As recently highlighted in the Harvard Law School Forum on Corporate Governance and Financial Regulation, a report (the Report) by Institutional Shareholder Services (ISS) found that majority voting practices and annual board elections, along with increases in board diversity, are the new norm.
The Report examined the public filings of Standard & Poor’s U.S. “Super 1,500” companies (S&P 1500) comprised of the S&P 500, MidCap 400 and SmallCap 600 indices from the period of July 1, 2014 through June 30, 2015.
Majority Voting and Annual Elections
Majority voting is now the clear market standard amongst S&P 500 companies, with over 88 per cent of companies in the index having adopted this practice. While larger companies had initially led the way in adopting these “accountability enhancements”, the Report notes that SmallCap 600 and MidCap 400 companies are now adopting majority voting standards at a faster pace than their S&P counterparts had in 2015.
Annual elections have also increased in prevalence, with over 60 per cent of S&P 1500 companies holding annual elections. The largest jump occurred last year with a rise from 60 to 64 per cent. Over 80% of S&P 500 companies now hold annual elections (and only 84 boards continue to hold staggered elections).
As discussed in one of our earlier posts, diversity has been a top priority for boards. Advocates for board diversity contend that different backgrounds and perspectives will enhance a board’s effectiveness and will ultimately lead to an increase in diversity throughout the corporate hierarchy.
ISS’ Report indicates that there has been a market-wide increase in board diversity over the past five years. Ninety-eight per cent of S&P 500 boards have at least one female member while 79 per cent have at least one minority board member. While the Report notes that companies with larger market caps have higher levels of gender and ethnic diversity, 90 per cent of MidCap boards and 78 per cent of SmallCap boards have at least one female or minority director, and the numbers suggest that these numbers will continue on an upward trend.
Board accountability and composition continue to inhabit the public corporate governance dialogue. Companies would be prudent to turn their attention to, if they have not already done so, incorporating what ISS calls “the new normal”.
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The author would like to thank Shreya Tekriwal, summer student, for her assistance in preparing this legal update.