ISS’s Proxy Policies Target Closed-End Funds, Diversity, Director Oversight

Proxy advisory firm ISS released its new benchmark policies, effective for shareholder meetings on or after February 1, 2021, with several policy changes targeted at public company board diversity, director accountability for governance failures, and closed-end funds. Some of the highlights:

• Closed-end Funds: ISS will make a general recommendation to vote against or withhold from nominating/governance committee members (or other directors on a case-by-case basis) of closed-end fund boards that have not provided a compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote. As ISS explained, SEC recent guidance and withdrawal of a prior SEC staff letter now permit closed-end funds to defend themselves against investors using measures under state corporate law. ISS noted that in recent years, some activist investors have targeted closed-end funds to effect fund liquidations or conversions of closed-end funds into open-end funds. With these state law Control Share Acquisition Statutes, closed-end fund boards will have a protective measure under state law requiring an investor who has acquired a large percentage of a fund’s outstanding shares (as defined by state law) to receive approval from the other fund shareholders in order to be able to vote all their shares. “As the staff of the Division of Investment Management may no longer recommend enforcement action to the SEC against a CEF under section 18(i) of the 1940 Act for opting in to the CSAA, CEF shareholders are denied important voting rights and are subject to management entrenchment,” ISS wrote.
• Diversity, other categories: ISS also said it would withhold votes or vote against directors based on board diversity measures and on the basis of material failures of governance, steward, risk oversight, or “Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.”