass Lewis has expanded its discussion of ESG initiatives by providing details on its considerations for the evaluation of ESG topics. In general, Glass Lewis seeks to evaluate all ESG issues with long-term shareholder value in mind. Glass Lewis encourages companies to consider material environmental and social factors in all aspects of their operations and to provide shareholders with disclosures that allow them to understand how ESG issues and risks are considered and mitigated, respectively.

• Written Consent. Glass Lewis codified its approach to shareholder proposals requesting that a company lower its threshold required to initiate written consent. When evaluating these proposals, Glass Lewis will generally recommend in favor of lowering the ownership threshold when the company has no special meeting provision or allows only shareholders owning more than 15% of its shares to call a special meeting. However, Glass Lewis will generally oppose lowering the ownership threshold necessary to initiate written consent if the company in question has a 15% or lower special meeting threshold.

• Executive Compensation. Glass Lewis’s clarifications with respect to executive compensation issues include:

• • Outlining its current approach to the use of environmental and/or social metrics in the variable incentive programs for named executive officers^[23]

• • Noting that it will consider adjustments to US generally accepted accounting principles financial results in its assessment of the short-term incentive award’s^[24] effectiveness at tying executive pay to performance

• • Explaining that it will consider the impact of the overall size of front-loaded incentive awards on dilution of shareholder wealth in addition to continuing to examine the quantum of awards on an annualized basis for the full vesting period of such awards

• Authorizations or Increases in Authorized Preferred Stock. Glass Lewis will generally recommend voting against preferred stock authorizations or increases unless the company discloses a commitment to not use such shares as an anti-takeover defense or in a shareholder rights plan, or discloses a commitment to submit any shareholder rights plan to a shareholder vote prior to its adoption.

• Federal Forum Provisions. When a board adopts an exclusive federal forum provision (i.e., designates federal courts as the sole jurisdiction for matters arising under the Securities Act of 1933, as amended) without seeking shareholder approval, Glass Lewis will generally recommend voting against the chair of such company’s governance committee at the annual meeting following such adoption. Glass Lewis will also generally recommend that shareholders vote against any bylaw or charter amendment seeking to adopt an exclusive federal forum provision. This approach is consistent with Glass Lewis’s approach if a board adopts an exclusive forum provision designating state courts as exclusive jurisdiction for certain matters or puts the adoption of such an exclusive forum provision to a shareholder vote.

• Governance Following an IPO, a Spin-off, or a Direct Listing. When evaluating governance following a direct listing, Glass Lewis will apply the same approach as in its existing policy on IPOs and spin-offs.

• Director Independence. In assessing director independence, Glass Lewis clarified that it applies a three-year lookback for material financial transactions and a five-year lookback for former employment relationships. Further, the $50,000 materiality threshold related to payments for a director’s other services also applies to a director who is the majority or principal owner of a firm that receives such payment.

• Evaluation of Shareholder Proposals. Glass Lewis clarified that it evaluates all shareholder proposals on a case-by-case basis with a view to promoting long-term shareholder value.

As companies prepare for the 2022 proxy season, they should consult with counsel regarding the impact of these proxy advisory firm voting policies as well as for any additional information on the upcoming proxy season.

[1] The revised policy goes into effect on February 1, 2023.

[2] ISS will make an exception if there was a woman on the company’s board at the preceding year’s annual meeting and the board makes a firm commitment to return to gender diverse status within a year.

[3] ISS will make an exception in this context as well if the board had a racially and/or ethnically diverse member at the company’s preceding annual meeting and the board makes a firm commitment to appoint at least one racially and/or ethnically diverse member within a year.

[4] For 2022, defined as those companies on the current Climate Action 100+ Focus Group list.

[5] For 2022, any “well-defined” GHG emissions reduction targets satisfy this requirement. Targets for Scope 3 emissions will not be required for 2022, but the targets should cover at least a significant portion of the company’s direct emissions. ISS notes that its expectations about what constitutes “minimum steps to mitigate risks related to climate change” will increase over time.

[6] Management say-on-climate proposals are generally advisory votes to approve a company’s climate transition action plan, climate transition-related ambitions, or commitment to reporting on the implementation of a company’s climate transition action plan. Shareholder say-on-climate proposals include proposals that ask 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 express approval or disapproval of such plan.

[7] ISS will consider (i) the company’s established process or framework for addressing racial inequity and discrimination internally; (ii) whether the company has issued a public statement related to its racial justice efforts in recent years or has committed to internal policy review; (iii) whether the company has engaged with impacted communities, stakeholders, and civil rights experts; (iv) the company’s track record in recent years of racial justice measures and external outreach; (v) whether the company has been the subject of recent controversy, litigation, or regulatory actions related to racial inequity or discrimination; and (vi) whether the company’s actions are aligned with market norms on civil rights as well as racial and/or ethnic diversity.

[8] The revised policy goes into effect on February 1, 2023.

[9] ISS notes that stock with “unequal voting rights” includes multi-class stock structures (i.e., classes of common stock that have more votes per share than other shares) as well as less common practices, such as classes of stock that are not entitled to vote on the same ballot items or nominees and loyalty shares (i.e., stock with time-phased voting rights).

[10] Exceptions include newly-public companies (i.e., companies that emerge from bankruptcy, SPAC transactions, spin-offs, direct listings, and those who complete a traditional IPO), with no longer than a seven-year sunset period on the unequal voting rights from the date of going public, limited partnerships and the operating partnership unit structure of real estate investment trusts, and situations where the unequal voting rights are de minimis or where a company provides sufficient protections for minority shareholders (e.g., a regular binding vote on maintaining the capital structure).

[11] If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, ISS will generally recommend a vote for an increase of up to 50% of current authorized shares. If share usage is 50% to 100% of the current authorized shares, ISS will generally recommend a vote for an increase of up to 100% of current authorized shares. If share usage is greater than current authorized shares, ISS will generally recommend a vote for an increase of up to the current share usage.

In the case of a stock split, ISS calculates the allowable increase based on the post-split adjusted authorization, and for the authorization of preferred shares, if no preferred shares are currently issued and outstanding, ISS will generally recommend a vote against the request, unless the company discloses a specific use for the shares.

[12] ISS’s general policy is to vote against or withhold votes from all director nominees (except new nominees, who will be considered on a case-by-case basis) if a company has a poison pill that was not approved by shareholders.

[13] The revised policy goes into effect on February 1, 2023.

[14] The “Value-Adjusted Burn Rate” will be calculated as follows:

Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) / (Weighted average common shares * stock price).

[15] In the updated Glass Lewis guidelines, “gender diverse” includes both female and non-binary directors.

[16] For example, companies headquartered in California are required to have one director from an “underrepresented community” (defined as an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender) on their boards by the end of 2021. Accordingly, for meetings held after December 31, 2021, if a company headquartered in California does not have at least one director from an underrepresented community on its board or does not provide adequate disclosure to make this determination, Glass Lewis will generally recommend voting against the chair of the nominating committee.

[17] The “Rooney Rule” refers to whether the board has adopted a policy that requires women and minorities to be included in the initial pool of candidates for director nominations.

[18] Glass Lewis notes that boards should maintain clear oversight of material ESG risks to company operations, including, but not limited to, matters related to climate change, human capital management, diversity, stakeholder relations, and health, safety, and environment. However, Glass Lewis does not specify a preference for the best structure for a board’s oversight of such issues (i.e., oversight could be left to the entire board, specific directors, a separate committee, or combined with the responsibilities of a key committee), but does note that it will look to a company’s governing documents (including committee charters) and proxy statement to determine whether the company’s directors maintain a meaningful level of oversight of and accountability for the company’s material environmental and social impacts.

[19] In evaluating these proposals, Glass Lewis will make note of and potentially consider (i) the request of the resolution; (ii) the company’s existing climate governance framework, initiatives, and reporting; (iii) the company’s industry and size; and (iv) the company’s exposure to climate-related risks.

[20] Glass Lewis will consider a company’s disclosure of how the board intends to interpret the vote results and its engagement with shareholders on the issue and disclosure of the board’s role in setting company strategy in the context of the say-on-climate vote. Glass Lewis also will evaluate each climate transition plan in the context of the company’s unique operations and risk profile.

[21] Similar to ISS, Glass Lewis considers unequal voting rights in this context to include situations where certain shareholders have more than one vote per share (including multi-class stock voting structures) and where a small group of shareholders (whether family members or otherwise) has different voting rights from other shareholders.

[22] According to Glass Lewis, a reasonable sunset of the multi-class share structure is generally seven or fewer years, which is also consistent with ISS’s guidance. Glass Lewis considers a three-to-five-year sunset reasonable in the case of a classified board or poison pill.

[23] Notably, Glass Lewis does not maintain a policy on the inclusion of such metrics or whether these metrics should be used in a company’s short- or long-term incentive program. When a company opts to use environmental and/or social metrics, Glass Lewis expects thorough disclosure on the metrics selected, the rigor of performance targets, and the determination of corresponding payout opportunities, consistent with its considerations for other types of metrics. In addition, for qualitative metrics, Glass Lewis expects a company to provide shareholders with an in-depth understanding of how such metrics will be used or assessed.

[24] Note that Glass Lewis’s policies also consider the basis for any adjustments to metrics or results for the analysis of long-term incentive awards (i.e., clear disclosure is equally important for long-term incentive awards).