Corporate board members up for re-election may face slightly less scrutiny now that proxy advisory firm Institutional Shareholder Services (ISS) has decided to change how it will evaluate director elections due to anti-DEI executive orders recently issued by the Trump White House.
In a statement on the ISS website, the advisory firm said:
“After February 25th, ISS will no longer consider the gender and racial and/or ethnic diversity of a company’s board when making vote recommendations with respect to the election or re-election of directors at U.S. companies under its Benchmark and Specialty policies. Assessments and vote recommendations on directors of U.S. companies will continue to be evaluated under the other considerations outlined in the Benchmark and Specialty voting guidelines including independence, accountability and responsiveness.”
The ISS decision to remove consideration of the gender, racial or ethnic diversity of a company’s board from voting recommendations reverses a measure that some governance professionals considered “best practice” in recent years. Previously, ISS and others have suggested that there is evidence that diverse boards generally produce better corporate governance outcomes. However, since the Trump administration executive orders basically accuse companies that promote diversity initiatives of “discrimination” and potentially threatens action against them, ISS has decided to back away from holding boards accountable for board diversity.
With these constantly evolving developments related to DEI, corporate directors may want to wait and see if other proxy advisory firms (Glass Lewis, Egan Jones) follow ISS in backing away from considering board diversity in director elections. However, the emphasis on encouraging publicly traded companies to increase board diversity may be over. A long list of companies has already ended or modified their diversity programs due to pressure from conservative groups—and now the U.S. President is applying pressure as well. With the move by ISS and the potential government DEI scrutiny, corporations now have the opportunity to revisit this issue to restate their position or make modifications. Some corporate directors might want to:
Re-evaluate whether to stand for re-election. One positive aspect of the ISS decision may allow some corporate directors to feel some relief concerning their prospects for re-election. Going forward, the lack of board diversity likely won’t be used as a reason proxy advisors recommend voting against an individual board director or the entire board. Boards continue to face significant scrutiny, so eliminating DEI as a contributing factor may help some directors’ election bids.
Hold new discussions regarding board composition and board succession. With the constantly evolving political landscape, companies might want to re-evaluate where they stand on board diversity as well as the qualifications they really want in new (and current) board members. Board members may want to debate whether diversity matters within their corporate culture and whether it contributes to their bottom-line growth; whether more diverse members would bring new ideas and innovation to the board’s decision-making; and whether the board can create a system of selecting new board members that is truly merit-based and unbiased. Open and honest discussions on these topics will at least help board members be in greater alignment with each other going forward. For those who are not in alignment with the majority, such discussions might clarify that it may be time for them to serve on a different board.
Reach out to proxy advisors to get full clarification on how they view DEI initiatives. While ISS has indicated its stance on director elections, there may be other issues related to diversity that could use clarification. This is a perfect opportunity to engage with proxy advisors and get ahead of any potential policy changes that they might be thinking about, before they are implemented.
