On September 25, 2020, ISS announced the results of its annual Global Benchmark Policy Survey. ISS, as in prior years, based its results on the survey responses of 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, 2021. ISS plans to request comments on its draft policies scheduled for release in October 2020, and publish its final policies in mid-November 2020.
While ISS’s 2020 survey included questions targeting both global and designated geographic markets, the key questions affecting the U.S. markets related to (1) ISS’s COVID-19-adjusted policies, including annual meeting formats and compensation; (2) racial and ethnic diversity; (3) climate change risk oversight and disclosure; (4) sustainability reporting; (5) independent board chairs; and (6) auditors and audit committees.
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.
This year, 175 investors (74% were asset managers) and 344 non-investors (80% were representatives from public corporations) participated in the survey, constituting a 31% increase in overall participation compared to 2019. Participants collectively represented 258 entities, with half the participants from organizations based in the U.S. Fifty-two percent (52%) of investors were from global organizations compared to 19% of non-investors. Twenty-six percent (26%) of investors and 43% of non-investors were from the United States.
The survey questions were organized by whether they were COVID-19-related. With regard to the COVID-19-related questions, participants generally agreed that ISS should continue issuing guidance on and applying a flexible approach to its policies into 2021 in light of the pandemic. In the wake of the pandemic, 70% of investors responded that the board’s decisions on executive compensation should thoughtfully factor the interest of stakeholders and be disclosed clearly to shareholders. With regard to short-term/annual incentive programs, a majority of investors and non-investors agreed that, depending on the circumstances, midyear adjustments would be appropriate to incentive metrics, performance targets, and measurement periods. A majority of both groups also said another appropriate action would be suspension of the annual incentive programs and alternatively issuing one-time awards made on a discretionary basis.
With regard to non-pandemic-related survey questions, investors felt more strongly than non-investors about the need for greater board disclosure on racial and ethnic diversity. Their views diverged significantly regarding the appropriateness of investors holding nominating committee members accountable when board racial and ethnic diversity is lacking or voting on a shareholder proposal calling for the company to fill senior-position vacancies using a “Rooney Rule” approach, meaning drawing from a candidate pool that includes at least one person of color. Investor respondents preferred independent chair structures more than non-investor respondents. Similar to last year’s survey results, which we previously discussed, investors and non-investors agreed that engagement with the company is the most appropriate shareholder action when a company fails to effectively report or address its climate change risk.
A. COVID-19-Related Questions (Global)
Continuing COVID-19-Related Guidance. Given the severity of the impact on companies from the unprecedented pandemic, in April 2020, ISS issued policy guidance expressing its views and approaches to applying its policies, including, but not limited to, policies on virtual meetings and executive compensation, which we previously discussed. Investors (62%) and non-investors (87%) agreed that ISS should keep this or similar guidance into 2021 and maintain flexible application of its policies through at least the 2021 main proxy seasons.
Annual Meeting Format. In the absence of COVID-19-related restrictions, almost 80% of investors preferred “hybrid” meetings, meaning a shareholder has the option of attending and participating in either in-person or remotely. By comparison, 42% of non-investors preferred in-person meetings, reserving virtual meetings for compelling reasons only (such as the pandemic restrictions).
Expectations on Compensation Adjustments. Seventy percent (70%) of investors felt that, in the wake of the pandemic, when boards decide executive compensation they should consider “the pandemic’s impact on the economy, employees, customers and communities and the role of government-sponsored loans and other benefits. . . .” Moreover, the board should clearly disclose these decisions to shareholders. Fifty-three percent (53%) of non-investors viewed the pandemic as distinguishable from prior market downturns and believed many boards and compensation committees will need to make reasonable adjustments to performance expectations and executive compensation.
Adjustments to Short-Term/Annual Incentive Programs. With regard to reasonable company approaches to short-term/annual incentive programs, a majority of both investors and non-investors indicated the following would be appropriate: (1) midyear adjustments to annual incentive metrics, performance targets, and/or measurement periods commensurate with the economic environment; and (2) suspension of the annual incentive program, and, alternatively, the issuance of one-time discretionary awards that can be justified based on the circumstances.
B. Non-COVID-19-Related Questions
Racial and Ethnic Diversity (Global). This year’s survey raises questions regarding diversity based on race and ethnicity due to “[r]ecent protests over racial and ethnic inequalities and public responses to them. . . .” The survey inquired what actions would be appropriate for an investor to take to encourage increased racial and ethnic board diversity at their portfolio companies. Both investors (85%) and non-investors (92%) overwhelming selected engagement with the board and management as the preferred method. Slightly over half (56%) of investors thought it would be appropriate for investors to consider voting against members of the nominating committee (or other directors) at companies that lack board racial and ethnic diversity. Only 11% of non-investors agreed.
Nearly three-quarters (73%) of investors indicated that all company boards should disclose the demographics of their board members to the full extent permitted legally, including directors who self-identified their race and/or ethnicity. Non-investors were less supportive of this approach, with only 36% being in favor of such disclosure.
Seventy-eight percent (78%) of investors would consider supporting shareholder proposals seeking corporate adoption of workforce diversity targets and 56% would support shareholder proposals asking the board to consider adopting the Rooney Rule for senior-position vacancies. A little over half of investors (58%) would support shareholder proposals seeking greater transparency about workforce diversity.
Climate Change Risk Oversight & Mitigation (Global). This year’s survey question resembles last year’s question regarding what is an appropriate response for investors to take when they disagree with the company’s level of disclosure and approach to climate change risk. This year’s survey results show that 75% of investors indicated a willingness to vote against directors who they believed were responsible for the poor management of climate change risks, compared with roughly half of the investors last year.
According to the 2020 survey results, the following are the top three actions investors felt were appropriate for accountability when a company ineffectively reports or addresses climate change risk:
- Engage with the board and company management (92%);
- Consider supporting shareholder proposals seeking increased disclosure of greenhouse gas (GHG) emissions or other climate-related measures (87%); and
- Consider supporting shareholder proposals requesting specific reduction targets for GHG emissions and possibly for the company’s carbon footprint (84%).
- Non-investor responses overwhelmingly favored engagement with the board and management as the most appropriate action (93%), over other possible actions.
Sustainable Development Goals (Global). The United Nations’ Sustainable Development Goals (SDGs) comprise 17 interconnected goals created to address a range of global challenges including poverty, health and education, climate change, and preservation of oceans and forests. As of February 2018, approximately 40% of the world’s largest companies acknowledged the SDGs in their corporate reporting or in the CEO and/or Chair’s message, as we discussed further in a client memorandum.
The ISS survey asked respondents whether the SDG framework is an effective method by which companies can measure environmental and social (E&S) risks and commit to improving E&S disclosures and actions. Each group, investors and non-investors, were roughly split 50/50 between “Yes” and “No.” Of the investors who answered “No,” their top three alternative frameworks were the Sustainability Accounting Standards Board (SASB) (82%), the Taskforce on Climate-related Financial Disclosures (TCFD) (73%), and the CDP (formerly the Carbon Disclosure Project) (52%). In comparison, non-investors who answered “No” chose SASB (60%), followed by the Global Reporting Initiative (GRI) Sustainability Reporting Standards (47%) and TCFD (43%). ISS’s benchmark policies and their application relating to sustainability standards, frameworks and disclosures will likely continue to evolve given various initiatives in the private sector and non-U.S. governmental bodies, some of which we recently discussed here and here.
Independent Board Chair (North America). 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 performance, governance structure, and governance practices. The 2020 ISS survey revisited the topic of board leadership structure, reasoning that shareholder proposals calling for independent board chairs received increased shareholder support in 2020, yet only two received majority shareholder support.
When asked to select which corporate governance or risk oversight failures are significant when evaluating a shareholder proposal calling for an independent chair, 80% of investors chose all of the following:
- Significant misconduct or mismanagement;
- Materially diminishing shareholder rights without approval;
- Significant audit failures;
- Insufficient responsiveness to a majority-supported shareholder proposal; and
- Failure to address risks such as those related to climate change.
- A significantly lower percentage of non-investors considered these factors significant.
The 2020 survey results show that investors prefer the independent chair structure more than non-investors. Eighty-five percent (85%) of investors preferred independent chairs as the board leadership structure, but 47% said that a company’s specific circumstances may warrant another structure, whereas 48% of non-investor respondents had no preference in board leadership structures.
Auditors and Audit Committees (Global). Noting that questions regarding quality of corporate audits have been in the spotlight, this year’s survey revisited questions posed in ISS’s 2018 survey regarding auditors and audit committees. This year’s survey asked participants to identify factors that they believe impact auditor independence. When considering criteria beyond the audit/non-audit fee ratio when evaluating the independence and performance of external auditors, investors’ top choices were significant audit controversies (88%) and significance/frequency of material restatements of financial results (83%).
Investors chose the following as the top factors to consider when evaluating audit committee performance: significant controversies relating to financial reporting, financial controls or audit (93%), closely followed by skills and experience of audit committee members (including financial expertise) (92%).