The 2021 proxy season is just around the corner. This quick reference guide, which is intended to supplement Shearman & Sterling's 18th Annual Corporate Governance & Compensation Survey, summarizes themes from the 2020 proxy season and developing trends to consider for 2021. It also identifies possible future changes in disclosure rules that U.S. public companies should consider for the upcoming proxy season.


Increased focus on enterprise-wide human capital management, and the perspective that workforce considerations can be material to shareholders, have also influenced a separate but related change in corporate governance: disclosures regarding policies, practices and initiatives related human capital management.

Fueling the change will be the adoption by the SEC of new human capital management disclosure rules, which became effective November 9, 2020. These principle-based rules are a response to the perspective that human capital is a critical source of value for most companies, which demands that companies speak to investors about it. The new rules require, to the extent material, a description of the issuer's human capital resources, including any human capital measures or objectives that management focuses on in managing the business (such as measures that address attraction, development, and retention of personnel).

Although the new SEC disclosure rules are required only in the Form 10-K and registration statements, we continue to expect companies to include human capital disclosures in the proxy statement, as the proxy statement has become an increasingly important vehicle for a company to present an overview of its approach to key ESG issues as part of its stakeholder engagement efforts.


The impact of COVID-19 on the global economy has forced many companies to reevaluate their incentive compensation programs. Although mid-year changes to performance metrics are typically frowned upon by institutional investors and proxy advisory firms, companies may find a more understanding audience this year, provided they adequately "tell the story" behind the compensation changes and the compensation-related changes are due to COVID-19 considerations.

In discussing any changes related to COVID-19, the CD&A should describe the challenges faced by the business, how changes to the compensation program are tied to those challenges, how the changes benefit investors and how the payouts compare with what would have been paid under the original program. Include any peer group analysis that the Board or compensation committee considered.

Finally, to the extent 2021 program design is impacted by COVID-19 and perhaps differs from 2020 plan design, this should also be described and may serve to mitigate concerns over the 2020 changes. ISS has also issued FAQs on how it will examine COVID-19-related decisions as part of its pay-for-performance analysis.


We anticipate that the board evaluation process will continue to receive focus in the 2021 proxy season. The board evaluation process has garnered increased attention from institutional investors, as it is increasingly becoming integrated into board refreshment discussions. Institutional investors are looking at the details of how a board evaluates its performance beyond the practice of self- assessment questionnaires and surveys. Proxy advisory firms have also shown interest in the board evaluation process. According to its 2020 ESG Governance Quality Scorecard, ISS expects boards, committees and individual directors to regularly assess their effectiveness and contribution. The evaluation process should include individual director assessments and involve a third party at least every three years. Glass Lewis also has an expectation of routine director evaluations, which include third-party reviews. Accordingly, many companies are turning to an outside party to engage in a process of director interviews, the results of which are shared with the Board. As you evaluate whether the Board self-assessment process should be refreshed this year, keep in mind what will be said in the 2021 proxy statement and, if you embark on a third party interview process, how that process will run to balance transparency and confidentiality.


We anticipate there will be an uptick in shareholder engagement and proposals in the following areas in the 2021 proxy season: diversity, social justice and human capital management. In responding to shareholder proposals, companies should always consider whether they can make a credible argument for exclusion, but, more so than in the past, companies should consider the message that could be drawn from a no-action letter that seeks to exclude a shareholder proposal. No-action letters seeking to exclude shareholder proposals are premised on nuanced understanding of, and appreciation for, the "SEC precedent" that has developed around concepts like "significant policy issue" and "substantially implemented."

A public letter from a company that asserts that a particular social policy initiative raised by a shareholder proposal is not a policy issue for the company or has been fully addressed by the company, could be easily misconstrued or, worse, used to paint the board or management as out of touch. Companies should seriously consider meaningful engagement with proponents before seeking the SEC's concurrence with exclusion of a proposal from the proxy statement. If a company decides to exclude a shareholder proposal, it should keep in mind that the audience for the no-action letter is broader than it ever has been.

Companies should also be mindful of changes coming in the 2022 proxy season to the shareholder proposal rules. In September 2020, the SEC adopted amendments to certain eligibility requirements for shareholder proposals that include raising the ownership threshold for submission eligibility and the resubmission threshold with respect to a proposal if it deals with substantively the same subject matter as another proposal submitted in the previous five years. These amendments are the first substantive changes to the shareholder proposal rules since 1998. Increased emphasis on engagement puts more importance on identifying directors with that skillset. From a disclosure perspective, we note that companies are increasingly providing more details about shareholder engagement efforts in their proxy statement summaries.


Investors, legislators and advocates have become increasingly focused on the diversity of corporate boards. For example, California and Washington have implemented diversity mandates requiring that at least a certain number of directors in a public company board identify as women, and Illinois, Maryland and New York have laws that impose board diversity reporting requirements.

On December 1, 2020, Nasdaq filed with the SEC a proposal to adopt listing rules related to board diversity. The proposed diverse board representation rule would require each Nasdaq-listed company to have (subject to certain exceptions), or explain why it does not have, at least two "diverse" directors, including (1) at least one director who self-identifies as "female," and (2) at least one director who self-identifies as an "Underrepresented Minority" or "LGBTQ+." Nasdaq has published a summary and FAQs to help companies understand the proposed board diversity listing rules and has indicated that further resources and assistance will be made available.

Blackrock, Inc. has said it would expect to see at least two women directors on every board, and ISS has proposed a voting policy change for the 2022 proxy season to recommend a vote against or withheld from the nominating committee chair (or other directors in a case-by-case basis) where the board has no apparent racially or ethnically diverse members. For 2021, ISS intends only to highlight this gap.

We also expect that diversity beyond the boardroom will become of increasing importance to institutional investors and social policy advocates. We heard time and again, as the protests for social justice increased in 2020, that diversity in the executive ranks is as important and that efforts to build the pipeline should start in the more junior ranks. Consider disclosures about diversity metrics for the whole company and company-wide efforts that are being taken to address diversity.


Many companies successfully navigated the transition from in-person to virtual annual shareholder meetings this year due to the COVID-19 pandemic. This largescale transition produced lessons learned and best practices to consider. Given the uncertainty related to the duration of the COVID-19-related social distancing protocols, many companies are expecting and planning to again hold annual meetings virtually again in 2021.

One theme to emerge is process transparency for shareholders. Be sure to provide thorough, thoughtful and jargon-free instructions in proxy materials describing what a shareholder needs to do to attend, vote and ask questions. Consider providing shareholder login information well in advance and providing a help-line number or online chat feature to guide shareholders on the day of the meeting and manage technical issues.

Not everyone was pleased with the 2020 virtual annual meeting season. Many complained that the virtual format contributed to shareholder disenfranchisement. The complaints centered on the inability of shareholders to engage directly with the board and management during the meeting, as most companies provided shareholders with the ability to submit questions by a message platform and not by voice. Companies are obviously concerned about allowing shareholders to ask questions in an open forum format, but companies can make efforts to improve engagement by adding a live video component to the meeting so that company shareholders can see management and the board, making it easier to submit questions in advance and publicizing all questions received and utilizing the video feature so that company shareholders can see management.

Companies should begin to work with their provider of their virtual meeting annual platform early as they create the structure for the annual meetings to facilitate making the virtual meeting features work seamlessly. Additionally, as we expect the use of the virtual annual meeting platform in 2021 to rival 2020, booking your meeting date early, with the limited number of experienced providers, is highly recommended.

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