Yesterday, Institutional Shareholder Services Inc. (ISS) announced its annual Benchmarking Policy survey. ISS will use survey responses to inform its policies governing 2020 shareholder meetings. Institutional investors, public companies, board directors, corporate advisors and other market participants are welcome to participate. Participants can make survey submissions until 5:00 PM ET on August 9, 2019. ISS typically publishes the survey results a few weeks thereafter.
While the survey includes questions targeting both global and designated geographic markets, the key questions affecting the U.S. markets fall into the following categories: (1) board composition/accountability, including gender diversity and overboarding, (2) board/capital structure, including dual or multi-class shares and combined CEO/chairs, (3) compensation and (4) climate change risk oversight and disclosure.
Board Gender Diversity:
The survey asks participants their views on the level of importance of board gender diversity. The suggested options range from an essential component to not significant at all.
Starting in 2020, ISS will recommend voting against the nominating committee chair (or other members as appropriate) at Russell 3000 and/or S&P 1500 companies that do not have at least one female director. Before ISS issues a negative recommendation on this basis, ISS intends to consider mitigating factors and the survey asks what those mitigating factors should be.
Director Overboarding: Given the evolving and increasingly stricter views of some large institutional investors on overboarding, ISS is revisiting its overboarding policies for non-executive directors and CEOs. ISS notes that, where local recommendations provide upper limits, ISS generally applies these limits. In the absence of local limits, the survey asks participants what the appropriate overboarding standard should be for non-executive directors and CEOs. For non-executive directors, ISS includes multiple options with one being a maximum of six total board seats, which is above ISS and Glass Lewis’s current cap for non-CEO directors, but consistent with State Street’s current cap for non-CEO directors. When a CEO serves on boards other than the CEO’s “home” board, ISS provides options up to a maximum number of three, including the “home” board.
Independent Chair: Currently, ISS generally supports shareholder proposals that request an independent board chair after taking into consideration a wide variety of factors such as the company’s financial practices, governance structure and governance practices. ISS observes in the survey that investors’ views greatly vary on the appropriate board leadership structure, noting that some investors have limited tolerance for a combined chair/CEO role whereas other investors view a combined role as acceptable, provided that the company has a strong lead independent director. ISS asks participants to indicate which factors they consider when evaluating whether the board leadership structure is adequate. The survey lists 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.
Multi-Class Structures and Sunset Provisions: ISS asks respondents whether a maximum seven-year sunset, or termination, provision for a multi-class capital structure is appropriate. Generally, ISS notes that the termination triggers are either time-based or ownership threshold based, meaning that the ownership level of the insiders and/or the high voting class falls below a certain threshold. ISS adds that some sunset provisions utilize a combination of time and ownership triggers, usually based on whichever occurs earliest.
Economic Value Added (EVA): Beginning in 2019, ISS research reports for the U.S. and Canadian markets started to include additional information on company performance using an EVA-based framework that applies a series of uniform, rules-based adjustments to financial statement accounting data, and aims to measure a company’s true underlying economic profit and capital productivity.
ISS believes that EVA metrics often provide an improved framework for comparing performance across companies with varying business models and capital structures, as compared to using purely GAAP-based financial metrics. Accordingly, ISS plans to incorporate EVA metrics into the Financial Performance Assessment (FPA) screens for the U.S. and Canadian pay-for-performance models. ISS states that the FPA is a secondary pay-for-performance screen that is used to assess a narrow subset of companies where the primary pay-for-performance screens indicate a borderline result between Low and Medium concern levels. Four EVA metrics will be used in the FPA’s comparison of relative long-term financial performance. Aside from the change to using the four EVA metrics where the FPA screen is applied, ISS notes that the basic operation of the FPA as a secondary screen affecting a relatively small number of companies would remain unchanged.
The survey asks whether constituents still want GAAP metrics to be provided in the research reports as a means of comparison.
Climate Change Risk Oversight & Disclosure
Director Accountability Relating to Climate Change Risk: ISS observes that measuring and assessing the impact of risks related to climate change in portfolio companies is increasingly important to many investors. As an example of the growing effort to combat climate change, ISS mentions that the Paris Agreement signatories (approximately 200 countries) had at least one law or policy related to climate change as of May 2018. ISS notes that this “rising regulatory tide” illustrates the need for companies to assess and mitigate regulatory risks related to climate change, as well as potentially direct environmental risks to their businesses.
ISS asks respondents whether climate change should be given a high priority in companies’ risk assessments. Adding to the ongoing debate over climate change disclosure, ISS questions whether all companies should be assessing and disclosing their climate-related risks and taking actions to mitigate them where possible.
Director Accountability for Failure to Assess and Mitigate Climate Change Risk:
Respondents are asked to share what they view as appropriate shareholder responses when a company fails to effectively report or address its climate change risk. The survey provides suggested actions, such as engaging with the board and/or management, voting in support of certain shareholder proposals seeking increased disclosure relating to greenhouse gas (GHG) emissions or reduction in GHG emissions, and voting against the board or specific board members.
The 20-page survey can be downloaded and printed. Inquiries and further responses regarding the survey can be directed to firstname.lastname@example.org.