ISS gives companies deadline to get women on boards

ISS has put US companies on notice that they have a limited time to adopt some level of board diversity or potentially face consequences in shareholder elections.

Among updates to its proxy voting policies announced last month, ISS unveiled a change with respect to US issuers that have no female directors serving on their boards – with a year’s grace period before it goes into effect. The new policy will be effective for meetings taking place on or after February 1, 2020 and will apply to companies in either the Russell 3000 or S&P 1500 indices.

Following the year’s grace period, ISS will generally issue recommendations against the election of the nominating committee chair on boards that still lack gender diversity. In addition, the election of other directors who are responsible for the board nomination process may also be affected – for example, at companies with no formal nominating committee.

ISS will, however, consider on a case-by-case basis ‘exceptional circumstances’ explaining the absence of board gender diversity. Mitigating factors will include a firm commitment, as stated in the proxy statement, to appoint at least one female to the board in the near term or the presence of a female on the board at the preceding annual meeting.

In explaining its rationale for the policy change, ISS says investors during the 2017 and 2018 proxy seasons increasingly targeted companies with little or no female representation on their boards, citing a desire for equality, good corporate governance and enhanced long-term company performance.

‘Increased investor engagement on the topic appears to have prompted many boards to add one or more women directors to their ranks over the past two years,’ ISS officials write. ‘When boards have failed to respond to such engagement, a number of large investors have cast votes against directors.’

ISS’ 2018 policy survey finds growing investor preference for boosting levels of boardroom gender diversity. According to the survey results, just 3 percent of investor respondents say they do not consider a lack of board gender diversity to be problematic, and more than 80 percent of investor respondents say a lack of gender diversity on the board is problematic. Forty-five percent of investor respondents say the absence of at least one female director may indicate problems in the board recruitment process.

‘Based on these survey results, most investors and other corporate constituencies consider that the absence of gender diversity may be problematic and should (at a minimum) trigger a deeper examination of a board’s nomination practices and policies,’ ISS officials write. ‘Non-investors overwhelmingly prefer engagement, but also appear to growingly recognize escalation at the ballot box may be an appropriate action by shareholders in some circumstances.’

ISS also points to studies showing that board gender diversity has been positively linked to better company performance. It further notes that diverse boards are increasingly the norm. For example, the US chapter of The 30 Percent Club in June announced that female board representation across its members is now above 30 percent.