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ISS Releases Preliminary Updates to 2020 Compensation-Related Policies

As we previously discussed, ISS recently released its U.S. Preliminary Compensation Policies FAQ, which provides interested parties an advance view of ISS’ answers to select questions posed to ISS regarding potential changes to its U.S. compensation policies.  Updated compensation-related FAQ documents and a methodological whitepaper—which will include a detailed introduction of ISS’ new Economic Value Added (EVA) metrics—will be available in mid-December.  These changes are effective for meetings held on or after February 1, 2020.  The below summarizes the key changes outlined by the preliminary FAQ.

Changes to the Quantitative Pay-for-Performance Screens for 2020 

ISS applies an initial set of quantitative screens followed by a set of qualitative screens when evaluating say-on-pay proposals. 
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ISS Releases Finalized 2020 U.S. Voting Policies, Preliminary Compensation Policies FAQ & Industry Group TSR Medians

Earlier this week, Institutional Shareholder Services Inc. (ISS) posted its U.S. Proxy Voting Guidelines, which include updates we previously discussed. The 2020 policies are effective for shareholder meetings occurring on or after February 1, 2020.

Also, ISS recently published the U.S. Preliminary Compensation Policies FAQ that is designed to address questions that have been posed to ISS regarding potential changes to its compensation-related policies. Unless the document states otherwise, the methodologies contained in this preliminary FAQ will apply to shareholder meetings occurring on or after February 1, 2020. ISS anticipates publishing the finalized compensation-related policies and FAQ as well as a methodological whitepaper in December 2019.
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ISS Releases Final Changes to Its Voting Policies for 2020 Proxy Season – Newly Public Companies, Independent Chair and Share Buyback Proposals, Board Gender Diversity, EVA and More

Today, Institutional Shareholder Services Inc. (ISS) released its 2020 global proxy voting policy updates, which will generally be applicable for shareholder meetings on or after February 1, 2020. Consistent with the preview offered in its proposed 2020 voting policy changes (covered on our blog here), the updates to ISS’ U.S. proxy voting policies apply primarily to the proxy advisory firm’s treatment of (1) certain governance structures at newly public companies, including multi-class shares; and (2) annual meeting proposals calling for independent board chairs and share buybacks.

The updates released today confirm that ISS will include Economic Value Added (or EVA) metrics in its pay-for-performance model’s secondary Financial Performance Assessment (or FPA) screen.
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ISS Calls for Feedback on Proposed 2020 Voting Policies: Multi-Class Structures, Independent Board Chair and Share Buybacks

Yesterday, Institutional Shareholder Services Inc. (ISS) announced proposed voting policies for 2020 affecting proposals related to three areas: (1) multi-class structures for newly public companies; (2) independent board chair; and (3) share buybacks. ISS states that the proposed changes either clarify an existing policy or largely codify an existing practice.

ISS requests feedback on the proposed rules, and market participants can submit comments until 5:00 PM ET on Friday, October 18, 2019. ISS expects to release its final policies in the first half of November 2019.

Over the summer, ISS administered its annual benchmarking survey to market participants, and two of the three topics covered by the proposed rules (multi-class structures and independent chair) were included in the survey.
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Key Findings of ISS 2019 Benchmarking Policy Survey

Yesterday, Institutional Shareholder Services Inc. (ISS) announced the results of its 2019 Global Policy Survey (a.k.a. ISS 2019 Benchmark Policy Survey) based on respondents including 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, 2020. ISS expects to solicit comments in the latter half of October 2019 on its draft policy updates and release its final policies in mid-November 2019.

While the survey included questions targeting both global and designated geographic markets, the key questions affecting the U.S. markets fell into the following categories: (1) board composition/accountability, including gender diversity, mitigating factors for zero women on boards and overboarding; (2) board/capital structure, including sunsets on multi-class shares and the combined CEO/chair role; (3) compensation; and (4) climate change risk oversight and disclosure.
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ISS Ratings and Data Now Available on Open:FactSet Marketplace

ISS ESG, the responsible investment arm of ISS, is now offering its ESG data on FactSet’s Open:FactSet Marketplace. ISS ESG is the umbrella entity that consists of ISS-ethix, which focuses on responsible investment issues and related screens, ISS-climate, which provides climate data, analytics and services to financial market participants and ISS-oekom, which provides ESG research and ratings, including ISS’s Governance QualityScore and E&S Disclosure QualityScore.  Open:FactSet Marketplace is a platform offering aggregated data and analytics from various data providers to provide a single point of access for asset managers and other investment professionals.  FactSet, which owns Open:FactSet, reportedly has approximately 100,000 users, but it is unclear how many of these subscribe to its Open:FactSet Marketplace offering.
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Next Week SEC Will Consider Issuing Guidance on the Use and Responsibilities of Proxy Advisors

Yesterday, the Securities and Exchange Commission (SEC or Commission) announced that the agenda for the Open Meeting, next Wednesday, August 21, 2019 at 10:00 a.m. E.T., will include consideration by the Division of Corporation Finance on whether to publish an interpretation and related guidance regarding the utilization of proxy advice in the proxy voting process.

In addition, the Division of Investment Management will consider whether to publish guidance on the proxy voting responsibilities of investment advisers under Rule 206(4)-6 of the Investment Advisers Act of 1940.  These regulatory responsibilities include advisers’ adopting policies and procedures that are reasonably designed to ensure that the advisers vote client securities in the best interests of their clients and disclosing how advisers resolve conflicts of interest.
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ISS Launches Annual Benchmarking Policy Survey

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.
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ISS Opens Window Today for Peer Group Submissions

Today begins the window where certain public companies in the U.S. and Canada have the option of submitting changes to their respective peer groups to Institutional Shareholder Services Inc. (“ISS”). The submission window closes next Friday at 8:00 PM EDT, July 19, 2019.

ISS’ invitation is directed to companies with annual meetings scheduled between September 16, 2019 and January 31, 2020 that have changed or anticipate changing their respective peer group from their last proxy disclosures. ISS advises that “[s]ubmissions should reflect peer companies used (or to be used) by the submitting company for pay-setting for the fiscal year ending prior to the company’s next upcoming annual meeting.”

Each proxy season, ISS constructs a peer group for each company prior to the company’s new proxy statement.
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New U.K. Rules for Proxy Advisory Firms

The Proxy Advisors (Shareholders’ Rights) Regulations 2019 (“Regulations”) in the United Kingdom went into effect this past Monday. Proxy advisory services typically include research reports on public companies as well as proxy voting recommendations on how the proxy advisors’ clients, namely shareholders, should vote on all shareholder proposals, including those that are submitted by the public company’s management.

General Overview. The new U.K. regulations are “intended to make sure that proxy advisors’ clients will be able to better understand what standards of conduct the proxy advisor adheres to, how the proxy advisor ensures an adequate standard of quality in its advice and how it manages conflicts of interest, in order to help the market for proxy advisor services to function effectively.”

The Regulations primarily establish a transparency framework rather than a conduct regime or expectation level regarding the controls or quality of proxy advisory services.
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Is an Eventual Negative Say-on-Pay Recommendation Almost Inevitable?

Results of a study published in April 2019 by the executive compensation consulting firm Pearl Meyer suggest that Russell 3000 companies which have not yet received an “Against” Say-on-Pay (SOP) recommendation will likely receive one down the road. The firm states that “it’s reasonable to expect that at some point in the future, more than 80% of companies will have fallen victim to a negative vote recommendation at least once.”

Relevance. Management’s SOP proposals give shareholders a precatory or nonbinding vote on compensation packages for the company’s top executives. While the underlying regulation permits some leeway on the frequency of holding these votes, many companies opt to do so annually.
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A Say-on-Pay Update — Plus Strategies for Responding to a Negative Recommendation by a Proxy Advisory Firm

The proxy season is just around the corner for calendar year public companies. Ahead of the season, two major proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, recently released their 2019 policy updates to provide guidance on how they will make recommendations on companies’ “say-on-pay” vote. Although a non-binding vote, performing poorly on a say-on-pay vote is not only disheartening, but can impact shareholder votes on election of directors (particularly compensation committee members), result in greater scrutiny of CEO performance, and require management and compensation committee members to expend significant time and resources to address concerns reflected by the vote.
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ISS Issues Benchmark Policies for 2019 and Bipartisan Bill to Regulate Proxy Advisory Firms is Proposed

New ISS Policies.  For meetings on or after February 1, 2019, two new and fairly minimal ISS policies will be applied.

As part of ISS’ client roundtables, one-to-one client discussions and public comment period on proposed policy changes, ISS discussed the potential use of Economic Value Added (EVA) metrics to assess company performance in executive compensation evaluations.  In its policy update, ISS explained that many institutional investors agreed with the notion of exploring the potential of EVA factors to add insight into company performance beyond total shareholder return (TSR) and GAAP measures, but that feedback received indicated that investors would like more time to understand the EVA methodology.
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ISS QualityScore Data Verification Opens; New Factors Added

ISS QualityScore Data Verification opened on Monday, November 5.  Companies should be aware of the new Board Diversity Subcategory, which consists of four new factors and five existing factors that will take effect on November 29, 2018.  The four new factors are:

  • How many women serve in leadership roles on the board?  The factor evaluates the number of women serving as board chair, chair of key committees or lead director.
  • How many women are named executive officers (NEOs) at the company?  Companies without any women as NEOs will lose credit, and credit will be capped for companies having more than two.

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ISS Proposes Limited Policy Updates for 2019 Related to Board Gender Diversity and Say-on-Pay Secondary Screens

Two key, but limited, policy changes for U.S. companies have been proposed by ISS.  The open comment period will run through 5:00 p.m. ET on November 1.

Board Gender Diversity. Beginning with meetings on or after February 1, 2020 (providing a year grace period), ISS may issue adverse voting recommendations against nominating committee chairs at boards with no gender diversity.  In special circumstances, the policy would allow the absence of board gender diversity to be temporarily explained and excused.

The mitigating factors that may be considered include: (a) a firm commitment, as stated in the proxy statement and/or other SEC filings to appoint at least one female director to the board in the near term (before the next annual general meeting); (b) the presence of at least one female director on the board at the immediately preceding annual meeting; and/or (c) any other compelling factors considered relevant on a case-by-case basis. 
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CII and ISS Team Up to Oppose House Legislation on Proxy Advisory Firms, Speak for “Real Main Street” Investors

Protect the Voice of Shareholders aims to oppose H.R. 4015, the Corporate Governance Reform and Transparency Act, that passed the House last October.  While not effective, the Act is perhaps best known for requiring that the SEC withdraw the no-action letters to Egan Jones and ISS, which the SEC itself undertook recently, as we previously discussed.

The site is a joint project of ISS and CII, with ISS responsible for the content with approval from CII.  The goal is to “correct the record, reveal the mistruths and double-speak of the lobbying groups trying to mislead lawmakers.”  According to the site, the Act would “allow boardrooms to inhibit” the distribution of research reports when they disagree with recommendations, arguing that it is “inappropriate to permit companies to hinder the current free flow of unbiased research and information to investors.”  The site provides news and resources as well as a way to reach Congress to oppose the Act.
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ISS Releases Responses to Policy Survey

ISS announced the results of its high-level policy survey. The results will inform the new and updated policies for the 2019 proxy season, which is usually released in November.

Auditors and Audit Committee. ISS asked whether additional indicators of audit quality and independence would be useful in addition to considering non-audit services and fees when assessing auditor independence. Investors most often cited regulatory fines or other penalties on the auditor for weaknesses or errors in audit practices, or significant audit controversies, as important matters of interest.  The third most favored factor was the identity of the audit partner and any links to the company or its management.
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In Advance of Roundtable, SEC Withdraws Letters on Investment Advisers’ Reliance on Proxy Advisory Firms for Voting Recommendations

The SEC issued a statement today announcing that its Division of Investment Management has rescinded the letters issued in 2004 to ISS and Egan-Jones, effective immediately.

The letters have been criticized to have unintentionally resulted in the endorsement of investors using proxy advisory firms in making proxy voting recommendations, in order to address potential conflicts of interests by investment advisers exercising their fiduciary obligations when voting proxies.  In them, the SEC staff stated that the recommendations of a third party, independent of an investment adviser, may “cleanse” the adviser’s vote from conflict, as we explained in a post more than five years ago.
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ISS Detailed Policy Survey Addresses Independent Chair Proposals, Board Matrix and Compensation – Part II

In additional to the high-level questions in its global policy survey which we previously discussed here, ISS also included a more detailed set of questions for the U.S. that addresses:

Independent Chair Shareholder Proposals.  ISS generally supports these proposals after taking into account factors such as the company’s governance structure and practices as well as financial performance.  The survey asks about the level of importance that respondents may attach to the following factors when evaluating independent chair proposals:  controversies and/or risk oversight failures; independence of key board committees; board’s rationale for having a combined CEO/chair structure; shareholder rights such as special meetings and proxy access; prevalence of takeover defenses; alignment between CEO pay and performance; board responsiveness to shareholder concerns; management of environmental and social issues; and the company’s short- and long-term TSR performance.
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ISS Policy Survey Covers Possibility of Tracking Directors and Additional Audit Committee Evaluations – Part I

The ISS annual global policy survey for 2018 includes only a few issues compared to prior years, but with more focus on the election of directors.  The responses to the survey will inform the new policies that govern the 2019 meetings.

The survey is again being undertaken in two parts, one covering fundamental and high-profile topics which we address in this post, and another focused on details which we will describe in Part II.

The first set closes on August 24, and the second ends on September 21.  You can access and respond to the survey here.

Auditors and Audit Committee
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ISS Updated FAQs Focus on Proxy Reports and Engagements

U.S. proxy reports are issued 13 to 30 calendar days before a shareholder meeting, but closer to 13 to 18 days during April to June due to the volume, according to the most recent ISS FAQs on U.S. Proxy Voting Research Procedures and Policies. Updated Q&As are highlighted in the report.

Several revisions relate to engagement with ISS and changing vote recommendations, both timely topics for the current stage of the proxy season. ISS already provides guidance on how issuers should engage with them. A few insights from the FAQs include:

  • Requests for engagement should be made by emailing the Research Helpdesk with (a) a detailed agenda, (b) a list of the company’s participants and (c) preferred dates and times.

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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.
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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.
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ISS Releases Additional Guidance on 2018 Policy Updates

As discussed in a November post, ISS recently published its 2018 policy updates, effective for meetings held on or after February 1, 2018. Last week, the proxy advisory firm released further guidance in the form of three revised policy supplements.

  • Pay-for-Performance Mechanics ISS’ December Pay-for-Performance Mechanics whitepaper describes a revised methodology for 2018 pay-for-performance evaluations. Key 2018 updates include: (a) the introduction of the Financial Performance Assessment secondary quantitative screen; (b) changes to the pay-for-performance quantitative screens for S&P 500 companies; and (c) TSR smoothing for quantitative pay-for-performance screens.
    • Financial Performance Assessment.  The most notable change to ISS’ pay-for-performance methodology is the new quantitative Financial Performance Assessment, which compares a company’s financial and operational performance against its ISS peer group.

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