On September 25th, Institutional Shareholder Services (ISS) released the results of this year's benchmark policy survey, publishing the feedback from over 500 respondents, including institutional investors; corporate executives, directors and consultants; academics; trade associations and others.
Prior surveys have often been a useful bellwether for advance insight into future policy shifts or new policies relating to emerging issues.
As expected, responses relating to COVID-19, racial and ethnic diversity, climate change and director accountability are among the key takeaways. Also unsurprisingly, the responses often show a split along investor/non-investor lines, with the former more likely to support action by proxy vote (e.g. against or withhold on directors, or support for a shareholder proposal) and the latter a preference towards engagement, flexibility and case-by-case guidelines.
Select results of global and North America-specific questions that may be of interest to US issuers include:
- ISS released guidance on April 8, 2020 covering topics including "meeting format and timing, poison pills, shareholder rights, director attendance, changes to boards and changes to compensation, capital structure, dividends and other payouts" and generally calling for a more flexible approach in response to the impact of the pandemic. In the policy survey, ISS sought feedback on continuing this guidance as well as feedback specific to virtual meetings, adjustments to compensation and adjustments to short-term/annual incentive programs.
- COVID-19 policy guidance
- With regard to its broader policy guidance in response to COVID-19, respondents overwhelmingly indicated a preference for ISS to keep this guidance in place through the 2021 proxy season, with 87% of non-investors and 62% of investors choosing this response. Most of the remaining investor responses (27%) indicated a preference for ISS to continue its guidance only for "specific markets, companies or industry sectors (e.g., travel, restaurants, retail and leisure) that continue to be severely impacted by the pandemic."
- Virtual meetings
- In the absence of continuing COVID-19-related health and social restrictions, more than three-quarters of investors (77%) expressed a preference for hybrid meeting formats going forward. Non-investors were noticeably less of one mind, with 31% of non-investors choosing this response and the plurality of non-investors (42%) preferring in-person meetings. Still more than a quarter (27%) of non-investors would prefer full virtual-only meetings going forward, a format prioritized by only 11% of investor respondents.
- Compensation adjustments
- While neither investors nor non-investors indicated strong support for treating the impact from the pandemic as "…not substantially different from other major market downturns…" (13% and 10%, respectively), there was otherwise a large split in responses on the matter. 70% of investors support the view that a broader impact and the role of government-sponsored loans and other benefits must be considered by boards and clearly disclosed to shareholders, a position held by 33% of non-investor respondents. Conversely, a majority of non-investor responses indicated that boards and compensation committees "will need flexibility to make decisions regarding reasonable adjustments to performance expectations and related changes to executive compensation." Only 10% of investors chose this response.
- Short-term/annual incentive adjustments
- A majority of both investors and non-investors were aligned on this matter, with 51% and 54%, respectively, indicating that both (1) mid-year changes to annual incentive metrics, performance targets and/or measurement periods and (2) suspension of annual incentive programs in favor of one-time awards based on committee discretion could be reasonable, depending on circumstances and rationale. More than a fifth of investors (21%) indicated that companies should avoid mid-year adjustments altogether (vs. 15% of non-investors).
- Climate change risk
- While almost all investors and non-investors (92% and 93%, respectively) agreed that engagement with management and the board is an appropriate response for shareholders with concerns that a company is not effectively reporting on or addressing its climate change risk, that is where the agreement ended. A majority of investors thought that: considering support for related shareholder proposals seeking increased disclosure (87%); considering support for related shareholder proposals seeking establishment of specific goals (84%); considering a vote against directors (75%); tying climate-risk related goals to executive compensation (74%); and, considering support for shareholder proposals calling for an independent board chair (65%) were all also appropriate responses. None of those actions were supported by greater than 30% of non-investor respondents.
- Perhaps the most divisive question in the survey, both investors and non-investors were each split on whether the SDG framework was an "effective way for companies to measure environmental and social risks and to commit to improving environmental and social disclosures and actions." A small majority in both groups answered in the negative, with 56% of investors and 51% of non-investors indicating their organizations did not think the framework effective.
- Of those that answered in the negative, The Sustainability Accounting Standards Board (SASB) was the preferred framework of both investors and non-investors, followed by The Taskforce on Climate-related Financial Disclosure (TCFD) for investors and The Global Reporting Initiative (GRI) Sustainability Reporting Standards for non-investors. A majority (53%) of investors indicated that the CDP (formerly the Carbon Disclosure Project) was also preferable to the SDG framework.
- 73% of investors indicated that all boards should "provide disclosure of the demographics of their board members including directors' self-identified race and/or ethnicity" to the full extent possible and permitted. Non-investor responses were more varied, with the plurality (36%) agreeing but a similar number (32%) indicating that boards should only do so where it is mandated.
- 61% of investors indicated their organization believes boards should aim to reflect the company's customer base and broader societies in which they operate, followed by 33% supporting the view that it is reasonable for expectations to differ based on other factors, e.g., local laws, company size and geography. The ratios were reversed for non-investors, with a majority (53%) supporting the view of reasonably differing expectations and 40% indicating boards should reflect their respective customers and societies.
- Regarding the appropriate actions for investors to consider to encourage increased racial and/or ethnic diversity, responses were similar to those on climate change risk, with overwhelming support from both investors and non-investors for engagement (85% and 92%, respectively) followed by majority support from investors for: support of related shareholder proposals seeking targets or increased transparency (78%); support of related shareholder proposals seeking at least one underrepresented minority in each slate of candidates (the so-called Rooney Rule) (58%); and votes against directors where racial and ethnic diversity is lacking (56%). Once again, none of these actions were preferred by non-investor respondents, with none garnering greater than 18% support.
- Auditor assessment
- Ratification of auditors is largely an uncontroversial proposal, with average support of 98.4% at Russell 3000 companies this past season according to Proxy Insight. 100% of these proposals passed and ISS recommended a vote in favor in all but a single instance according to ISS data. However, it is worth noting that when asked to consider the relevance of additional factors in assessing auditor independence, there was majority support from both investor and non-investor respondents for all but one proposed factor (audit firm tenure, supported as a relevant factor by 40% of non-investor respondents). Issuers should consider themselves warned that at least some of these additional factors will likely make their way into ISS policies on ratification of auditors in the future.
Governance (North America)
- Independent chair
- As noted in our recent 2020 Annual Corporate Governance Review, shareholder proposals for an independent board chair saw a spike in support this year. While only two received majority support, investor sentiment around this issue is clearly continuing to evolve. ISS' survey questions indicate the potential for refined guidelines around recommending support for these proposals, which, given the trends we are already seeing, could well result in a greater number of majority-supported proposals in the future.
- A plurality of investors (47%) indicated a preference for an independent chair, while allowing for company-specific exceptions – a view shared by 34% of non-investors. The plurality of non-investors (48%) had no single preferred model. The second most popular response for investors was a default to the independent chair model, absent emergencies or transition periods (38%).
- When evaluating these shareholder proposals, both groups agreed the most important governance or risk oversight failure to consider was "(s)ignificant misconduct or mismanagement by the company, board or senior executives resulting in legal and reputational risks." A majority of investors considered all other response options were significant factors as well, whereas only "(s)ignificant failures of audit or internal control oversight" was also considered a significant factor by a majority of non-investors.
The window between survey results and updated policies is small. Later in October, ISS will release draft policy updates for public comment and in mid-November will release final policies for meetings that occur on or after the first of February 2021.
Georgeson acts as solicitor and advisor on over 400 meetings annually and assists clients across all industries and market capitalizations in anticipating and responding to advisory recommendations from ISS and Glass Lewis. If you have questions or concerns about what effect an advisory policy may have at your company, reach out to your existing Georgeson representative or use the link below.
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