Proxy Adviser ISS Drops Diversity Factors from U.S. Board Recommendations

Institutional Shareholder Services announced it will indefinitely halt consideration of gender, racial and ethnic diversity factors in American director vote recommendations under its Benchmark and Specialty policies. The reversal reflects mounting political pressure on DEI that contrasts with diversity expectations embedded in India's governance norms.

Institutional Shareholder Services (ISS), a leading proxy advisory firm, announced it will no longer factor gender, racial or ethnic diversity into voting recommendations for U.S. corporate board director elections and re-elections under its proprietary Benchmark and Specialty policies. The shift follows growing political scrutiny of Diversity, Equity, and Inclusion (DEI) initiatives, intensified by a Supreme Court ruling striking down Harvard's race-based affirmative action in college admissions, which heightened legal and political challenges to corporate DEI programs across the United States.

The change affects U.S. public companies and institutional investors relying on ISS recommendations for board votes. The pushback gained momentum after Donald Trump's election and an executive order eliminating DEI-based preferences in federal contracting, requiring contractors to affirm they will not engage in illegal discrimination including illegal DEI. ISS itself faced pressure when 21 state Attorneys General warned the firm in 2023 that its support for DEI and climate proposals could conflict with its duty to prioritise clients' financial interests.

Companies and institutional investors should reassess how the policy shift affects board-composition voting outcomes, as ISS anticipates a range of perspectives on whether and how firms adapt DEI policies to evolving market and governmental activity. Issuers should monitor whether other proxy advisers and asset managers follow ISS in dropping diversity factors. Multinationals operating across jurisdictions with differing diversity expectations should track the divergence between the U.S. retreat and governance norms in other markets when setting global board policies.

Key figure — Political pressure: 21 state Attorneys General warned ISS in 2023