Recently the two prominent global proxy advisors, ISS and Glass Lewis, have issued 2022 proxy voting policies for Taiwan market. The updated ISS policy will apply to shareholder meetings held on or after February 1, 2022, and the updated Glass Lewis policy will apply to shareholder meetings held on and after January 1, 2022.
This article will review the important updates of the two companies' latest policies. Overall, the updates of ISS reflect international investors' concern for climate change issues, while the ones of Glass Lewis focus more on the efficacy of the board and raise some requirements for functional committees.
Climate change: Say-on Climate has become an emerging issue
Say-on Climate was put forward by TCI Fund Management, an UK-based shareholder activism hedge fund, in 2020. Say on Climate advocates conducting voting on corporate climate transition action plans at shareholder meetings. In 2020, a proposal was issued at a Spanish airport management company AENA's shareholder meeting and finally won widespread support. 98% of the shareholders supported putting climate transition action plans to an advisory vote on an annual basis, and 96% of the shareholders supported amending corporate bylaws to achieve the objectives mentioned above.
In 2021, tens of multinational corporations, including Royal Dutch Shell, Unilever, and Nestle, put climate transition action plans to vote at shareholder meetings, gaining support from 80% of their shareholders. As a matter of fact, currently, voting for climate transition action plan has mainly taken place in the UK (including Canada and Australia, etc.), the US and few European markets (France, Spain, and Switzerland). Its impact on Taiwan or other Asian markets is still limited.
ISS policy: incorporating Say-on Climate framework into policy
As climate-related issues in proposals at board meetings and shareholder meetings have been increasingly popular, ISS has decided to include the evaluation framework of these proposals in global voting policy as of 2022. Specifically, when evaluating the proposed climate transition action plans from the board, in addition to completeness and rigor, ISS will consider following factors:
For shareholder proposals, ISS will evaluate the following factors:
Glass Lewis policy: Cautious about supporting Say-on Climate vote proposed by shareholders
Glass Lewis also put forward its perspective on global ESG voting guidelines. The advisor generally support the proposal enhancing climate-related data disclosure. However, it shows concerns for the Say-on Climate vote conducted at shareholder meetings. Glass Lewis regards climate-related action plans as an indistinguishable part of a company's long-term business strategy, and setting a long-term strategy is the board's responsibility. As a result, the Say on Climate vote may lead to the board's abdication of their responsibilities. Besides, whether there is sufficient data for shareholders to make informative decisions should also be taken into consideration.
Given the reasons mentioned above, Glass Lewis generally recommend against shareholder proposals on Say on Climate. If the board raises the climate transition proposals, Glass Lewis will pay attention to the board's role in setting policies and how the company interprets the vote results. Moreover, Glass Lewis believes companies should establish communication prior to and after the vote.
If the disclosure of the governance of the Say on Climate vote is inadequate, Glass Lewis may recommend that shareholders abstain or vote against the board. Regarding Say on Climate, Glass Lewis will evaluate if the proposal is aligned with the recommendations of the TCFD and other factors and then conduct a case evaluation regarding the proposal quality.
The board of directors: appeal to board gender diversity affects the board election
Board gender diversity has gradually received more attention in recent years. According to Glass Lewis' evaluation of 298 companies in Taiwan in 2020, 39% of the companies (115 out of 298) didn't have any female board members on their corporate board of directors; 35% (104 out of 298) of the companies had only one, and 26% of the companies had two or more.
ISS policy: diversity hasn't been incorporated in Taiwan's vote policy
In Taiwan's 2022 vote policy, ISS didn't update its criteria on board election, nor did it reveal a requirement for board gender diversity in Taiwan. However, in markets in the USA and Japan, ISS has gradually incorporated board gender diversity into vote policy. In the future, whether ISS will expand this requirement to other Asian markets deserves more attention.
Glass Lewis policy: implementation of board gender diversity needs to start
As Glass Lewis updated their vote policy in 2020, they recommended that at least one board member of different sexuality be on the board. This recommendation will be included in the vote policy as of 2021. In Taiwan, nearly 40% of the companies fall short of this requirement, and it is predicted that this must have a negative impact on the board election in these companies. Another limitation on the term of independent board members went into effect in 2021. If an independent board member serves more than four terms (12 years) in office, Glass Lewis will deem this member loses independence.
In addition, Glass Lewis has raised its requirements of functional committees. Focusing on the audit committee, Glass Lewis will evaluate whether the audit members are independent in reality and whether the audit committee members (or the legal persons they represent) hold more than 20% of the equity. As for the remuneration committee, Glass Lewis will evaluate whether the remuneration committee members are independent and whether they are also members of the corporate management or employees. If a company has not set up an audit committee or remuneration committee, Glass Lewis may recommend that shareholders vote against the chair of the board.
Outlook for 2022
From the observation of Results of the Global Benchmark Policy Survey issued by ISS in October 2021, we can find that international investors heavily emphasize the themes closely related to ESG, including the relation between management's remuneration and ESG performances, racial equity audits, and climate change accountability. Therefore, from a global perspective, ESG will still be the focus of shareholder meetings in 2022.
Given the fact that Taiwan is classified as an emerging market, international investors' expectations for ESG in Taiwanese companies are still low – most of them still focus on two primary corporate governance indicators: board gender diversity (the ratio of female board members) and the independence of directors (the ratio of independent board members). In the future, with the internationalization of Taiwan market, international investors' requirements will be higher. To meet these increasing requirements, it is predicted that global proxy advisors will keep requiring companies in Taiwan to improve the performances on these indicators.
