The Advisors' Blog

– Bimal Patel, Head of ISS’ Policy Steering Committee

Investors indicate little tolerance for unilateral boardroom adoption of fee-shifting, dissident director compensation, and other bylaw amendments that diminish shareholder rights, according to results of ISS’ recently released annual global policy survey. ISS received more than 370 total responses to this year’s survey, of which 105 were institutional investors, nearly one-third of whom manage assets in excess of $100 billion. Roughly 70 percent of these respondents were based in the U.S., with the remainder divided between the U.K., Continental Europe, Canada, and the Asia-Pacific region.

ISS also received responses from 255 members of the corporate issuer community (including corporations, consultants/advisers to issuers, and other organizations representing issuers), nearly 90 percent of whom were located in the U.S. The survey, conducted between July 17 and Sept. 5, covered a range of issues, including: pay for performance; board accountability; boardroom diversity; equity plan evaluation; risk oversight and audit; cross-market listings; and environmental and social performance goals.

“The aim of our yearly survey is to ensure that ISS’ policies reflect local best practices, create dialogue around important issues, and serve the proxy voting needs of our institutional clients worldwide,” said Dr. Martha Carter, ISS’ Global Head of Research & Policy. “We’re extremely pleased at the breadth, depth, and diversity of responses in this the 10th year that ISS has solicited the opinion of governance market constituents in formulating its benchmark voting policies.”

Key findings from this year’s survey include:

– Investors indicate little tolerance for unilateral boardroom adoption of bylaw amendments that diminish shareholder rights. With regard to evaluating board accountability where a board adopts without shareholder approval a material bylaw amendment that diminishes shareholders’ rights, 72 percent of investors indicate the board should never adopt bylaw/charter amendments that negatively impact investors’ rights without shareholder approval, while 20 percent choose “it depends.” Nearly one-half (44 percent) of issuer respondents, meanwhile, indicate the board should be free to unilaterally adopt any bylaw/charter amendment(s) subject to applicable law.

– ISS plans to implement a “balanced scorecard” approach to evaluating plan proposals for U.S. companies that gives weight to various factors under three broad categories related to the proposal: (1) cost, (2) plan features, and (3) company grant practices. With respect to how the plan cost category should be weighed in a scorecard, 70 percent of investors indicate weights ranging from 30 to 50 percent, with a 40 percent weighting cited most often. Sixty-two percent of investors suggest weightings from 25 to 35 percent for plan features; and 64 percent indicate weights ranging from 20 to 35 percent for grant practices. Weightings suggested by issuers were also quite dispersed, but generally skewed somewhat higher with respect to cost, and somewhat lower for plan features and grant practices compared to investors.

– Although a quarter of investor respondents do not focus on pay magnitude, most appear to be concerned about this issue in addition to how CEO pay is determined. When asked whether there is a threshold at which the magnitude of CEO pay warrants concern even if the company’s performance is positive (e.g., outperforming peer group), 60 percent of investor respondents answer in the affirmative. Notably, 50 percent of issuer respondents selected the response “No, my organization does not consider the magnitude of CEO compensation when evaluating pay practices; other aspects (such as company performance and pay structure) are considered more important.”

– For European markets where shareholders are offered say-on-pay proposals or other executive compensation related items, 83 percent of investors indicate that a European pay for performance quantitative methodology, including the use of peer group comparisons, would be useful as a factor in such evaluations. Of investor respondents answering in the affirmative on the use of peer groups as a factor in evaluating a company’s compensation practices, 87 percent indicate that they would like to see a comparison to cross-market industry sector peer groups.

– A majority of all respondents (60 percent of investors and 75 percent of issuers) indicate that they consider overall diversity (including but not limited to gender) on the board when evaluating boards. Notably, 17 percent of investor respondents and 7 percent of issuer respondents indicate that they do not consider gender diversity at all when evaluating boards.

– Investors focus on boardroom oversight subsequent to incidents when evaluating the board’s role in risk oversight. Over the past few years, shareholders’ investments have been impacted by a number of well publicized failures of boardroom risk oversight. When evaluating the board’s risk oversight role, a majority of shareholders indicate that the role of the company’s relevant risk oversight committee(s), the board’s risk oversight policies and procedures, boardroom oversight actions prior to incident(s), boardroom oversight actions subsequent to incident(s), and changes in senior management are all either “very” or “somewhat” important to their voting decision on directors. Boardroom oversight action subsequent to an incident garners the highest percentage (85 percent) as a “very important” factor whereas only 46 percent indicate that changes in senior management are “very important.”

– Investors and issuers differ on the appropriateness of quantitative E&S performance goals. When asked when it is appropriate for a company to utilize quantitative E&S performance goals, a majority of both investor and issuer respondents, 57 percent and 75 percent, respectively, indicate a preference for case-by-case analysis (“it depends”). Of those investor respondents who choose “it depends,” a significant majority indicate that it considers if a company’s performance on a given environmental or social issue shows a negative trend or if the company has experienced significant controversies (89 percent); if the company has operations with significant exposure to potential regulatory or financial impacts (92 percent); and if the practice has become an industry norm (90 percent). A slight majority (51 percent) indicate that it depends only if/when the quantitative goals are required by government regulations. Notably, 39 percent of investor respondents indicate that it is appropriate for a company to always utilize quantitative E&S performance goals compared with only 7 percent of issuer respondents.

ISS’ survey marks the commencement of its annual policy formulation process, which typically culminates in November with the release of final policies applicable to global shareholder meetings occurring on or after Feb. 1 of the following year. In October, ISS is expected to release draft policies that will be subject to a public consultation period before they are finalized.