Effective as of February 1, 2020 Institutional Shareholder Services (ISS) will increase its focus on gender diversity within corporate boards of directors with its updated policy on diversity in corporate board composition. This policy was announced in its “Proxy Voting Guidelines Updates for 2020” published on November 11, 2019. After publishing its original board composition diversity policy, which allowed for a one-year transition period, ISS now increases the pressure on public companies to make a commitment to improving gender diversity in corporate leadership.
The policy, which became effective at the start of this month, encourages certain public companies to improve gender diversity by generally recommending a vote against the chair of the company’s nominating committee, or other directors on a case-by-case basis, if the company’s board does not include at least one woman. However, ISS will consider “mitigating factors” such as (i) a statement in the company’s proxy statement that firmly commits the company to appoint at least one woman to its board within one year (only a mitigating factor until February 1, 2021), (ii) the presence of a woman on the company’s board at the prior annual meeting and a firm commitment to appoint at least one woman to its board within the next year, and (iii) other applicable factors.
In addition, with an increase in proposed federal and state legislation in recent years, gender diversity continues to be an area of increased focus in both the U.S. and international marketplaces. For example, in November 2019 the U.S. House of Representatives passed the “Improving Corporate Governance Through Diversity Act of 2019” (H.R. 5084), which if passed by the Senate and signed into law by the President, would require certain public companies to disclose diversity demographic data for their board of directors and named executive officers. In recent years at the state level, California and Illinois state legislatures have passed legislation demanding an increased commitment toward improving gender and, in the case of Illinois, racial and ethnic diversity in corporate leadership (California S.B. 826; Illinois Public Act 101-0589).
Through this updated policy, which comes after a one-year transition period and sets a time limit for when a stated “firm commitment” qualifies as a mitigating factor, ISS is saying that the time is now for public companies to improve their commitment to gender diversity in corporate leadership. Public companies should carefully review their current policies to ensure proper commitment to diversity in its corporate leadership and strongly consider revisions and adjustments to such policies.