& Securities

Institutional Shareholder Services (ISS) has released results of its Annual Global Benchmark Policy Survey, which is expected to inform policy changes for the upcoming 2024 proxy season. A significant portion of this year’s Global Benchmark Policy Survey, available here, focuses on global environmental topics, particularly climate change, as well as compensation, governance and stewardship topics such as non-GAAP incentive metrics, director independence classifications for professional services and cross-market/foreign private issuer policies. Investor responses in particular demonstrate support for holding directors accountable on these topics.

There were two categories of survey respondents: investors, comprised primarily of asset managers; and non-investors, comprised primarily public corporations. According to ISS, this year’s survey saw responses from investors rise by approximately 16.5%, which appears to demonstrate their increasing interest in ESG topics broadly. In total, 239 investors and 205 non-investors participated in this survey. ISS expects to release draft policy updates based on these results in November and, after a comment period, to release final policy updates in late November or early December. The final policies will be effective for shareholder meetings occurring on or after February 1, 2024.

A more detailed summary of the highlights of the survey results for the Global and U.S. region follows.

Compensation: Non-GAAP Incentive Pay Program Metrics (U.S.)

Many companies do not disclose in their proxy statements a line-item reconciliation of non-GAAP to GAAP financial measures for incentive program metrics (as permitted by Instruction 5 to Item 402(b) of Regulation S-K, which provides that non-GAAP target levels are not required to be reconciled, but that disclosure must be provided as to how the non-GAAP financial measures are calculated from the company’s audited financial statements). ISS notes that investors are scrutinizing non-GAAP adjustments in U.S. companies’ incentive pay program metrics in recent years, in light of non-GAAP adjustments for COVID-19-related impacts, the Russia-Ukraine conflict, and litigation. In response to the survey, a growing number of investors report that line-item reconciliation disclosures are needed to make an informed assessment of executives’ incentive pay, with 60% responding that line-item reconciliation adjustments should always be disclosed and 35% responding that disclosure is only needed when the adjustments significantly impact payouts and/or when non-GAAP results have a significantly different result from GAAP payouts.  Not surprisingly, non-investor respondents are less supportive. Some investors provided comments in their responses noting that they would disfavor redundancy if adjustments were already disclosed in annual and quarterly SEC filings.

Director Independence: Professional Services (Global)

Currently, directors who provide professional services (such as legal, audit or consulting services) in excess of a “de minimis” amount ($10,000 per year in the U.S.) are considered non-independent under ISS standards. A partner, employee, or controlling shareholder of an organization that provides these services is also considered non-independent, as well as any immediate family member of a director. Recognizing that an audit or law firm might employ thousands of people, many of whom have no involvement in or influence over the services provided to the company, ISS asked whether it was appropriate to treat a director as non-independent due to a family member’s employment by such a firm. Results were divided, with 51% of investors responding that it was appropriate to consider a director not to be independent if such person’s family member is employed at a professional services firm which provides services to the company in excess of the “de minimis” amount, while only 27% of non-investors agreed. Notably, 25% of investors said that the policy was appropriate, but that the “de minimis” amount should be increased from $10,000.

Cross Market Companies/FPI Policy (Global)

U.S.-listed companies that qualify as Foreign Private Issuers (FPIs) may follow the governance and disclosure rules of their “home market” defined based on location of incorporation (not headquarters) pursuant to the current ISS policy for FPIs (see page 21). In light of numerous companies recently adding a secondary or dual primary listing in a non-U.S. market, ISS asked whether FPIs that have added a dual primary listing on a non-U.S. exchange should be analyzed under the policy applicable to the new dual listing market instead of the FPI policy. Investors (49%) and non-investors (55%) alike generally agree that ISS should apply the new dual listing market policies, rather than the FPI policy.

Global Environmental & Social Questions

In light of evolving market expectations, regulations, guidelines, standards and frameworks, particularly regarding climate change, ISS sought feedback on a number of global environmental topics.

• ISS Policy Application: Global Consistency to Market Specific Approach. ISS sought feedback regarding whether its principles and application on climate, biodiversity and human rights should be applied consistently or based on a market-specific approach.  For each category, a majority of investors are in favor of global consistency on both principles and policy application, with another roughly one-third responding that there should be consistency on principles but market-specific on policy application. Respondents from the U.S. and non-investors more commonly favored market-specific principles and policy application.
• Double Materiality. Some regulatory regimes, including the EU’s Corporate Sustainability Reporting Directive, the Global Reporting Initiative and the OECD Corporate Governance Principles (2023 Version), employ a “double” or “dynamic” materiality approach. Notably, investors (44%) and non-investors (48%) are aligned that materiality assessments should include the company’s expected impact on the environment and society, as externalities can be expected to impact the company’s financial performance. Investors (31%) and non-investors (14%) differed in their position as to whether materiality assessments should include the company’s impact on the society and environment even if they are not expected to financially impact the company.
• Board Risk Oversight for High GHG Emitters. Under ISS’s current policy, a board of a high GHG emitting company will be deemed to be materially failing in its risk oversight if the company does not have an overall ISS assessment of at least “Meets Standards” on climate-related disclosure. ISS sought feedback on whether to change the policy to require high GHG emitters to have an assessment of at least “Meets Standards” in each of its climate-related disclosure pillars: “Governance,” “Strategy,” “Risk Management,” and “Metrics and Targets.” Over half (54%) of investor respondents considered directors at a high GHG emitter to be materially failing in its risk oversight responsibilities if the company did not have adequate disclosure in each pillar.

• Say on Climate/Transition Plans.

• Shareholder Proposals. ISS asked about the most helpful part of ISS E&S Shareholder Proposal Analysis. 62% of investors responded that the summary of request and proponent and board statements was most helpful. Investors also identified the summary of the company’s disclosure and actions, the peer comparison and a list of related controversies and media attention as helpful.  

• Anti-ESG. ISS asked whether the recent increased politicization surrounding ESG risk disclosure and mitigation caused investors to view a reduction in company transparency on potentially sensitive topics as acceptable. An overwhelming 85% of investor respondents and 49% of non-investors said that they would not be tolerant of such reductions in transparency.