ISS ran their 2020 Global Benchmark Policy Survey from 29 July 2020 to 21 August 2020 and, on 25 September 2020, released the results[1] of this survey. On 14 October 2020 ISS made available for public comment a number of proposed changes[2] to ISS's benchmark voting policies for 2021. Finally, on 12 November 2020, ISS announced their policy updates for the 2021 AGM season[3].

The updates will be effective from 1 February 2021 and apply to all shareholder meetings thereafter. The below memo summarizes the policy changes that will be applied across UK & Ireland and Continental Europe.

The most important changes applicable to large-cap companies in Europe largely fall under the following categories:

​UK & Ireland

Director Elections
  • Material Environmental & Social Risk Oversight Failures
  • Overboarding
  • Board gender diversity
Remuneration Policy
  • Pension Contribution Rates
  • Post-employment Shareholdings







​Continental Europe

Appointment of Auditors
Director Elections
  • Material Environmental & Social Risk Oversight Failures
  • Director terms (particularly relevant for Germany)
  • Former CEO election as Chairman
  • Overboarding
  • Composition of committees
  • Board Gender Diversity
Capital structure
  • Double-voting rights (France)
  • Share repurchase plans (Italy & Germany)
Executive Remuneration

UK & Ireland 

Director Elections

Material Environmental & Social Risk Oversight Failures
ISS have announced that from 2021 they will "consider recommending a vote against individual directors for […] demonstrably poor risk oversight of environmental and social issues, including climate change".
Overboarding
The overall threshold for the number of acceptable external mandates has not been updated. However, the ISS guidelines now state that, when it comes to overboarding, "a more lenient view may apply for directors who serve on the boards of less complex companies (for example, externally managed investment companies)". 
Board Gender Diversity
The ISS guidelines state that ISS will "generally recommend against the chair of the nomination committee (or other directors on a case-by-case basis) in the following cases:
  • The company is a constituent of the FTSE 350 (excluding investment trusts) and the board does not comprise at least 33 percent representation of women, in line with the recommendation of the Hampton-Alexander Review.
  • The company (excluding investment trusts) is a constituent of any of the following, and there is not at least one woman on the board:
    • FTSE SmallCap;
    • ISEQ 20;
    • Listed on the AIM with a market capitalisation of over GBP 500 million."
Alongside the newly introduced provision, ISS guidelines now also state that mitigating factors include "Compliance with the relevant board diversity standard at the preceding AGM and a firm commitment, publicly available to comply with the relevant standard within a year. In 2021 only, for FTSE 350 constituents, a public commitment to bring the composition of the board in line with the recommendations of the Hampton-Alexander Review by the following AGM will not result in a negative recommendation, regardless of the previous composition of the board.

Remuneration Policy

Pension Contribution Rates

Following evolving market practice subsequent to the coming into force of the 2018 UK Code (which recommends that pension contribution rates should be aligned to the wider workforce), ISS guidelines now state that, amongst other factors, they will review whether the company's approach to fixed remuneration is appropriate with "particular focus on the extent to which pension contributions are aligned with those available to the wider workforce, as recommended by the UK Code".

Post-employment Shareholdings

In line with the introduction of post-employment shareholdings by the 2018 UK Code, ISS now states that the remuneration policies shall provide for a 200% of salary shareholding requirement for executive directors "with an appropriate post-employment shareholding requirement in place".


Continental Europe

Appointment of Auditors and Auditor Fees

Under the new ISS guidelines, the cap on non-audit fees (set at 100% of audit-related fees) has been extended to all companies, whereas previously it was applicable to "widely-held" [4] companies only.


Director Elections

Material Environmental & Social Risk Oversight Failures: ISS have announced that from 2021 they will "consider recommending a vote against individual directors for […] demonstrably poor risk oversight of environmental and social issues, including climate change".
Director terms
ISS will now recommend to vote against directors whose term in office is either "not disclosed or when it exceeds four years and adequate explanation for noncompliance has not been provided." This provision used to apply to Belgium, France, Greece, Netherlands, Spain, and Switzerland and has now been extended to all European countries.
Former CEO election as Chairman
For Germany, Austria and the Netherlands, the ISS guidelines have extended the recommendation to vote against the "election or re-election of a former CEO as chairman to the supervisory board or board of directors" to all companies. The previous guidelines provided that a negative recommendation would only be issued for any such instance occurring at "widely-held" companies.
Overboarding
Under the updated ISS guidelines, the rules for the evaluation of overboarded directors have been extended from applying to "widely-held" companies only to being applicable to all companies. The number of board appointments to be considered overboarded remains unchanged.
Composition of committees
ISS will recommend for widely-held companies to "generally vote against the (re)election of any non-independent members of the remuneration committee if:
  • Fewer than 50 percent of the remuneration committee members, who are elected by shareholders in such capacity or another – excluding, where relevant, employee shareholder representatives – would be independent; or
  • Fewer than one-third of all remuneration committee members would be independent."

Lastly the recommendation to vote against the "re-election of executives who serve on the company's audit or remuneration committee" has been extended from applying only to Belgium, Denmark, Finland, France, Iceland, Luxembourg, the Netherlands, Norway, Spain, Sweden, and Switzerland to being applicable across all European markets.

Board gender diversity

ISS recommends to "vote against the chair of the nomination committee (or other directors on a case-by-case basis) if:

The underrepresented gender accounts for less than 30 percent (or any higher domestic threshold) of board directors of a widely held company.

Both genders are not represented on the board of a non widely-held company."

The updated guidelines also state that mitigating factors may include:

  • "Compliance with the relevant standard at the preceding annual meeting and a firm commitment, publicly available, to comply with the relevant standard within a year; or
  • Other relevant factors as applicable."

The guidelines update specifies that as regards the 30 percent threshold mentioned above, a "one-year transitional period will apply in 2021. During this transitional period, vote recommendations will not be impacted by the policy applicable to widely held companies. The latter will come into effect on Feb. 1, 2022."


Capital structure

Double-voting rights (France)

A section regarding double-voting rights under the Florange Act in France has been removed as it is no longer relevant.

Share repurchase plans (Italy and Germany)

Under the 2021 ISS guidelines, "The amendment repeals the market specific exceptions on the use of derivatives in the context of share repurchase plans. These exceptions to the ISS general guidelines currently concern Germany and Italy only. The change is mainly justified by the application of the Market Abuse Regulation at the EU level, which imposes strict rules on share repurchase".


Executive compensation

Following the implementation of the SRD II across European markets, the ISS guidelines now state that: "The level of disclosure of the proposed compensation policy and remuneration report shall be sufficient for shareholders to make an informed decision and shall be in line with what local market best practice standards dictate."
As regards the content of the remuneration report, the ISS guidelines now state that "Remuneration report disclosure is expected to include amongst others: amounts paid to executives, alignment between company performance and payout to executives, disclosure of variable incentive targets and according levels of achievement and performance awards made, after the relevant performance period (ex-post), and disclosure and explanation of use of any discretionary authority or derogation clause by the board or remuneration committee to adjust pay outcomes".


Covid-19 Guidance

Alongside the changes to the guidelines, ISS has also noted that the policy guidance issued on 8 April 2020 in response to the impact of the pandemic received strong feedback "from ISS's 2020 global benchmark policy survey [and] ISS intends to carry this or similar policy guidance[5] into 2021 and update going forward as needed." The provisions included therein apply to AGM format and timing, poison pills, shareholder rights, director attendance, changes to boards, and changes to compensation, capital structure, dividends and other payouts.


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Contact

​DANIELE VITALE
Head of Governance UK & Europe 
daniele.vitale@georgeson.com 




[1] https://www.issgovernance.com/iss-announces-results-of-global-benchmark-policy-survey-2020/
[2] https://www.issgovernance.com/iss-launches-open-comment-period-for-2021-iss-benchmark-voting-policy-changes/
[4] The term "widely held" refers to companies that ISS designates as such based on their membership in a major index and/or the number of ISS clients holding the securities.
[5] https://www.issgovernance.com/file/policy/active/americas/ISS-Policy-Guidance-for-Impacts-of-the-Coronavirus-Pandemic.pdf