ISS updates its proxy voting guidelines for 2023
The changes follow its recent benchmark policy consultation across all its policies worldwide. In that consultation, the only change on which ISS consulted (and which it has decided to implement – see below) was a small, but significant, amendment to its voting recommendation policy on annual increases in executive remuneration.
For more information on that consultation, see our previous Corporate Law Update.
The key changes to ISS’ guidelines for the UK and Ireland are set out below.
The guidelines have been updated to reflect recent changes made by the Financial Conduct Authority (FCA) to its Listing Rules to promote greater gender and ethnic diversity among listed company boards. (For more information on those changes, see our previous Corporate Law Update).
As a result, for listed companies (both premium and standard), ISS will recommend voting against the chair of the nomination committee if the company has not met the following FCA Listing Rules targets:
- at least 40% of the board comprises women;
- a woman occupies at least one of the four senior positions (Chair, CEO, CFO and Senior Independent Director); and
- at least one member of the board is from an ethnic minority background.
For AIM companies with a market capitalisation above £500m, ISS will recommend a vote against if the company has not appointed at least one woman to the board or if, by 2024, it has not appointed at least one board member from an ethnic minority background.
The policy also sets out mitigating factors that may persuade ISS not to recommend a vote against. All changes apply to financial years beginning on or after 1 April 2022.
Emissions reduction targets
ISS will generally recommend voting against the chair of the board if it feels a company is not taking the minimum steps needed to understand, assess and mitigate risks arising from climate change.
This includes setting “appropriate greenhouse gas (GHG) emissions reduction targets”. For 2023, this will change from “any well-defined” targets to “medium-term GHG reduction targets or Net-Zero-by-2050 GHG reduction targets”.
In addition, ISS will now expect targets to cover “the vast majority” of a company’s operations, rather than merely a “significant portion” (as was the case in 2022).
As during 2022, ISS does not require targets to cover Scope 3 emissions.
Audit committee meetings
ISS has introduced a new policy requiring a minimum number of audit committee meetings per year. It will “note” or “draw attention” where a company fails to meet the minimum target, although the guidelines do not contemplate a voting recommendation.
For FTSE 350 companies, ISS will note where there have been four or fewer meetings in the relevant period. For FTSE All Share companies (other than investment companies), it will draw attention where there have been three or fewer meetings.
ISS now expects annual executive salary increases to be “lower proportionally” than increases across the broader workforce, rather than merely “in line with” broader workforce changes. This reflects the proposed change in ISS’ benchmark policy consultation.
Disapplying pre-emption rights
The proxy guidelines now reflect the recent changes to the Pre-Emption Group’s Statement of Principles on disapplying statutory pre-emption rights. (For more information on those changes, see our previous Corporate Law Update).
In particular, ISS will generally recommend voting against a resolution to authorise the issuance of equity securities if the routine authority to disapply pre-emption rights exceeds 20% of the company’s issued share capital or if any disapplication above 10% is not limited to use for an acquisition or a specified capital investment.
If a company receives authority to disapply pre-emption rights and then is “subsequently viewed as abusing that authority”, ISS is likely to issue a negative recommendation at the next AGM.
The guidelines continue to state that any share allotment and disapplication authorities should expire at the next AGM, but they also now clarify that the authorities should not last longer than 15 months.
ISS has also updated its policy for smaller companies to reflect a limit of 20% of issued share capital for disapplications of pre-emption rights.