Institutional Shareholder Services Inc. (ISS) has opened up its annual Global Policy Survey (the “Survey”), which is the first step in its 2018 global benchmark policy formulation process. ISS has invited investors, companies, directors and other market participants to respond to the Survey. You can click here to participate in the survey, but we are providing this Client Alert to give you an independent perspective about the survey.
This year, ISS has broken the Survey into two parts. The first part is new and is more philosophical, and seeks views on broader governance principles that have received attention lately. This part of the Survey will close on August 31st at 5:00 p.m. Eastern Time.
The second part is similar to the detailed surveys of prior years, and seeks input on specific aspects of policy application. This year, a majority of these more detailed policy questions pertain to companies incorporated in Europe and Asia. This part of the Survey will close on October 6th at 5:00 p.m. Eastern Time. As usual, ISS will also conduct roundtables and conference calls to collect input.
While informative, companies should keep in mind that historically, many of the items addressed in the annual Global Policy Survey do not necessarily make their way into final policies, and conversely, there can be items in the final policy updates that were not covered by the Survey. As such, it is helpful not to read too much into the questions being addressed in the Survey.
We expect that the results of the Survey will be published in mid to late October 2017, about three weeks after the second part of the Survey closes. The results are expected to provide an indication of the views of investors and companies (with policy changes typically being driven by investor preferences over company preferences). ISS generally uses these results to inform its draft policy updates, which it will publish for comment. After receiving comments on its draft updates, ISS will issue final policy updates in late fall that will be effective for annual meetings after February 1, 2018.
Survey Part I, Governance Principles
This part of the Survey seeks input on five general questions of governance principles.
One Share, One Vote
Historically, a shareholder’s voting power generally corresponded to the holder’s ownership stake and capital investment. Some recent, high profile IPOs and other established companies (Snap Inc., Alphabet, Facebook and Blue Apron) have structures where there is less of a link between voting rights and economic ownership interest. ISS is seeking views on the one share, one vote principle.
Board Gender Diversity
Non-U.S. markets have focused increased attention on board gender diversity, by requiring increasing disclosure, making best practice recommendations or mandating outright quota requirements. ISS asks whether it is a problem for a company to have no female directors, and what shareholder actions might be appropriate in response.
CEO pay ratios will be in effect for the 2018 proxy season, barring any regulatory or legislative action. (For help with the determination of, or disclosure to shareholders or employees about, your CEO pay ratio, contact a member of the Aon Governance team listed below.) Such ratios and related disclosures are proposed in the U.K. and Europe. ISS inquires as to how investors and issuers intend to, and should, use pay ratio data.
Virtual or Hybrid Annual Meetings
Companies in the U.S., U.K. and some other markets may conduct their annual meetings virtually using online streaming video and audio technology. Many companies also conduct “hybrid” meetings, which is a physical meeting in tandem with a virtual meeting. Virtual-only meetings can represent a tradeoff between increased participation with lower cost, and reduced opportunity for face to face exchanges. ISS is soliciting views on virtual and hybrid annual meetings.
Cross Market Share Issuance and Buyback Proposals
There are differing requirements applicable to U.S.-listed companies and companies in European markets in connection with share issuances and share buybacks. Such cross market companies that are incorporated in the UK or Europe and listed in the U.S. might be required under their home country law to obtain shareholder approval, but obtaining such approval might not be required under U.S. listing rules. ISS is asking for input on how to treat share issuance or buyback proposals of such cross market companies.
Survey Part II, Policy Application Survey
The second part of the Survey seeks input across five familiar topic areas: (1) Board, (2) Compensation, (3) Environmental and Social, (4) Capital-Related/Other, and (5) Takeover Defenses. The questions applicable to U.S. and Canadian companies address the following topics.
Realized and Realizable Pay
The increased investor focus toward pay-for-performance has made performance-based compensation more common. Under SEC rules, the amounts shown in the Summary Compensation Table for grants of performance-based vehicles represent the accounting value, and not what the executive officer actually receives. To illustrate the alignment between pay and performance, many companies include a graphic of the amount of pay actually realized or realizable, and ISS includes a standardized depiction of realizable pay for CEOs of S&P 1500 companies. ISS is seeking input on whether and how to incorporate realizable pay in the pay for performance quantitative methodology.
Non-Executive Director Pay Quantum and Structures
Pay levels for non-executive directors have risen in recent years, and director pay has been the focus of recent lawsuits alleging that the total amounts are excessive. ISS runs a quantitative screen as part of the QualityScore to identify director pay outliers and then conducts a follow-up qualitative analysis. The Survey seeks feedback on what factors should be considered in evaluating director pay magnitude and program structure, and what to do about perennial outliers.
Gender Pay Gap
The difference between the median earnings of males and females in a company has been the focus of shareholder proposals in the past two years. These proposals have asked companies to disclose policies and goals for reducing this gender pay gap. ISS is seeking input on whether companies should disclose such gender pay gap information, and if so, under what circumstances.
Short Term Poison Pills
When a company adopts a short-term poison pill without a shareholder vote, current ISS policy evaluates such a situation on a case-by-case basis. ISS asks for feedback on whether a case-by-case approach is appropriate.
If you have questions about the Survey or any other corporate governance issues, please contact us and request to speak with one of our Corporate Governance team members.