& 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 2025 proxy season.

For U.S. companies, this year’s Global Benchmark Policy Survey, available here, largely focuses on poison pills, executive compensation and environmental and social topics, including greenhouse gas (GHG) emissions and shareholder proposals.

As in years past, there were two categories of survey respondents: investors, comprised primarily of asset managers; and non-investors, comprised primarily of public corporations, although ISS noted that participation by both groups was down. 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 annual shareholder meetings occurring on or after February 1, 2025.

A more detailed summary of the highlights of the survey results follow.

Shareholder Rights: Poison Pills (U.S.)

ISS noted that shareholder rights plans (or “poison pills”) have morphed from a defense against unsolicited takeovers, into a defensive response to the accumulation of shares by activists. As a result, several survey questions focused on the recent trend for companies to adopt a poison pill with a lower trigger of 12.5%, 10% or even lower (rather than 15-20%) for a short duration of one year or less.

• Generally, non-investors (65%) appear to support the use of a short-term poison pill as defensive measure to an activist campaign, while a majority of investors (52%) do not support such adoption.  

• A series of additional questions on poison pills sought more granular feedback on different features of poison pills, such as the trigger threshold (15%), qualifying offer clause, and whether additional leeway should be provided to early stage companies depending on their corporate governance profile.

U.S. Executive Compensation (U.S.)

• Pay-for-Performance Misalignment – Extended Time-Vested Awards. ISS’s longstanding policy on the ratio between performance-based and time-based equity awards is based on investor views that the use of performance vesting criteria for a majority of equity pay, when well-designed and disclosed, strengthens the alignment of interests between executives and shareholders. When analyzing whether a company exhibits a quantitative pay-for-performance misalignment, ISS will typically view a predominance of performance-conditioned equity awards as a positive mitigating factor and the predominance of time-vesting equity awards as a negative exacerbating factor. In light of recent and growing skepticism from investors about executive pay being, among other things, too complex or have non-rigorous goals resulting in vesting of significantly more than target value, ISS noted that some investors believe replacing performance-based awards with time-based awards with extended vesting periods could eliminate some of the issues and maintain long-term alignment of interests between executives and shareholders. In response to the survey, investors generally support continuation of ISS’s current approach (43%), rather than a revised approach that would favor extended vesting periods as a positive mitigating factor (31%).  In contrast, most non-investors (70%) answered that ISS should revise the policy in support of longer term time-vested awards.  Of the respondents that believe ISS should revise the current approach, 66% of investor respondents and 58% of non-investor respondents supported a vesting period of at least five years. Investors (68%) and non-investors (27%) were split on their support of whether a meaningful post-vesting holding period should be present to consider the longer term time-vested awards as a positive mitigating factor.

• Discretionary Annual Incentive Programs. ISS has asked for feedback on whether discretionary year-end awards without pre-set performance goals should be viewed as problematic if such practice is generally consistent with industry or peer practice, as is the case in many large financial firms.  While non-investor respondents were split between 38% finding such awards not to be problematic, and 31% finding such awards to be problematic only if pay is not aligned with company performance, a majority (52%) of investors believe such awards are generally problematic.

• Profit Distributions for Managed Funds. Companies in certain industries, including alternative asset managers, will sometimes make awards or distributions representing a share of the profits from managed funds, which ISS notes are not capped, are complex and result in exceedingly high compensation. Such companies cite industry and competition concerns with privately held competitors when justifying such compensation practices. A vast majority of investors (69%) and nearly a majority (49%) of non-investor respondents believe that ISS should continue its current approach to analyze the magnitude and structure of such awards as it would for regular incentive pay.  

Environmental & Social (Global)

• Scope 3 GHG Emissions. Not surprisingly, investors and non-investors are divided on whether companies should be required to disclose Scope 3 GHG emission reduction targets, with 48% of investors supporting disclosure of Scope 3 emissions targets, 88% of which believe that should disclose both mid-term and net zero Scope 3 targets, and 61% of non-investors responding that companies should not be required to set targets for their Scope 3 emission reduction.

• Climate-Related Shareholder Proposals. When evaluating climate-related shareholder resolutions asking companies to report on or establish targets or plans to reduce emissions, ISS takes into consideration various factors, such as the adequacy of climate-related disclosure, existing and potential legal and regulatory risks, peer comparisons and board and management oversight disclosure.  ISS will generally recommend in favor of the proposal – without regard to whether the requests are burdensome to the company – if it identifies shortcomings in the company’s approach signaling that changes are likely in the best interest of shareholders even if they do not achieve full value chain net zero emissions. In the survey, ISS asked about the relevance of certain factors to respondents when considering proposals for a report on or to take climate-related actions. Investor respondents (33%) most commonly answered that they “generally, do not view such requests as overly burdensome and… tend to support them if shortcomings are identified in the company’s current approach.” Meanwhile, 15% of investor respondents stated they would be “less likely to support” proposals when “the technology necessary to achieve full value chain net-zero goals is not yet cost competitive.” Among non-investor respondents, 20% view target requirements for supply chain emissions as less relevant and another 20% view as less relevant when the technology necessary to achieve full value chain net-zero goals is not yet cost-competitive.

• Workplace Diversity Shareholder Proposals. ISS asked respondents which of the human capital management metrics and disclosure topics from a list of nine options provided they believe investors should support if requested in a shareholder proposal. Investors and non-investors were somewhat aligned on their top responses The top three answers selected by investors were: (1) racial/ethnic diversity and gender representation data (22%); (2) board oversight of the human capital management issue raised in the proposal (19%); and (3) adjusted gender pay gap disclosure (14%). The top three answers selected by non-investors were: (1) management oversight of the human capital management issued raised in the proposal (25%); (2) racial/ethnic diversity and gender representation data (20%); and (3) board oversight of the human capital management issue raised in the proposal (20%).