Heads Up for the 2019 Proxy Season: ISS Survey Results May 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 U.S. institutional investors and public companies and is available here.1 We expect that ISS will publish draft 2019 policy updates in late October and release final policy updates in mid-November after a comment period. The results of ISS’s more in-depth Policy Application Survey, which addresses topics by region, will remain opened until September 21, 2018.

Director Accountability and Track Records. An overwhelming number of investors (84%) responded that they would like information concerning oversight shortfalls by a director relating to past and present directorships. Non-investor respondents are divided on whether they consider such information relevant. Investors and non-investors are generally aligned that risk oversight failures relating to fraud or other forms of corporate malfeasance are most pertinent. Other oversight failures cited as relevant are those related to protection of shareholder rights or shareholder value, those related to business operations, such as cybersecurity, and poor compensation practices. With respect to the appropriate look-back period, 30% of investors support five years, while 39% supported no time limit. Non-investors generally support a shorter look-back period, with 44% selecting three years and 13% selecting one year. ISS noted that where identified, concerns about oversight shortfalls may trigger negative recommendations under current ISS policy for directors who held boardroom leadership roles or served on committees with direct responsibility for overseeing the activities that triggered the controversy.

Auditor and Audit Committees. Citing recent events, such as the collapse of U.K. construction giant Carillion after a clean bill of health from its auditor, ISS asked respondents what additional audit-related factors would be useful to evaluate the independence and performance of a company’s external auditor. In response, investors most often expressed interest in obtaining information about regulatory fines or other penalties incurred by the auditor relating to weaknesses or errors in audit practices. They also expressed interest in information about significant audit controversies, and ties between the audit partner and the company or management. Non-investors indicated that they are primarily concerned with the audit partner’s ties to the company or management.

Lack of Gender Diversity. In light of a cited lack of progress in increasing gender diversity on boards, ISS again posed the question of whether it is problematic if there are no female directors on a public company board. Affirmative responses from both investors and non-investors increased year-over-year, with 80% of investors and 60% of non-investors indicating that no female board representation is problematic (up from 69% and 54%, respectively, in 2017). Most investors and non-investors consider engagement with the board and/or management to be the appropriate response. Supporting a shareholder proposal to increase diversity and voting against the chair of the nominating committee were the second and third most frequent answers. Supporting a shareholder-nominated candidate and considering voting against all members of the nominating committee tied for fourth place.

One Share, One Vote.  For the third year in a row, ISS requested feedback on multi-class capital structures. When asked whether ISS should provide voting results illustrating what the vote would have been if all votes were counted equally, 92% of investors and 59% of non-investors responded they would like such information. Notably, 31% of non-investors responded that ISS should not provide such information. There does not appear to be a consensus on the appropriate sunset period on unequal voting rights, with “it depends” reflected as the most popular answer from investors and non-investors.

Endnotes    (↵ returns to text)

  1. ISS received 669 responses to the survey: 107 responses from institutional investors or their service providers; 469 from public companies; and the remainder from consultants or advisors to public companies, corporate directors, and organizations that represent or provide services to public companies. Over 400 responses were from organizations based in the US.