Heads Up for the 2018 Proxy Season: ISS Survey Results Signal Policy Changes

ISS has released results of its Governance Principles Survey which is often a precursor to changes to its voting policies. The results primarily reflect the views of US institutional investors and public companies.1 In late October, ISS is expected to publish draft 2018 policy updates and open a comment period, after which ISS anticipates releasing final policy updates in mid-November. Key takeaways from the survey are as follows:

Pay Ratio: Investors Likely to Pay Attention

Beginning in 2018, many US issuers will be required to report the ratio of the total annual compensation of the CEO to the median annual total compensation of all employees of the company (other than the CEO) in their Form 10-K or proxy statement disclosure. ISS survey results reflect that approximately 66% of investors intend to make use of this disclosure to evaluate pay ratios across company/industry sectors and to assess year-over-year changes in the ratio at an individual company. Investors also support shareholders’ use of pay ratio as one factor in determining how to vote on compensation-related resolutions and as a part of engagement efforts with public companies.

Mixed-Views on Virtual-Only Shareholder Meetings

Despite criticism from some pension funds and other investors, virtual-only shareholder meetings have increased in popularity. According to Proxy Pulse 2017 Proxy Season Review, as of September 2017, 163 companies held virtual-only shareholder meetings, compared to 122 during the same period in 2016.  Survey results reflect that approximately 44% of investors consider virtual-only shareholder meetings unacceptable, with another 32% indicating such meetings would be acceptable so long as they provide the same shareholder rights as physical meeting. Hybrid meetings (physical meetings supplemented with technological means of participation) are supported by 87% of investors and 73% of public companies.

Lack of Gender Diversity Seen as Problematic

The tide has clearly shifted with 69% of investors indicating that the absence of any female directors is problematic. Approximately one-quarter of investors indicated that their concerns may be mitigated if the company disclosed its policy or approach to increasing gender diversity on the board.

When asked about how shareholders should respond to a lack of board gender diversity, investors first favor engagement with the company, then submission of shareholder proposals on gender diversity, followed by support for a shareholder-nominated candidate.

Unequal Voting Rights without Limitation Still Seen as Problematic

For the second year in a row, ISS requested feedback on multi-class capital structures. Multi-class capital structures with unequal voting rights have been in the spotlight in recent years due to a series of high-profile share issuances that deviated from one-share one-vote, including the recent no-vote share IPO of Snap Inc. Investors are split: 43% said an unequal voting structure is never appropriate for a public company, and 43% said such a structure is appropriate at a newly-public company if the structure is subject to an automatic sunset or periodic approval from the low vote shareholders.

Investors Mixed on Cross-Market Share Issuance Proposals

Rules regarding shareholder approval of share issuances and buybacks vary by market. Many European markets require shareholder approval for share issuances and share buybacks. In contrast, US listing rules do not require shareholder approval for share repurchases, and only require shareholder approval for certain share issuances (e.g., in excess of 20% or in connection with a change in control). ISS asked respondents to provide views on proposals for share issuances or share repurchases at cross-market companies (e.g., companies with a primary listing in the US that are incorporated in a foreign jurisdiction such as in the U.K., Ireland, or the Netherlands). 36% of investors were of the view that cross-market companies should be required to follow home country practices while 26% indicated that as long as the company follows customary US capital market practice, the proposal should be treated as routine.

Policy Application Survey

ISS’s survey was broken into two parts this year – the high-level Governance Principles Survey and the Policy Application Survey, which drills down into key issues by market and regions, as well as by topics such as responsible investing, takeover defenses, and compensation. The Policy Application Survey will remain open until October 6, 2017 at 5 p.m.

Endnotes    (≈ returns to text)

  1. ISS received 602 responses to the survey: 129 responses from institutional investors or their service providers; 382 from public companies; and the remaining responses from consultants or advisors to public companies, corporate directors, organizations that represent or provide services to public companies. Over 400 responses were from organizations based in the US.