Environmental and Social Metrics Added to ISS QualityScore

Along with its four pillars for governance which score companies on a one to ten scale, ISS has launched Environmental & Social (E&S) QualityScore to measure corporate disclosure on environmental and social issues.  Similar to the Governance QualityScore, the measures are relative based on peer companies within a specific industry group.

An initial set of 1,500 companies is being covered globally, including Energy, Materials, Capital Goods, Transportation, Automobiles & Components, and Consumer Durables & Apparel.   It is expected that by Q2 2018, an additional 3,500 companies across 18 industries will be included.  The scores will be part of the companies’ proxy voting reports, but like all of the QualityScores, will not impact the vote recommendations. Continue Reading

New Tax Act Has Meaningful Implications for Broad-Based Employee Benefit Plans

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA), which generally went into effect for tax years beginning on or after January 1, 2018.  The TCJA provisions affecting executive compensation (for example, the elimination of the performance-based compensation exception to Section 162(m) of the Internal Revenue Code) have received signification attention, but the TCJA also has meaningful implications for broad-based employee benefit plans and programs.

A memorandum that provides an overview of the key TCJA provisions impacting employee benefits is available here. Continue Reading

What You Should Know About BlackRock’s Updated Voting Guidelines

BlackRock updated its proxy voting guidelines, and some of the key highlights since its last update include:

Two women on boards.  In its discussion of the importance of boards comprising a diverse selection of individuals bringing to bear a range of experiences and competing views and opinions, BlackRock emphasized that in addition to other elements of diversity, the investor would “normally expect to see at least two women directors on every board.”

Overboarding limits.  BlackRock’s views that outside directors should only sit on four boards have long been more restrictive than the proxy advisors.  Now BlackRock also indicates that CEOs should just serve on one other board besides their own (for a total of two boards). Continue Reading

Administering Compensation Programs in the Wake of the Tax Cuts and Jobs Act – New Section 162(m)

The Tax Cuts and Jobs Act (TCJA) significantly changes Section 162(m) of the Internal Revenue Code, effective for tax years beginning after December 31, 2017. While supplemental regulatory guidance is likely, the impact on companies’ compensation programs and planning processes is immediate.

For an in-depth discussion of the significant changes, ways companies can address them and areas where the new rules present uncertainty, see our memorandum. Continue Reading

Corporate Sustainability Disclosure is Not the Primary Driver of MSCI ESG Ratings

The topic of corporate ESG disclosure is among the ESG trends to watch in 2018, according to a recent report from MSCI.

Companies are increasingly providing voluntary information about their sustainability practices, and since MSCI ESG Research is among one of largest groups that review and rate corporate ESG disclosures and practices, grading companies from AAA to CCC, MSCI is “one of the world’s largest consumers” of corporate sustainability disclosure.

As the report explains, companies are providing more information given that investors are overwhelmingly supportive of efforts by various standard setters to encourage disclosure, with an alphabet soup of requests and choices that companies can follow, including CDP, GRI, SASB, IIRC and FSB.  Continue Reading

Another Twist in the Challenges to Director Compensation

In a series of cases challenging the magnitude of equity award compensation that boards have provided for their non-employee directors, the Delaware Chancery Court suggested that if the awards were made within a “meaningful limit” approved by shareholders the court would review these challenges under the standard business judgement rule rather than requiring an entire fairness review.

Many companies took heed, seeking shareholder approval for amendments adding a director award limit to their stock incentive plans. However, the Delaware Supreme Court recently put into question whether a meaningful limit would actually help to avoid an entire fairness review.

While it is hard to believe that a reasonable limit approved by shareholders would be of no value in rebutting a challenge to an otherwise defensible equity grant, boards should focus on the entirety of their approach to determining non-employee director compensation. Continue Reading

Chairman Clayton’s Roadmap to Finishing the Dodd-Frank Mandates, Including the Executive Compensation Disclosures

In a recent speech, Chairman Clayton discussed completing the rulemaking mandates under Dodd-Frank, in light of his mission to allocate the SEC’s resources to both fulfilling statutory requirements and meeting day-to-day needs. The complexity of the mandates coupled with “mission-critical demands” are key variables that influence the objective of finishing the rules.

In terms of how the SEC should proceed on the remaining Dodd-Frank rules, Clayton declared that the executive compensation rules were particularly challenging, in part because “we are writing on an already very colorful canvas and different constituencies see the rules as serving different, and sometimes inconsistent, goals.” He favors a “serial approach” and pointed out that the recent interpretative guidance on the pay ratio rules managed to comply with the statute, reduce compliance costs and remain practical. Continue Reading

BlackRock’s Annual Letter to CEOs Focuses on Doing Good and Continues to Emphasize Governance and Strategy

Reports of BlackRock’s annual letter to CEOs have largely focused on Larry Fink’s exhortation that companies must serve a social purpose and “make a positive contribution to society” in addition to delivering on financial performance.

The letter also focused on “a new model for corporate governance,” since index investors who cannot walk away from companies that they disapprove of must be active and engaged agents for their clients.  Shareholder engagement, Fink states, have been too focused on annual meetings and proxy votes, rather than a year-round conversation about long-term value.  The firm intends to double the size of its investment stewardship team over the next three years, to more than 60 people, so that discussions with companies can be “deeper, more frequent and more productive.”

As in previous letters, BlackRock asks that companies explain their strategic framework and explicitly affirm that it has been reviewed by the board of directors.   Continue Reading

ISS Launches Corporate Profile Products for Investors that Includes More Focus on Individual Directors, a Board Skills Matrix and QualityScore Analysis

Recently, ISS announced a new product for investors, called corporate due diligence profiles, that contains a historical review of past ISS recommendations and vote results, measurements of company governance and compensation practices against QualityScore best practices with red flags indicating deviations, as well as charts of each director’s tenure against the TSR at the public companies where that director serve.

We understand from ISS that the product was designed to meet investor demands in reviewing companies for possible shareholder engagement and seeking more insight on individual directors.  While the overall data is not new, as the report aggregates information primarily from prior ISS reports and QualityScore into new formats, companies will likely want to be aware of they are being perceived by investors. Continue Reading