2019 ISS Global Policy Survey Results

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on his Institutional Shareholder Services publication.

Key Findings

  • Board Gender Diversity: Majorities of both investors (61 percent) and non-investors (55 percent) agreed with the view that board gender diversity is an essential attribute of effective board governance regardless of the company or its market. Approximately 27 percent of investors tended to favor a market-by-market approach to reviewing board gender diversity, while 24 percent of non-investors tended to favor an analysis conducted at the company level.
  • Director Overboarding: Investors and non-investors diverged on the question of measurement of director overboarding. A plurality of investor respondents (42 percent) indicated four public-company boards as the appropriate maximum limit for non-executive directors. A plurality of investor respondents (45 percent) also responded that two total board seats is an appropriate maximum limit for CEOs (i.e., the CEO’s “home” board plus one other board). A plurality of non-investors responded that a general board seat limit should not be applied to either non-executives (39 percent) or CEOs (36 percent), and that each board should consider what is appropriate and act accordingly.
  • Board Chair Independence: Concerning the U.S. market, survey participants were asked to identify factors that suggest the need for an independent chair in the context of a shareholder proposal. Investor respondents cited poor responsiveness to shareholder concerns as the most commonly chosen factor that strongly suggested the need for an independent board chair. Additional factors included governance practices that weaken or reduce board accountability to shareholders (such as a classified board, plurality vote standard, lack of ability to call special meetings and lack of a proxy access right). Concerning European markets, 62 percent of investors supported the policy position of a potential vote against the election of a non-independent chair solely based on the principle that the board chair should be independent. Most investor and non-investor respondents, 89 percent and 70 percent, respectively, indicated that they would apply the same approach in European markets where companies are more likely to combine the roles of CEO and Chair as in markets where separating the roles is the norm.
  • Climate Change Risk Oversight: Sixty percent of investor respondents supported the idea that all companies should be assessing and disclosing climate-related risks and taking actions to mitigate such risks where possible, while 35 percent of investor respondents indicated that climate disclosure and action may depend on company-specific factors, including the business model, industry, and location of operations. Only 5 percent of investors indicated that the possible risks related to climate change are too uncertain to incorporate into a company-specific risk assessment model.

The Survey

The ISS 2019 Global Benchmark Policy Survey is a part of ISS’ annual global benchmark policy development process, and was, as in every year, open to institutional investors, corporate executives, board members, and all other interested constituencies to solicit broad feedback on areas of potential policy change for 2020 and beyond.

Questions this year covered a broad range of topics, including board gender diversity, director overboarding, director accountability relating to climate change risk, combined chairman and CEO roles, the sun-setting of multi-class capital structures in the U.S., board responsiveness to low support for remuneration proposals in Europe, and the display of GAAP metrics in the ISS pay-for-performance quantitative model as a point of comparison to EVA (Economic Value Added) for companies in the U.S. and Canada.

In total, ISS received 396 responses to this year’s 2019 Global Policy Survey, including 128 responses from investors and 268 responses from non-investors. Of the institutional investor respondents, 69 percent represented asset managers, 18 percent represented asset owners, and three percent represented both. Responses from representatives of public corporations were by far the most prevalent.

Sixty percent of the respondents to the online survey (234 respondents) represented organizations based in the United States. Eighty-six respondents were based in Continental Europe and the U.K., while 29 respondents were based in Canada. In addition, responses came in from at least 20 organizations based in Asia. Most investor respondents had a market focus that goes beyond their own home country.

The institutional investor respondents represented entities of various sizes based on assets under management, with 29 percent of respondents representing institutions with more than $100 billion in assets under management.

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Board Gender Diversity

The responses of 95 percent of investor respondents and 90 percent of non-investor respondents suggest an acknowledgement of board gender diversity as a significant factor when assessing board quality. Responses varied in terms of how to best address the subject of board gender diversity. Sixty-one percent of investor respondents and 55 percent of non-investor respondents considered board gender diversity an essential characteristic for effective board management universally across all board and markets. Among respondents who were more inclined to apply potential exceptions to a principled approach, investors were more likely to review board gender diversity in the context of market norms, while non-investors supported an evaluation based on a company-level approach.

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Survey respondents were also asked whether ISS, under its new U.S. Benchmark Voting Policy for 2020 (announced in 2018), should consider mitigating factors beyond a commitment to appoint a woman in the near term and having recently had a female on the board, when assessing companies with no female directors. Investor respondents were less likely to suggest that other mitigating factors should be considered. Non-investor respondents were more likely to recommend additional factors to be considered, such as adopting inclusive policies and procedures for candidate searches or maintaining an active recruitment process despite the absence of a board vacancy.

The survey also included a question about board gender diversity in India. Regarding new rules requiring at least one female independent director on boards of Indian public companies, a majority of both investor and non-investor respondents, 72 percent and 66 percent, respectively, indicated that shareholders should hold members of the nominating committee accountable for non-compliance with the board gender diversity regulations, unless the company provides a compelling justification for non-compliance (one example given was not receiving timely government approval for a director appointment where this is required by law).

Director Overboarding

Some large institutional investors have recently tightened their limits on director overboarding, presumably believing the time commitment required to be an effective board member at a public company has increased in recent years.

Global standards on overboarding vary. The updated U.K. Corporate Governance Code, for example, indicates that full-time executive directors should not take on more than one non-executive directorship in a FTSE 100 company or other significant appointment. In Korea, an outside director who serves on more than two public company boards would be in violation of the Commercial Act and accompanying presidential decree.

Given the evolving views of some large institutional investors, ISS is revisiting the questions raised in the 2015 policy survey with respect to director overboarding to track changes, if any, in investors’ and non-investors’ attitudes on this topic. Forty-two percent of investor respondents indicated four total boards as the limit for non-executive directors, with five boards featuring as the second most popular response selected by 22 percent of respondents. The most popular response among non-investors (with 39 percent of respondents) was a preference for no general limit, so that each board may consider what is appropriate and act accordingly. However, 48 percent of non-investor respondents indicated that a general limit is appropriate, with four boards being the most popular response.

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A plurality of investor respondents (45 percent) also responded that two total board seats is an appropriate maximum limit for CEOs (i.e., the CEO’s “home” board plus one other). The second most popular response for investors was three total boards, with 26 percent of respondents selecting that board limit for CEOs. A plurality of non-investors responded that a general board seat limit should not be applied to CEOs (36 percent), while 29 percent of non-investor respondents selected a limit of three total boards, and 28 percent of non-investors selected a limit of two total boards.

Board Chair Independence

The debate over the proper board leadership structure continues, especially in the U.S. where many market participants agree in principle on the need for independent board leadership but disagree as to whether a lead independent director is an acceptable alternative to an independent board chair. Some investors in the U.S. market have limited tolerance for a combined Chair/CEO role whereas others view a combined role as acceptable provided that the company has a strong lead independent director. ISS U.S. policy recommends generally supporting shareholder proposals requesting that the position of board chair be filled by an independent director, after taking into consideration a wide variety of factors.

The following table shows the ranking of factors that may suggest the need for an independent board chair by investor and non-investor survey respondents.

Investors’ Rank* Non-Investors’ Rank*
Poor responsiveness to shareholder concerns 1 (95) 2 (80)
Governance practices that weaken or reduce board accountability to shareholders (e.g. a classified board, plurality vote standard, inability of shareholders to call a special meeting, lack of a proxy access right) 2 (94) 4 (66)
A corporate crisis (e.g. a serious regulatory scandal, security breach, accounting scandal, or product/operational failure) 3 (88) 3 (71)
A weak or poorly-defined lead director role 4 (87) 1 (101)
Long-term underperformance of the company relative to peer companies 5 (83) 5 (63)
Excessive or poorly-structured executive compensation 5 (83) 7 (42)
Lack of board refreshment or board diversity 7 (74) 6 (58)
Scale/complexity of the business (that is, a larger or more complex business indicating a greater need for stronger separation of the leadership roles) 8 (53) 8 (34)
Other 9 (19) 9 (27)
Number of respondents who checked at least one answer 111 178

*Rankings are based on number of responses for each answer choice
Source: 2019 ISS Policy Survey Results

In Europe, separation of the board chair and CEO roles is widely accepted as good governance practice (even though it is still not the norm in every country). However, the question of the independence of the chair and the interplay with overall board independence remains a more open topic. ISS European policy holds that a board of directors or supervisory board and its major committees should contain a sufficient number of independent directors to allow for the exercise of independent judgment. Therefore, for European companies, ISS may recommend against the election or reelection of any non-independent director, including the board chair, if their non-independence would lead to the board being considered insufficiently independent overall.

Given the importance of board independence and the key role of the board chair, ISS is considering whether a change of policy in this area may be appropriate. Fifty-two percent of investor survey respondents and 37 percent of non-investor respondents favored policies that would potentially apply negative vote recommendations to non-independent Chairs in Europe. Twenty-six percent of investor participants and 53 percent of non-investor participants opposed the introduction of policies that would take action against the election of the chair solely on the basis of board chair independence.

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Europe—Board Responsiveness to Low Support for Remuneration Proposal: Regarding board responsiveness to remuneration proposals in Europe and the EU requirements under SRD II, a majority of both investor and non-investor respondents, 98 percent and 63 percent, respectively, indicated that boards should take steps to be responsive to shareholders’ concerns as expressed by low support to the remuneration proposal (even though the proposal passes), and report feedback to shareholders. When asking respondents who indicated that boards should take steps to be responsive to shareholders’ concerns as expressed by low support to the remuneration proposal, investors were split about what exact level of vote opposition should be considered significant, with roughly one-third considering at least 20 percent of votes cast against as significant, roughly one-third considering at least 30 percent of votes cast against as significant, and 35 percent considering that the level of opposition should take into account the capital structure of the company and consider a threshold representing the “free float” opposition. One-half of non-investors indicated a level of vote opposition of at least 30 percent of votes cast against as significant.

U.S. and Canada—Quantitative Pay-for-Performance Assessment EVA in FPA Secondary Screen: Beginning in 2019, ISS’ research reports for the U.S. and Canadian markets started to include additional information on company performance using Economic Value Added (EVA) metrics. Inclusion of EVA data came in response to broad client feedback over several years that asked ISS to consider the use of additional financial metrics beyond TSR. EVA is a framework that applies a series of uniform, rules-based adjustments to financial statement accounting data, and aims to measure a company’s true underlying economic profit and capital productivity. ISS believes that EVA metrics often provide an improved framework for comparing financial performance across companies with varying business models and capital structures, as compared to using purely GAAP-based financial metrics. Accordingly, ISS plans to incorporate EVA metrics into one part of its quantitative Pay-for-Performance models, the Financial Performance Assessment (FPA) screen, for U.S. and Canadian pay-for-performance assessments from 2020. Initial feedback from some investor clients in 2018 indicated that, in the event of the use of EVA metrics in this manner, they would find it useful for ISS to continue to display the prior-used GAAP metrics separately as a point of comparison in the ISS report.

In this year’s survey, when asked for the respondent’s viewpoint regarding the display of the prior-used GAAP-based metrics, a significant majority of both investors and non-investors (84 percent and 71 percent respectively) responded that prior-used GAAP-based metrics should be displayed below the Financial Performance Assessment screen in the ISS report as a point of comparison. Thirteen percent of investors and nine percent of non-investors responded that display of the prior-used GAAP-based metrics was unnecessary. The smaller percentages of other responses and comments, from three percent of investors and 20 percent of non-investor respondents, were varied, mainly indicating some concerns with the use of EVA metrics in the FPA (one investor and 12 non-investor respondents) and some suggestions for using other metrics beyond GAAP and EVA as part of the financial performance assessment.

Climate Change Risk Oversight

Measuring and assessing the impact of risks related to climate change in portfolio companies is increasingly important to many investors. The Paris Agreement’s long-term goal to keep the increase in global average temperature to well below 2°C is receiving continued attention, including by many institutional investors. The emergence of widely accepted voluntary disclosure frameworks, such as the Taskforce on Climate-related Financial Disclosures (TCFD), encourages companies to adopt standardized approaches to reporting that allow investors to better evaluate companies’ climate awareness and risk management. In addition to the direct environmental impacts of climate change, government-mandated frameworks and legislation to regulate climate change related disclosure and carbon emissions performance are spreading. Most if not all Paris agreement signatories (approximately 200 countries) had at least one law or policy related to climate change as of May 2018. This rising regulatory tide illustrates the need for companies to assess and mitigate regulatory risks related to climate change, as well as potentially direct environmental risks to their businesses. The survey asked participants to indicate whether their organization considers that climate change should be a high-priority component of companies’ risk assessment.

A majority (60 percent) of investor respondents answered that all companies should be assessing and disclosing climate-related risks and taking actions to mitigate such risks. Thirty-five percent of investor respondents answered “Maybe—each company’s appropriate level of disclosure and action will depend on a variety of factors including its own business model, its industry sector, where and how it operates, and other company-specific factors and board members”. Only five percent of investors indicated that the possible risks related to climate change are often too uncertain to incorporate into a company-specific risk assessment model. The most popular actions that investors considered appropriate for shareholders to take at companies assessed to not be effectively reporting on or addressing their climate-related risks were engagement with the company (96 responses) and considering supporting shareholder proposals on the topic (94 responses).

The complete publication, including footnotes, is available here.

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