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2019 ISS Benchmarking Policy Survey – Key Findings

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L&A REPORTS KEY FINDINGS IN ISS 2019 SURVEY

On Sept. 11, 2019, Institutional Shareholder Services Inc. (ISS) announced the results of its 2019 Global Policy Survey based on respondents including investors, public company executives and company advisors. ISS will use these results to inform its policies for shareholder meetings occurring on or after February 1, 2020. ISS expects to release its final policies in mid-November 2019 based on the results.

THE KEY QUESTIONS AFFECTING THE U.S. MARKETS FELL INTO THE FOLLOWING CATEGORIES:

  1. Board composition/accountability, including gender diversity, mitigating factors for zero women on boards and overboarding;
  2. Board/capital structure, including sunsets on multi-class shares and the combined CEO/chair role;
  3. Compensation; and
  4. Climate change risk oversight and disclosure.

The ISS report distinguishes responses from investors versus non-investors. Investors primarily include asset managers, asset owners, and institutional investor advisors. In contrast, non-investors mainly comprise public company executives, public company board members, and public company advisors.

BOARD DIVERSITY

Beginning in 2020, ISS will generally recommend voting against nominating committee chairs (and potentially other directors) at companies with no female directors unless certain mitigating factors apply. Mitigating factors that will be considered before a negative recommendation is made will include (1) a firm commitment, as stated in the company’s proxy statement, to appoint at least one woman to the board in the near term, such as within the next year, (2) the presence of at least one woman on the board at the time of the preceding annual meeting, and (3) other relevant mitigating factors on a case-by-case basis if applicable.

At a minimum, companies with no female directors should consider how best to disclose either a plan to increase gender diversity on the board or their rationale for not having any female directors.

Mitigating Factors for Zero Women on Boards: Respondents were asked whether ISS under its new U.S. Benchmark Voting Policy for 2020 (announced in 2018) should consider other mitigating factors, beyond a firm commitment to appoint a woman in the near-term and having recently had a female on the board, when assessing companies with no female directors.

  • Results: Both investors (61%) and non-investors (55%) indicated that board gender diversity is an essential attribute of effective board governance regardless of the company or its market. Among respondents who do not believe diversity is essential, investors tended to favor a market-by-market approach and non-investors tended to favor an analysis conducted at the company level

OVERBOARDING (GLOBAL)

Under current US policy, ISS may withhold votes from individual directors who sit on more than five public company boards (or are CEOs of public companies who sit on the boards of more than two public companies besides their own, in which case ISS will withhold votes on the outside boards). This year’s survey asks for additional insight into views about director overboarding on a global level, noting that global standards on overboarding vary. Where local best practice codes and recommendations provide upper limits for board mandates beyond which directors would be considered overboarded, ISS policies generally apply these limits already.

Although, this question is aimed at the global level, it is possible that ISS is seeking input in an effort to tighten its US standards (i.e., decrease the threshold on overboarding limits).

  • Results: The survey responses show investors and non-investors appear to hold diverging positions on director overboarding. On a plurality basis, investors (42%) preferred a maximum of four total board seats for non-executive directors while they (45%) preferred a maximum of two board seats (including the “home” board) for CEOs. In comparison, on a plurality basis, about one third of non-investors preferred to leave the determination to the board’s discretion for both non-executive directors and CEOs

ISS notes that the debate over the proper board leadership structure continues, especially in the US where many market participants agree in principle on the need for independent board leadership but disagree as to whether a lead independent director is an acceptable alternative to an independent board chair. ISS’s US policy recommends generally supporting shareholder proposals requesting that the position of board chair be filled by an independent director, after taking into consideration a wide variety of factors.

ISS asked participants to indicate which factors the respondent considers and listed factors for respondents to choose from, such as a weak or poorly defined lead director role, governance practices that weaken or reduce board accountability to shareholders, lack of board refreshment or board diversity, and poor responsiveness to shareholder concerns. Respondents were instructed to check all that applied.

Results:

  • Investors prefer an independent board chair more than non-investors. Investors chose poor responsiveness to shareholder concerns most often whereas non-investors selected the factor relating to a weak or poorly defined lead director role.
  • Investors’ second highest selection was governance practices that weaken or reduce board accountability to shareholders (such as a classified board, plurality vote standard, lack of ability to call special meetings and lack of a proxy access right). For non-investors, poor responsiveness to shareholder concerns was the second highest selection.

Last year, ISS considered changing this methodology for assessing CEO pay and performance by supplementing or replacing existing GAAP-based accounting metrics in the FPA with Economic Value Added (EVA)-based metrics to measure corporate economic performance. However, ISS ultimately decided to table incorporation of EVA into FPA for 2019. Instead, it simply displayed EVA measures in its 2019 reports on a stand-alone basis with no impact on the FPA analysis. 

ISS plans to incorporate EVA metrics into one part of its quantitative Pay-for- Performance models, the Financial Performance Assessment (FPA) screen, for U.S. and Canadian pay-for-performance assessments from 2020.

The survey asks participants which of the following best describes its organization’s viewpoint on this issue, with the options being:

The prior-used GAAP-based metrics should be displayed below the FPA screen in the report as a point of comparison

  • Results: 84 percent of investors and 71 percent of non-investors respectively responded that prior-used GAAP-based metrics should be displayed below the Financial Performance Assessment screen in the ISS report as a point of comparison.

Display of the prior-used GAAP-based metrics is unnecessary

  • Results: 13 percent of investors and 9 percent of non-investors responded that display of the prior-used GAAP-based metrics was unnecessary

Other (please specify)

  • Results: A small percentage of respondents provided comments and were varied in responses. Many indicated concerns with the use of EVA metrics in the FPA and others suggesting the use of other metrics as part of the FPA.

A majority (60 percent) of investor respondents answered that all companies should be assessing and disclosing climate-related risks and taking actions to mitigate them where possible. 35 percent of investor respondents answered “Maybe – each company’s appropriate level of disclosure and action will depend on a variety of factors including its own business model, its industry sector, where and how it operates, and other company-specific factors and board members”. Only 5 percent of investors indicated that the possible risks related to climate change are often too uncertain to incorporate into a company-specific risk assessment model. The most popular actions that investors considered appropriate for shareholders to take at companies assessed to not be effectively reporting on or addressing their climate-related risks were engagement with the company (96 responses), and considering supporting shareholder proposals on the topic (94 responses).

As part of our effort to keep you informed of key issues affecting our industry, staying on top of the latest updates from ISS is critical for us here at L&A. As always, don’t hesitate to reach out to us if you have any questions regarding any of these topics and how they may affect your organization.