Looking Ahead to the 2020 Proxy Season: ISS Annual Policy Survey Signals Top of Mind Issues

This week, Institutional Shareholder Services (ISS) launched its Annual Policy Survey ⁠— a key part of ISS’s annual update to its proxy voting policies signaling potential changes for 2020. This year, ISS streamlined the survey to include fewer questions presented in a single survey, rather than in two parts. This Alert discusses the global and U.S. survey topics including board gender diversity, director over-boarding, combined chair and CEO roles, director accountability for climate change risk, sun-setting of multi-class capital structures and the use of Economic Value Added (EVA) metrics in ISS’s pay-for-performance secondary screen.

Institutional investors, companies, corporate directors and other market constituents participate in the survey. The survey will close on August 9, 2019, at 5pm ET. ISS will then review the results along with input obtained from investors, company executives, directors and others through its various regional, topic-specific roundtables and conference calls to inform any updates to its policies ahead of 2020 annual shareholder meetings. The survey is available here.

Mitigating Factors on Board Gender Diversity (U.S.). ISS previously adopted a policy, effective for annual meetings on or after February 1, 2020, pursuant to which ISS will recommend against the election the nominating committee chair (or other nominating committee members) at Russell 3000 and S&P 500 companies where there are no women. In making its recommendation, ISS will consider certain mitigating factors, including the company’s disclosed commitment in its proxy statement to appoint at least one female to the board in the near term or the presence of a female on the board at the preceding annual meeting. ISS asks respondents to provide their views on whether mitigating factors such as a company’s commitment to include one or more women in its pool of candidates (known as the “Rooney rule”) or a commitment to conduct an active search to add women to the board, regardless of whether there is a current vacancy on the board, should be sufficient to avoid a negative ISS recommendation.

Director Over-boarding (Global). ISS may be re-evaluating its over-boarding policy, citing the “evolving views” of some large institutional investors, such as BlackRock and Vanguard that have adopted more restrictive policies, available here and here. ISS’s current policy is to recommend against the election of any director that (i) serves on more than five public company boards in total or (ii) is a public company CEO and serves on the board of two other public companies in addition to serving on his or her own company’s board (recommending against the director’s election only at the outside boards).

Combined Chair and CEO Roles (U.S.). ISS acknowledges the long-debated questions of whether independent board leadership is essential or whether a lead independent director is an acceptable alternative to an independent board chair. Specifically, ISS asks what factors or circumstances would most strongly suggest the need for an independent chair. Examples provided by ISS are as follows: a poorly-defined lead director role; governance practices that weaken board accountability to shareholders (e.g., a classified board, plurality voting, inability of shareholders to call a special meeting, lack of a proxy access); lack of board refreshment or board diversity; poor responsiveness to shareholder concerns; long-term underperformance relative to peers; scale/complexity of the business (that is, a larger or more complex business indicating a greater need for stronger separation of the leadership roles); excessive or poorly-structured executive compensation; or a corporate crisis (e.g. a serious regulatory scandal, security breach, accounting scandal, or product/operational failure).

Accountability for Climate Change Risk (U.S.). Citing the emergence of widely accepted frameworks for the disclosure of climate change risk (e.g., the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD)) and spread of global regulations on climate change- related disclosure and carbon emissions performance, ISS advocates that companies and their boards need to assess and mitigate regulatory risks related to climate-change and environmental risks to their businesses. Accordingly, ISS is seeking feedback on appropriate ways for shareholders to hold companies accountable for ineffectively reporting on or ineffectively addressing climate change risk. Examples provided by ISS include engaging with management or the board, supporting shareholder proposals seeking disclosure or other climate related measures, voting against the chair of the audit or risk committee, the lead director or chair of the board.

Sunset Provisions for Multi-Class Stock (U.S.). For the third year in a row, ISS is inquiring as to what period of time is appropriate for a time-based sunset provision to be triggered for multi-class capital structures with unequal voting rights. ISS specifically asks whether seven years is appropriate.

EVA Pay-for-Performance (U.S.). In 2019, ISS began to include additional information on company performance through the EVA framework that applies a series of rules-based adjustments to financial statement accounting data offering a “uniform” non-GAAP basis for evaluating performance across companies. ISS intends to continue to explore whether to incorporate EVA metrics into its secondary pay-for-performance screen — which assesses a narrow subset of companies when the primary screens indicate a borderline result between “Low” and “Medium” concern levels. Based on initial feedback, ISS is seeking additional responses as to whether it should also provide the GAAP metrics currently used as a point of comparison to the EVA measures.

ISS typically announces proposed policy changes, including change resulting from input provided on the survey, and seeks further comment approximately two months after the survey closes. More information on ISS’s policy development process is available here.