& Securities

Institutional Shareholder Service (ISS) has released results of its annual policy survey previewing possible policy changes for the upcoming proxy season. The results primarily reflect the views of U.S. institutional investors and public companies and are available here. We expect that ISS will publish draft 2021 policy updates in late October and release final policy updates in mid-November after a comment period. For 2021, responses demonstrate a desire by investors and non-investors for ISS to continue to be flexible in applying certain policies adopted in reaction to the COVID-19 pandemic and a sustained focus on diversity, climate change and sustainability issues. Key takeaways from the survey results are as follows:

Pandemic Related Survey Questions

• ISS’s “Flexible” COVID-19 Guidance (Global). In light of the ongoing global pandemic, ISS asked how it should factor COVID-19 into its policies and application for 2021. The majority of investors (62%) and non-investors (87%) support ISS continuing to apply its COVID-19 pandemic policy guidance and flexible approach where warranted through at least the 2021 main proxy season. The respondents who did not take that view believe that the guidance should apply only to specific markets, companies or industry sectors, such as travel, restaurants, retail and leisure, into 2021 and not more generally. Our summary of ISS’s COVID-19 guidance, which addressed topics such as the annual meeting format and timing, poison pills, shareholder rights, director attendance, changes to boards, and changes to compensation, capital structure, dividends and other payouts, can be found here.
• Executive Compensation Adjustments (Global). The majority (70%) of investors support clear disclosure about the pandemic’s impact on the economy, employees, customers and communities and the role of government-sponsored loans and other benefits and believe that boards must consider these factors and incorporate them thoughtfully into compensation decisions to adjust pay and performance expectations. Meanwhile, the majority (53%) of non-investors, but only 10% of investors, believe that the pandemic is different from previous market downturns and many boards and compensation committees will need flexibility to make decisions regarding reasonable adjustments to performance expectations and related changes to executive compensation.
• Adjustments to or Suspension of Short-Term/Annual Incentive Programs. With respect to short-term or annual incentive programs, 21% of investors and 15% of non-investors believe that companies should avoid mid-year adjustments and make payouts based on the original programs. The majority of investors (51%) and non-investors (54%) believe it would be reasonable for companies to make mid-year changes to reflect changed economic realities, or suspend annual incentive programs and instead make one-time awards based on committee discretion, depending on the circumstances and disclosed justification.
• Virtual-only Shareholder Meeting Format (Global). Absent continuing COVID-19 health and social restriction, a significant majority (77%) of investors and about one-third (31%) of non-investors indicated a preference for “hybrid” meetings, with the possibility for shareholders to attend and participate in the meeting either in-person or via effective remote communications. The plurality (42%) of non-investors (versus 12% of investors) still prefer in-person meetings, with virtual meetings used only when there is a compelling reason (such as pandemic restrictions).

Non-Pandemic Related Survey Questions

• Racial and Ethnic Diversity (Global). Responses to ISS’s three questions relating to racial and ethnic diversity underscore the lack of board and C-suite diversity and demonstrated investors’ interest in diversity and related disclosure.
  • Approaches to Disclosure. A significant majority of investors (73%) (but a minority of non-investors (36%)) indicated that companies should disclose the demographics of their directors, including directors’ self-identified race and/or ethnicity to the fullest extent possible and permitted under relevant laws.
  • Views on the Importance of Board Diversity. A majority (61%) of investors and a significant number (40%) of non-investors supported the view that boards should aim to reflect a company’s customer base and the broader societies in which it operates by including directors drawn from racial and ethnic minority groups.
  • Action to Achieving Diversity Goals. Investors (85%) and non-investors (92%) generally supported engagement with the board and management as their primary approach to encouraging the inclusion of racial and ethnically diverse directors. To further encourage increased racial/ethnic diversity, investors indicated that they would consider supporting shareholder proposals that urge the company to set workforce diversity targets or be more transparent about workforce diversity levels (78%) or to consider adopting the Rooney Rule – i.e., at least one underrepresented minority in the slate of candidates for every open senior position (58%). Investors would also consider voting against members of the nominating committee (or other directors) where board racial and ethnic diversity is lacking (56%).
• Oversight of Climate Change Risk Mitigation (Global). ISS asked what actions were appropriate for investors to take at a company that is not effectively reporting or addressing climate change risk. Both investors (92%) and non-investors (93%) overwhelmingly agree that engagement with the board and management about concerns relating to effective reporting on or addressing climate change risk is a preferred approach. Investors, however, also strongly support actions such as support of shareholder proposals, including those seeking increased disclosure related to greenhouse gas (GHG) emissions or other climate-related measures, or seeking to establish specific targets for reduction of GHG emissions, and votes against the responsible directors. Additionally, 74% of investors would urge boards to make appropriate climate-risk related goals part of executive incentive programs.
• Sustainability Frameworks (Global). Amid heightened investor interest in standardized reporting on environmental and social (E&S) metrics, ISS asked whether the Sustainable Development Goals, a series of 17 interconnected goals developed by the U.N. on a range of social topics (discussed here) were considered an effective way to measure E&S risks. Both investors and non-investors nearly were nearly split on their responses, however the majority of investors (56%) and non-investors (51%) responded “no.”
• Auditors and Audit Committees (Global). Citing recent fraud placing the quality of corporate audits into question, ISS revisited a question from its 2018 policy survey asking what other factors are relevant to evaluating the independence and performance of an external auditor. Responses from investors were as follows: significant audit controversies (88%); significance/frequency of material restatements of financial results by the company due to errors, omissions or misconduct (83%); regulatory fines or other penalties on the company related to financial disclosure practices or weaknesses not identified in the audit report (82%); regulatory fines or other penalties on the auditor for weaknesses or errors in audit practices (82%); identity of the lead audit partner(s) and any significant links to the company or its management (78%); audit firm tenure (72%); and audit partner tenure (55%).
  When asked about what information should be considered by shareholders in evaluating a company’s audit committee, the most popular responses were significant controversies (93%) and skills and experience (92%).
• Independent Chair (North America). In the context of increased support for shareholder proposals calling for independent board chairs in 2020, 85% of investors indicated that an independent chair is the preferred board leadership model. However, 47% of investors said that company-specific circumstances may justify other models while 38% indicated that only emergencies or a temporary transition period could allow for a non-independent chair. Nearly half (48%) of non-investor respondents indicated that there was no single preferred model for board leadership.