QualityScore: Methodology Guide

Overview

ISS ESG Governance QualityScore (GQS) is a data-driven scoring and screening solution designed to help institutional investors monitor portfolio company governance. At both an overall company level and along topical classifications covering Board Structure, Compensation, Shareholder Rights, and Audit & Risk Oversight, scores indicate relative governance quality supported by factor-level data. That data, in turn, is critical to the scoring assessment, while historical scores and underlying reasons prompting scoring changes provide greater context and trending analysis to understand a company’s approach to governance over time.

With the continued and growing focus on investor stewardship and engagement, alongside the global convergence of standards and best practices, governance plays an increasingly prominent role in investment decisions. As an extra-financial data screening solution, the Governance QualityScore methodology delivers several key benefits.

Employs robust governance data and attributes. Governance attributes are categorized under four topical categories: Board Structure, Shareholder Rights & Takeover Defenses, Compensation/Remuneration, and Audit & Risk Oversight. Governance QualityScore calls upon a library of more than 230 governance factors across the coverage universe, of which up to 127 are used for any one company (defined by region). Governance QualityScore highlights both potentially shareholder-adverse practices at a company, as well as mitigating factors that help tell a more complete story. The underlying dataset is updated on an ongoing basis as company disclosures are filed, providing the most-timely data available in the marketplace.

Incorporates Company Disclosures. Information included in Governance QualityScore includes that drawn from the annual filing of companies’ proxies, annual reports, 10-Ks, circulars, meeting notices, and other publicly disclosed materials related to a company’s annual general meeting (AGM). Those data are augmented by proprietary analytics and information stemming from ISS analyses, interpretations, and proxy voting policies and subsequent recommendations to our clients for these shareholder meetings. While companies have the ability most of the year to submit changes to Governance QualityScore answers, this ability is restricted between the dates when the company files its proxy or meeting materials and the publication of ISS’ proxy analysis for the company’s annual meeting. During the blackout period, the company’s online Governance QualityScore profile and data is frozen and does not reflect the latest information being gathered for the proxy analysis. Once the proxy research report is published and released to ISS’ clients, companies are once again able to review their Governance QualityScore data profiles and provide updates through the Data Verification tool.

The Governance QualityScore profiles available online are updated once daily, at approximately 5am ET (10 AM UTC). Therefore, when the ISS proxy analysis is released containing the updated Governance QualityScore scores after the daily update, the online website will not yet reflect these updated scores and information. The updated online score and profile will be viewable the following day after the next daily update.

Leverages ISS’ global footprint and industry leadership. Governance QualityScore leverages ISS’ industry leading global footprint, which includes deep legal and language expertise across key global capital markets, including many of those within the coverage universe. Factors used to assess risk-related concerns for a given company in each market are based on the same principles that form the foundation of ISS’ global benchmark voting policy. Developed through an extensive, transparent, and inclusive process, these policies reflect best practices across jurisdictions, as well as the views of institutional investors, issuers, and governance practitioners worldwide. The Governance QualityScore factor methodology is aligned with ISS’ benchmark proxy voting policy to ensure it is up-to-date and tailored to address appropriate variations in governance practices across global capital markets. (For more on ISS benchmark policies and their formulation, visit www.issgovernance.com/policy.)

Presents at-a-glance governance rankings relative to index and region. Governance QualityScore features company-level decile scores, presented as integers from 1 through 10, plus underlying category scores using the same scale that together provide a clear understanding of the drivers of a company’s governance risk. A score in the 1^st decile indicates higher quality and relatively lower governance risk, and, conversely, a score in the 10^th decile indicates relatively lower quality and higher governance risk. These scores provide an at-a-glance view of each company’s governance risk relative to their index and region. The individual factor breakdown takes a regional approach in evaluating and scoring companies, to allow for company-level comparisons within markets where corporate governance practices are similar.

Provides global governance factor comparability. In 2017, Governance QualityScore refined its in-depth regional focus to include more factors that are applicable across all markets. The number of global core factors currently stand at over 30 overall, applicable to at least 29 countries. The global core factors provide more data to assess and benchmark governance risk, allow for an increased gradation in scoring, and results in more comprehensive governance profiles. The methodology ensures that companies within a given region/country have a core base of factors that are comparable to other companies globally, to provide greater benchmarking capabilities.

Summary of Updates

The Governance QualityScore annual methodology review ensures the approach remains closely aligned with the ISS’ benchmark voting policies and reflect developments in regulatory and market practices.

January 2021 Methodology Updates

Governance QualityScore methodology will be enhanced to provide users with deep insights into the governance of information security risk through the introduction of eleven new factors across two new subcategories, Information Security Risk Management and Information Security Risk Oversight, within the Audit category. Additionally, ISS ESG is enhancing the Diversity and Inclusion subcategory with a factor that examines ethnic and racial diversity on the board. The Compensation category will include a new factor that evaluates the level of disclosure of diversity and inclusion performance metrics and two new factors that will assess the presence and proportion of special grants awarded to executives. Within the Board category, a new factor will evaluate the independence of the sustainability committee as more companies begin to delineate responsibilities for environmental and social oversight within the board. Moreover, another factor will evaluate the presence of familial relationships between directors. In total, seventeen new factors will be added, making this the largest Governance QualityScore methodology release in recent years.

Governance QualityScore has also rebalanced certain existing factors into the new Board Commitments subcategory, largely themed around director overboarding and attendance issues, and into the new Litigation Rights subcategory.

New Factors as of January 29, 2021:

Audit (Information Security Risk Oversight)

• What percentage of the committee responsible for information security risk is independent? (Q403)
  • Market Applicability: All regions excluding Japan and South Korea
• How often does senior leadership brief the board on information security matters? (Q404)
  • Market Applicability: All regions excluding Japan and South Korea
• How many directors with information security experience are on the board? (Q405)
  • Market Applicability: All regions excluding Japan and South Korea

Audit (Information Security Risk Management)

• Does the company disclose an approach on identifying and mitigating information security risks? (Q402)
  • Market Applicability: All regions excluding Japan and South Korea
• What are the net expenses incurred from information security breaches over the last three years relative to total revenue? (Q406)
  • Market Applicability: U.S.
• Has the company experienced an information security breach in the last three years? (Q407)
  • Market Applicability: All regions excluding Japan and South Korea
• What are the net expenses incurred from information security breach penalties and settlements over the last three years relative to total revenue? (Q408)
  • Market Applicability: U.S.
• Has the company entered into an information security risk insurance policy? (Q409)
  • Market Applicability: All regions excluding Japan and South Korea
• Is the company externally audited or certified by top information security standards? (Q410)
  • Market Applicability: All regions excluding Japan and South Korea
• Does the company have an information security training program? (Q411)
  • Market Applicability: All regions excluding Japan and South Korea
• How long ago did the most recent information security breach occur (in months)? (Q412)
  • Market Applicability: All regions excluding Japan and South Korea

Board Structure (Diversity and Inclusion)

• Does the board exhibit ethnic or racial diversity? (Q390)
  • Market Applicability: U.S.

Board Structure (Board Practices)

• What percentage of the sustainability committee is independent? (Q396)
  • Market Applicability: All Regions except Japan and South Korea

Board Structure (Board Composition)

• What percentage of the board has familial relationships with other directors? (Q401)
  • Market Applicability: All regions* except Japan, AsiaPac, India, and Latin America

Compensation (Communications and Disclosure)

• What is the level of disclosure on diversity and inclusion performance measures for the short-term or any long-term incentive plan for executives? (Q398)
  • Market Applicability: All Regions except Japan and South Korea. Unscored in India.

Compensation (Compensation Controversies)

• Has the company made special grants to executives excluding the CEO in the most recent fiscal year? (Q399)
  • Market Applicability: U.S.
• What percentage of the CEO’s total compensation was due to special grants in the most recent fiscal year? (Q400)
  • Market Applicability: U.S.

Application of Existing Factors to New Markets:

Board Structure

• How many executive directors serve on an excessive number of outside boards? (Q36)
  • Add: U.S., Canada
• Does the Board Chair serve on a significant number of outside boards? (Q39)
  • Add: U.S., Canada

Shareholder Rights

• What is the percentage of multiple voting rights or voting certificates relative to total voting rights? (Q57)
  • Add: Australasia*, AsiaPac*, India*, Latin America*, Russia*, S. Europe, U.S., Canada
• What is the free float percentage of multiple voting rights or voting certificates? (Q58)
  • Add: Russia*, S. Europe
• What percentage of issued share capital is composed of non-voting shares? (Q63)
  • Add: Australasia*, AsiaPac*, India*, Latin America*, U.S., Canada
• Does the company have a controlling shareholder? (Q290)
  • Add: Anglo*, Canada*, Germanic*, Nordic*, W. Europe* (Now global)

*Indicates this factor is not scored for the respective region

The complete publication, including footnotes and appendix, is available here.