The Advisors' Blog

– Broc Romanek, CompensationStandards.com

ISS would like to respond to the inaccuracies in the recent blog by Mike Kesner at Deloitte Consulting regarding ISS’ Governance Risk indicators (GRId) as follows:

To begin with, we would like to emphasize that every issuer has access to its own scores and ratings completely free of charge. This includes the company’s answers to every GRId question and an indication of their impact – positive, neutral, or negative. Each question’s impact on the scores and rating is described in the GRId 2.0 technical document (posted at www.issgovernance.com/grid-info). Together, the technical document and the online issuer data verification site provide a clear indication of the particular practices a company would want to target in order to improve its corporate governance profile (and thus its GRId score).

Mr. Kesner’s posting also mischaracterizes or misunderstands the GRId 2.0 scoring methodology. The goal of GRId is to flag governance-related concerns, and the new scoring system is therefore designed to ensure that important single factors – such as apparent pay-for-performance disconnects, excise-tax gross ups or modified single triggers – or important particular combinations of factors, such as equity granting practices that mitigate (or fail to mitigate) risk – are appropriately reflected in the overall level of concern.

As a result the scoring model is not purely linear – while category scores range from 0 to 100, with 75 being neutral, there are many more than 75 negative points and 25 positive points available within each category. We have paid a great deal of attention to the interaction of a company’s practices in each subsection and how practices either increase or mitigate levels of concern. In some cases (for instance, in the termination subsection), good practices may mitigate concerns seen elsewhere. In others (for instance, pay-for-performance), the absence of a concern does not mitigate concerns identified elsewhere. These interactions – both question-level concerns and the level of concern and/or mitigation available in each subsection – are detailed in the GRId 2.0 technical document.

Indeed, the scenarios described in the original posting are working as designed: it is appropriate that companies with apparent pay-for-performance misalignment raise a concern, even in the presence of good practices elsewhere. These good practices can mitigate but not eliminate the concerns raised under pay-for-performance. Conversely, companies that do not exhibit pay-for-performance misalignment may still receive low scores if there are other concerning practices such as modified single triggers, excise-tax gross ups, incomplete disclosure of performance metrics, etc.

Finally, issuers should know that they can view their scores and underlying data and submit updates at any time before their definitive proxy is filed through the free GRId data verification site. ISS will review any publicly disclosed changes to company governance practices and issue updated GRId scores and ratings, if appropriate, within five business days.

Here is a page with our technical document, issuer FAQs, and more information on the GRId data verification process.