ISS Benchmark Policy Updated—Executive Summary

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

Each year, ISS conducts a robust, inclusive, and transparent global policy review process to update the ISS Benchmark Proxy Voting Guidelines (benchmark guidelines or policies) for the upcoming year.

The policy update process begins with an internal review of emerging issues, relevant regulatory changes and notable trends seen across global, regional and individual markets. Based on information gathered throughout the year (particularly feedback from investors and companies during and after proxy seasons), ISS internal policy working groups examine various governance and other voting topics across global markets. As part of this process, the working groups also examine relevant academic research, other empirical studies, and commentary by market participants. To gain further insights from a broad range of market participants, ISS then conducts a global policy survey, convenes multiple roundtable discussions, and posts draft policy change proposals for an open review and comment period. After considering this broad input and completing the extensive review process, the final policy updates are reviewed by the ISS Global Policy Board and approved for the following year. For most markets, updated policies are announced in November of each year and apply to meetings held on and after February 1 of the following year. Different timetables apply to a small number of markets that have off-cycle main proxy seasons.

This annual review and update process also informs updates to ISS’ various specialty (or thematic) policies. ISS solutions include specialty policies for socially responsible investors, faith-based investors, Taft-Hartley (labor) funds and their external asset managers, and public employee pension funds. The content of the research and the vote recommendations issued under these thematic policies may differ from those under the ISS benchmark voting policies.

ISS also helps clients to develop and implement their own voting policies based on their organizations’ specific mandates and requirements. As part of the annual review process, ISS custom research teams work with many institutional investor clients that use ISS research to help implement their own customized approaches to proxy voting. ISS helps clients apply more than 400 specific custom policies that reflect clients’ unique corporate governance philosophies and investment strategies.

2019-2020 Outreach

Policy Survey

ISS launched its global benchmark policy survey on July 22, 2019 and closed it on Aug. 13. Topics covered this year included global questions on board gender diversity, director time commitments (overboarding), and director accountability on climate change risk and market-specific questions on sunsetting of dual-class capital structures (US), independent board chair shareholder proposals (US), discharge of directors (Europe), board responsiveness to low support for remuneration proposals (Europe), and the display of GAAP metrics in one part of the ISS pay-for-performance quantitative model as a point of comparison to Economic Value Added or EVA (US and Canada). The survey was available publicly and attracted input from investors and companies, as well as from a range of other market constituents.

ISS received 396 total responses to the global policy survey. That tally included responses received through the online survey from 126 representatives of institutional investors and related organizations. Of the institutional investor respondents, 69 percent represented asset managers, 18 percent represented asset owners, and three percent represented both. Two institutional investor provided responses to ISS without taking the online survey bringing the total investor responses to 128. Responses were also received from 265 non-investors to the online survey. Responses from representatives of public corporations were by far the most prevalent. Three non-investors provided responses to ISS without taking the online survey bringing the total non-investor responses to 268.

As in past years, the majority (60 percent) of the respondents to the online survey—234 in all—represented organizations based in the United States. Eighty-six respondents were based in Continental Europe or the UK, and 29 respondents were based in Canada. Responses also came in from at least 20 organizations based in Asia. Most investor respondents had a market focus that goes beyond their home country, with many being global.

Policy Roundtables/Feedback

In the US, ISS held four roundtable discussions with various market constituents as follows:

  • On Sept. 10, 2019, a telephonic roundtable with six institutional investors covered CEO pay quantum; non-employee director pay levels and structure; evergreens in equity plans, particularly relating to recent IPOs; and the future of performance equity.
  • On Sept. 18, 2019, a telephonic roundtable with three institutional investors and two corporate directors covered director overboarding; the creation of specialized board committees/appointment of subject matter experts to a board; IPO governance structure; binding bylaw amendments; and mitigating factors in the absence of board gender diversity.
  • In-person roundtables were held with 13 institutional investors in Boston on Oct. 4, 2019 and 15 institutional investors in New York City on Oct. 10, 2019. Each of these roundtables included discussions on board gender diversity; evergreen equity plans, director overboarding limits, and critical audit matter disclosures.

In Canada, ISS held a telephonic roundtable discussion on Sept. 25, 2019 with seven institutional investors, which covered shareholder proposals on the adoption of climate change targets; shareholder proposals on the integration of environmental and social performance metrics in executive compensation; CEO overboarding thresholds; externally-managed issuers and director overboarding; and the use of evergreen equity plans by Canadian Securities Exchange-listed companies. Also, on Oct. 22, 2019, an in-person roundtable discussion with 23 institutional investors was held in Montreal. The in-person roundtable sought input on the same topics that were covered in the Sept. 25 telephonic roundtable.

In Europe, three separate in-person roundtable discussions were held with institutional investors.

  • On Sept. 23, 2019, in Edinburgh and on Sept. 24, 2019 in London, ISS held policy roundtable discussions with 30 institutional investors (representing 14 organizations) and 28 institutional investors (representing 21 organizations), respectively, covering potential policy developments around gender diversity on boards; executive remuneration; the duration of board mandates; and the impact of evolving regulatory and best practice frameworks (e.g. SRD II and the Stewardship Code) on engagement and voting.
  • On Sept. 27, 2019, ISS held a policy roundtable discussion with about a dozen institutional investors in Paris covering potential UK and Continental European policy developments around director accountability; board composition and leadership; and climate change risks and policy applications in the French market following recent legal changes.

In Japan, one-on-one meetings were held with 21 institutional investors over the July to September time period to discuss ROE policy; cross-shareholding; director independence criteria; and board diversity; among other topics applicable to Japan.

In other Asian markets, one-on-one meetings have been held with four institutional investors to review policies in Asia in general, and Singapore, Korea, and India specifically. Topics discussed included share repurchase pricing limits; director attendance and tenure; board accountability; board independence; equity compensation for the Chinese market; gender diversity; remuneration; royalty and licensing for related party transactions; updates on the government’s initiatives to reduce AGM concentration in South Korea; and shareholder proposals.

In addition, ISS participated in numerous one-on-one and other discussions throughout the year with institutional investors and/or issuers and other stakeholders in the US, Canada, UK, Continental Europe, Japan, Asia and Australia.

Public Comment Period on Proposed Policy Changes

On Oct. 7, 2019, ISS opened its public comment period and invited institutional investors, corporate issuers, and other interested constituents to provide their views on the main proposed policy changes for 2020. The comment period, which ran through Oct. 18, 2019, sought feedback on 17 proposed updates to ISS’ benchmark policy guidelines.

For policies covering European companies, feedback was sought on director terms in Continental Europe; the use of discretion by remuneration committees in UK, Ireland and Continental Europe; remuneration committee responsiveness; and board gender diversity.

For policies covering US companies, ISS sought feedback on policy changes applying to sunset provisions for dual-class stock structures, share repurchase programs, and shareholder proposals on independent board chairs.

For policies covering companies in Asia, feedback was sought on policy changes on controlled companies in Japan, board accountability in South Korea, cash dividends in Taiwan, off-market repurchase pricing limits in Singapore, and board gender diversity in India.

For coverage of companies in a number of emerging markets, ISS sought feedback on new policies and changes on cumulative voting and board independence in the Middle East, Africa (excluding South Africa), and Turkey, and director and officer indemnification and liability provisions in Brazil.

As of Oct. 21, 2019, ISS had received a total of 29 comments: Four from institutional investors and 25 from non-investors of which 24 were from corporate issuers. A summary of the comments is included in Appendix A. Comments from all respondents who did not request confidential treatment of their submissions were posted on ISS’ website under the Policy Gateway.

Summary of Policy Updates

ISS’ Benchmark Proxy Voting Guidelines consider market-specific regulations and best practices (such as those found in listing rules, local codes of best practice, etc.), investors’ growing demand for transparency in corporate reporting, and direct input from institutional investor clients and other market constituents in addressing topics such as board structure, director accountability, corporate governance standards, executive compensation, shareholder rights, corporate transactions, and social/environmental issues. The updates contained in this document reflect changes to proxy voting policies within ISS’ three global research regions—the Americas, EMEA (Europe/Middle East/Africa), and Asia-Pacific. The changes have been based on significant engagement and outreach with multiple constituents, along with a thorough analysis of regulatory changes, best practice codes, emerging governance and voting trends, and academic research.

The 2020 policy updates in this summary are grouped by region, and with separate documents addressing Americas, EMEA, and Asia-Pacific policy changes in further detail. These updates are also available through the ISS Policy Gateway. Previews of the more significant policy updates were provided to the market for comment prior to adoption:

  • US—Problematic Governance Structure—Newly Public Companies
  • US—Independent Board Chair—Shareholder Proposals
  • US—Share Repurchase Program Proposals
  • Americas Regional and Brazil—Indemnification Proposals
  • Continental Europe—Director Terms
  • Continental Europe—Board Gender Diversity
  • Continental Europe—Remuneration Committee Responsiveness
  • Continental Europe—Use of Discretion by Remuneration Committees
  • UK & Ireland—Board Gender Diversity
  • UK & Ireland—Use of Discretion by Remuneration Committees
  • EMEA Regional—Middle East & Africa (excluding South Africa), Turkey—Board Independence
  • EMEA Regional—UAE, Saudi Arabia, Egypt, Jordan, Qatar – Director Disclosure—Cumulative Voting
  • Japan—Board Independence—Controlled Companies
  • India—Board Gender Diversity
  • South Korea—Director Accountability—Governance Failures
  • Singapore—Share Repurchase Pricing Limit Proposals
  • Taiwan—Article Amendment Proposals—Cash Dividend Distribution Plans

As detailed in the regional policy documents, ISS is also making a number of less significant policy changes where further market comment was deemed unnecessary, and generally consist of changes
due to regulatory changes, changes in market practice, the expiration of transition periods, and clarifications of current policy. The full text of the updates, along with detailed results from the policy surveys and posted comments during the open comment period, are all also available on the ISS website in the Policy Gateway.

The ISS 2020 Global Policy Updates will be effective for meetings that occur on or after Feb. 1, 2020.

The main updates are summarized below.

Americas Updates

US – Problematic Governance Structure—Newly Public Companies

The prevalence of multi-class capital structure companies with disparate voting rights has grown among newly-listed entities in the US over the past several years. According to ISS data, in 2018, 14 percent of newly-public companies included such discriminatory provisions in their capital structure. Moreover, in each of the past four years, at least 10 percent of newly-public companies had multi class capital structures with unequal voting rights in place when they went public. Overall, approximately seven percent of Russell 3000 companies currently have a multi-class capital structure in place.

In recent years, a significant proportion of the companies that went public with multi-class capital structures provided for the sunset of their unequal voting rights and the creation of a one-share, one-vote structure in their governing documents. Most of these sunset requirements are time-based with the lifespans varying from as short as three years to as long as 10 years.

According to figures compiled by the Council of Institutional Investors (CII), six of the 23 companies that went public in 2017 with unequal voting rights made such structures subject to time-based sunsets. In 2018, five of the 15 firms with unequal voting in place at the time of their initial public offerings included time-based sunsets in their charters. In the first half of 2019, four of the 15 IPO firms with unequal voting schemes included such time-based sunsets in their governing documents.

Investor sentiment varies regarding both the use of multi-class share structures in principle and the appropriate mechanism for unwinding them. Research indicates that benefits attributed to multi-class structures dissipate over time and may actually turn into discounts within six to nine years after the IPO.

In the 2019 Global Policy Survey for US companies, ISS asked investors whether a time-based sunset requirement of no more than seven years was seen as appropriate. For those investors who provided a response to the question, 55 percent agreed that a maximum seven-year sunset is appropriate.

ISS seeks to provide clarity on policy application at newly-public companies by creating two distinct policies that address (1) problematic governance provisions and (2) multi-class capital structures with unequal voting rights. Specifically, the changes create a policy to address problematic capital structures at newly-public companies and provide a framework for addressing acceptable sunset requirements. In assessing the reasonableness of a time-based sunset requirement, consideration will be given to the company’s lifespan, its post-IPO ownership structure and the board’s disclosed rationale for the specific duration selected. No sunset period of more than seven years from the date of the IPO will be considered to be reasonable.

In line with the current implementation of the policy, the update also clarifies and narrows the focus of the policy to certain highly problematic governance structures.

US – Independent Board Chair Shareholder Proposals

Calls for independent board chairs are one of the most prevalent types of shareholder proposals offered for consideration at US companies’ annual general meetings. As a result, ISS has periodically included questions related to this topic in its annual policy surveys—including both the 2018 and 2019 versions—to monitor evolving investor viewpoints with respect to boardroom leadership.

According to ISS’ 2019 Global Policy Survey results, for US companies investors strongly favored incorporating certain risk factors such as poor responsiveness and oversight failures into consideration of independent chair shareholder proposals.

The policy update largely codifies the existing ISS policy application with respect to independent chair proposals. While ISS will maintain a holistic approach to evaluating these proposals, the policy now explicitly identifies the factors that will generally result in recommending support for these proposals.

In line with the feedback received from investors in the policy survey and roundtables, support for a well-crafted proposal will be likely at companies where boards rely on a weak lead independent director role or there is evidence that directors failed to oversee material risks facing the company or did not adequately respond to shareholders’ concerns. The language in the existing policy that provided an overview of how ISS will analyze the scope and rationale of the proposal, the company’s current board leadership structure, the company’s governance structure and practices, company performance, and the overriding factors will be updated and subsequently relocated to the relevant ISS Policy FAQ document.

US – Share Repurchase Program Proposals

While most US companies can (and often do) implement share buyback programs through board resolutions without shareholder votes, there are exceptions to this general rule. Certain financial institutions, for example, are required by their regulators to receive shareholder approval for buyback programs. In addition, certain US-listed cross-market companies are required by the law of their country of incorporation to receive shareholder approval to grant the board the authority to repurchase shares.

While some buyback critics express concerns that boards may authorize repurchases in lieu of R&D spending, CapEx investments or boosts in workers’ pay, shareholders generally support the use of buybacks as a way of returning cash without creating an immediate taxable event for shareholders who retain their shares, and as a form of market discipline to reduce the likelihood of unwise investments and empire-building acquisitions.

The policy update codifies the existing ISS approach, particularly with respect to the rare cases in which an “against” recommendation may be warranted. It is intended that this policy will apply to US Domestic Issuers (DEF 14 filers) listed solely in the US, regardless of their country of incorporation.

The updated policy provides safeguards against (1) the use of targeted share buybacks as greenmail or to reward company insiders by purchasing their shares at a price higher than they could receive in an open market sale, (2) the use of buybacks to boost EPS or other compensation metrics to increase payouts to executives or other insiders, and (3) repurchases that threaten a company’s long-term viability (or a bank’s capitalization level). In the absence of these abusive practices, support will generally be warranted for a grant of authority to the board to engage in a buyback.

The complete publication is available here.

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