Results of ISS Governance Principles Survey

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley publication by Ms. Posner.

ISS has posted the results of its most recent Governance Principles Survey, which can sometimes guide future ISS policies. The key areas of focus were auditors and audit committees, director accountability and track records, board gender diversity and the principle of one-share one-vote.

The results reflect 669 responses from 638 different organizations, including 469 corporations and 109 individual investor representatives. (See also this post on thecorporatecounsel.net.)

Auditors and Audit Committees

When asked what factors (other than fees) they consider in evaluating auditors, investors first cited regulatory penalties on the auditor for audit weaknesses or errors, then significant audit controversies and last, the identity of the audit partner and any links to the company or its management. Non-investors most often cited links of the audit partner to the company or its management, followed by regulatory penalties on the company related to financial disclosure practices or weaknesses not identified in the audit report, and then regulatory penalties on the auditor. Interestingly, given that audit firm tenure has recently been an issue, audit firm tenure ranked fifth for investors and sixth for non-investors out of seven factors. (See, for example, this PubCo post discussing the recommendations of both ISS and Glass Lewis against ratification of GE’s auditor, KPMG, on the basis of audit quality and auditor tenure, with a resultant 35% “against” vote.)

Factors most commonly cited by investors in evaluating the audit committee were skills and experience of audit committee members, followed by significant financial reporting or audit controversies and, finally, the quality of the company’s financial reporting, such as the number and nature of restatements. Non-investors also first cited skills and experience of audit committee members, but reversed the order of the last two factors, naming the quality of the company’s financial reporting before significant financial reporting or audit controversies.

Director Accountability and Track Records

The vast majority of investors wanted ISS to provide information regarding director oversight failures identified at other companies that resulted in a negative ISS vote recommendation. For a small percentage, the answer depended on the significance of the failure. Non-investors were nearly evenly split on the issue, while in some cases it depended on the circumstances of the oversight problem. The most relevant type of oversight issue for both groups was risk oversight failure relating to fraud or other forms of corporate malfeasance. Investors then identified oversight failures regarding the protection of shareholder rights or shareholder value and risk oversight failures related to business operations (such as cybersecurity). Non-investors identified oversight failures regarding protection of shareholder rights or shareholder value as second, followed by a pattern of poor stewardship of compensation practices, with failures related to business operations cited next. For an appropriate look-back period, 39% of investors chose no limit and 30% chose five years; among non-investors, the timeframe was shorter, with 44% choosing three years.

Board Gender Diversity

Is board gender diversity finally being taken seriously? (See, e.g., this PubCo postthis PubCo post and this PubCo post.) Of investors, 45% said that the absence of any women directors on a company’s board would indicate a problem in the board recruitment process, while 37% indicated that it would be problematic; however, those “concerns may be mitigated if there is a disclosed policy/approach that describes the considerations taken into account by the board or the nominating committee to increase gender diversity on the board.” The response most favored by investors and non-investors that found the absence of women on the board to be problematic was board or management engagement, followed by support for a shareholder proposal aimed at increasing diversity and voting against the chair of the nom/gov committee.

One-Share, One-Vote Principle

With regard to multi-class share structures with unequal voting rights that companies employ to provide some protection “from perceived short-term pressures,” ISS asked if respondents would like ISS to provide a pro forma adjusted analysis showing what the voting results would have been had they been calculated on a one-share, one-vote basis. In response, 92% of investors and 59% of non-investors responded positively. When ISS then asked whether it should use the adjusted vote analysis (as opposed to the actual results) to determine the need for board responsiveness to shareholder vote results in the following year, 72% of investors were in favor, but only 42% of non-investors agreed. Some respondents advocated use of the adjusted data on a case-by-case basis depending on ownership structure and absence of a sunset provision. Appropriate timeframe for sunset provisions? Forty-six percent of each group chose either “one to three years” or “four to six years.” A “significant minority” responded that the timeframe depended on a variety of factors, such as “the level of involvement of family or original founders, the share structure and the difference in voting rights, the maturity of the company, the industry, company size, company governance, and shareholder engagement.”

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