On Friday, September 13, investors and issuers gathered together at the University of Delaware's Weinberg Center for Corporate Governance for the Investor Stewardship Group's (ISG) inaugural Corporate Issuers Conference (the Conference). Below, we share our top 6 takeaways from the Conference.
1. On several occasions, panelists suggested that the implementation of the ISG Governance Principles brings a “comply or explain” structure to the U.S. market.
A company need not "check off" every element identified within the principles, but investors are interested in knowing how issuers are thinking about and embracing the principles set forth in the ISG guidelines, even if they do not follow all of the enumerated practices. If guidance provided within the principles does not apply to an issuer, investors want issuers to explain that.
2. The ISG Governance Principles are meant to be common ground, baseline principles of governance expectations for U.S. companies.
Throughout the conference, investor panelists reminded attendees that the purpose of the ISG principles is not aspirational or an attempt to define "best practices." In light of ISS being viewed as a governance standard-setter, and in the absence of a federal U.S. corporate governance code, investors developed the ISG principles to serve as a stewardship code for the United States. All of the institutions represented on conference panels indicated their individual policies go beyond the principles set forth in the ISG framework. Rather, these are foundational principles upon which investors' individual practices and policies are built.
3. Board accountability is a common focus across ISG signatories.
While the investors represented at the conference have varied expectations as to the acceptable pace and rate of meaningful improvement to corporate governance practices, there was general agreement that the board of directors is ultimately responsible for a company's governance practices. Accordingly, where issuers have poor governance practices and fail to exhibit constructive dialogue and progress, investors express their dissatisfaction by voting against one or more directors. Indeed, we saw this play out in practice during the 2019 proxy season: this uptick in votes against directors will be discussed in our forthcoming Annual Corporate Governance Review, to be published later this month. Furthermore, concurrently with the ISG conference, Legal & General announced it will be escalating the separation of chair and CEO roles in the coming 2020 proxy season, by voting against CEOs on the board at companies that do not have independent chairs.
4. Contrary to some recent headlines, not all investors think that the CEO signatories to the Business Roundtable's Statement on the Purpose of a Corporation 'got it wrong.'
While opinions varied as to whether the statement got it entirely right, long-term asset owners and managers generally view the statement as consistent with their positions that long-term shareholder value creation cannot exist without a holistic consideration of stakeholders.
Going forward, it will be interesting to see if investors that do support the statement begin asking company signatories what their individual corporate purpose is. Bob Eccles (the founding Chairman of the Sustainability Accounting Standards Board, and a founder of the International Integrated Reporting Council) and Tim Youmans (of Hermes EOS) have been discussing for several years the idea that companies should publish a statement of purpose, and the Business Roundtable statement brings that work to the forefront. Their proposition is that the board of a company should publish an annual, brief (one to two page) statement of purpose that takes a long-term view (transcending CEO tenure and business cycles).
5. Issuers would be wise to review their corporate governance frameworks against the ISG Governance Principles as they begin their off-season engagements.
Investors use the principles as a springboard to identify topics for discussion during engagements, as well as to inform their voting decisions on proxy ballot items. For example, State Street (SSGA) recently published its 2018 – 2019 Stewardship Report, which explicitly notes that SSGA is using the ISG Governance Principles both to identify companies for engagement and as a reference point for its proprietary R-Factor ESG rating system.1 It also flagged a handful of companies as noteworthy for having publicly disclosed the alignment of their corporate governance practices with the ISG framework.
On the subject of engagement, investors also expressed a clear expectation and desire for issuers to not only read their stewardship reports and other thought leadership content, but also offer these perspectives to their directors to generate discussion within the boardroom. The rationale driving this expectation is that doing so would enable issuers to have more constructive, pragmatic and efficient engagements with investors.
6. Investors and issuers share a common goal of improving the quality of engagements.
During the conference issuer and investor panelists both expressed a desire for engagements that are more constructive, pragmatic and efficient. To this end, investors urged issuers to increase their dialogue with the ISG to help achieve this goal. We believe the ISG may offer the opportunity for authentic and constructive dialogue between issuers and investors on corporate governance matters. What is unclear at this early stage, however, is whether a meaningful contingent of issuers will join the conversation.
1State Street Global Advisors, "Stewardship Report 2018–19," https://www.ssga.com/investment-topics/environmental-social-governance/2019/09/annual-asset-stewardship-report-2018.pdf
The ISG Governance Principles in Brief
The ISG is comprised of a group of 65 U.S. and international investor signatories* representing approximately $32 trillion in combined assets under management. ISG's corporate governance framework articulates six principles that it believes are fundamental governance practices at U.S. listed companies.
Principle 1: Boards are accountable to shareholders.
Principle 2: Shareholders should be entitled to voting rights in proportion to their economic interest.
Principle 3: Boards should be responsive to shareholders and be proactive in order to understand their perspectives.
Principle 4: Boards should have a strong, independent leadership structure.
Principle 5: Boards should adopt structures and practices that enhance their effectiveness.
Principle 6: Boards should develop management incentive structures that are aligned with the long-term strategy of the company.
*International investors that are governed by home-country governance or stewardship principles, or who have signed corporate governance or stewardship codes in other jurisdictions that may be inconsistent with the ISG Framework, have endorsed the framework in lieu of becoming signatories to demonstrate their support.
Georgeson published a report on the ISG Governance Principles in March 2018 – you can view that report here.