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Institutional Shareholder Services (ISS) has launched its Annual Benchmark Policy Survey (available here) along with a separate Climate Policy Survey (available here), signaling potential changes to voting policies for 2022. Topics covered in the Annual Policy Survey include non-financial environment, social and governance (ESG) performance metrics in executive compensation plans, racial equity audits, virtual-only annual shareholder meetings, CEO compensation and votes on SPAC transactions. The Climate Policy Survey is focused on climate transition policies and board oversight of climate change risk. The surveys will inform ISS’s annual proxy voting policy updates.
Both surveys will close on August 20, 2021, at 5pm ET. ISS typically announces proposed policy changes in October and adopts its final policy changes in mid- to late-November. More information on ISS’s policy development process is available here.
Annual Survey (Global and North America Region)
- Non-Financial ESG Performance Metrics in Executive Compensation (Global). Citing that almost 30% of public companies across Europe, North America and Asia Pacific had incorporated at least one E&S-related incentive metric into their compensation plans, this year, ISS asks respondents to provide their views on whether it is appropriate to incentivize executives based on non-financial ESG metrics and, if so, whether it is best to incorporate such metrics into short-term or long-term incentives, or both.
- Mid-Cycle Changes to Long-term Incentive Programs (U.S. and Canada). ISS generally views adjustments made to long-term incentive programs in response to the COVID-19 as problematic, given that many investors consider that long-term incentives should not be adjusted on short-term market disruptions. However, as the pandemic continues to negatively impact many industries, ISS is requesting feedback about the reasonableness of mid-cycle changes to long-term incentives for such companies.
- Long(er)-Term Perspective on CEO Pay (U.S. and Canada). ISS’s current quantitative pay-for-performance screen evaluates one-year CEO pay as a multiple of the median of CEO peers. ISS is considering whether a longer-term assessment of CEO pay (e.g., three years) should be included in the ISS pay-for- performance quantitative screen.
Diversity, Virtual Meetings & Corporate Governance Practices
- Racial Equity Audits (Global). Citing increased shareholder engagement with companies on diversity and racial equity issues, ISS is requesting feedback about third-party racial equity audits. ISS asks respondents that operate in jurisdictions where racial equity audits are permissible, whether companies would benefit from an independent racial equity audit. ISS also asks what company-specific factors would be relevant in making a determination that a company would benefit from an independent audit (e.g. being involved in significant diversity-related controversies; the company does not provide detailed EEO-1 type data).
- Virtual-Only Meetings (Global). ISS notes that responses to last year’s survey reflect that the vast majority of investors preferred a hybrid meeting approach allowing for a conventional in-person meeting with additional facilities for shareholders to attend virtually. This year, ISS asks what practices in a virtual-only meeting make such meetings problematic or detrimental. Examples of potentially problematic practices cited by ISS include: the inability to ask live questions at the meeting with or without the option to submit questions in advance; participants muted and only given the option to watch the meeting; the inability for shareholders to vote or change their votes at the meeting; a requirement to register a week or more in advance, or other unreasonable barriers to shareholder registration or identification; the inability for a shareholder proponent to present and explain a shareholder proposal considered at the meeting; question and answer opportunities not provided, or questions submitted not answered; and management unreasonably “curating” which and how many questions to answer during the meeting, apparently to avoid addressing difficult questions. ISS also asks participants to opine on an appropriate way for shareholders to voice concerns regarding such problematic practices.
- Companies with Pre-2015 Problematic Governance Provisions – multi-class stock, classified board, supermajority vote requirements (U.S.). ISS currently recommends voting against directors of newly public companies that adopted certain problematic governance provisions in connection with an initial public offering (IPO), including multiple classes of stock with unequal voting rights without a reasonable sunset, classified board structure and supermajority vote requirements for amendments to governing documents. Companies that completed an IPO prior to 2015 have been exempt, or “grandfathered” from the adverse voting policy. ISS is now considering whether to eliminate this exemption. Specifically, the survey asks whether ISS should consider issuing negative voting recommendations on directors at companies maintaining these provisions regardless of when the company went public, and if so, which provisions ISS should revisit and no longer grandfather.
- Recurring Adverse Director Recommendations (U.S.). Where the company has sought shareholder approval to eliminate or otherwise amend a problematic governance provision but failed to receive adequate shareholder support, the survey asks whether an attempt to make a change is sufficient to justify supporting the election of the directors who previously adopted such problematic governance provisions or whether ISS should continue making recurring adverse director vote recommendations.
Special Purpose Acquisition Corporations (SPACs)
- SPAC Deal Votes (U.S. and Canada). ISS currently evaluates SPAC transactions on a case-by-case basis, with a main driver being the market price relative to redemption value. Given that the redemption features of most SPAC transactions are very similar, ISS notes that there may be little reason for an investor not to support a SPAC transaction. ISS asks whether investors should generally vote in favor of SPAC transactions, irrespective of the merits of the target company combination or any governance concerns and asks respondents to identify what issues, “dealbreakers” or areas of concern they consider to be reasons an investors may vote against a SPAC transaction.
- Proposals with Conditional Poor Governance Provisions (U.S.). ISS notes that one way companies impose poor governance features on shareholders is by conditioning the closing of a transaction on the passing of other ballot items such as charter amendments. ISS suggests that this provides shareholders with an “all-or-nothing” choice on poor governance features in order to approve a transaction. ISS asks respondents to provide their views on the best course of action for shareholders that support an underlying transaction but do not support ballot items that impose poor governance features (which may include unequal voting structures, excessive authorized shares, supermajority voting requirements, classified boards). The closing conditions often may be waived by the parties if they are not approved by shareholders, which suggests shareholders could vote against these conditional proposals without jeopardizing the underlying transaction.
ISS Climate Policy Survey
ISS is seeking input on shareholder expectations of companies with respect to their actions, disclosures and transition plans relating to climate change. ISS noted that it changed its 2021 policies as a result of 75% of investors responding to the 2020 annual policy survey that they may consider voting against directors who are deemed to be responsible for poor climate change risk management oversight.
- Defining Climate-Related “Material Governance Failures.” ISS seeks input on what climate-related actions and other information would be useful in assessing the quality of a company’s climate transition plans or climate risk management. ISS asks five questions seeking feedback to help define views and expectations on what climate-related action (or lack thereof) may be considered to demonstrate such poor climate change risk management that they rise to the level of material governance failures. Among the “minimum actions” identified by ISS are: providing clear and appropriately detailed disclosure of climate change emissions governance, strategy, risk mitigation efforts, and metrics and targets, such as that set forth by the Task Force on Climate-Related Financial Disclosure (TCFD); declaring a long-term ambition to be in line with Paris Agreement goals for its operations and supply chain emissions (Scopes 1, 2 & 3 targets); setting and disclosing absolute medium-term (through 2035) greenhouse gas (GHG) emissions reductions targets in line with Paris Agreement goals; and reporting that demonstrates that the company’s corporate and trade association lobbying activities align with (or do not contradict) Paris Agreement goals. The survey also asks whether similar minimum expectations are reasonable for companies that are viewed as not contributing as strongly to climate change.
- Say-on-Climate. The survey asks whether any of the “minimum actions” (referred to above) could be “dealbreakers” for shareholder support for approval of a management-proposed say-on-climate vote. The survey also asks whether voting on a say-on-climate proposal is the appropriate place to express investor sentiment about the adequacy of a company’s climate risk mitigation, or whether votes cast “against” directors would be more appropriate. ISS also requests feedback on whether and under what circumstances a shareholder proposal requesting a regular say-on-climate vote would warrant support.
- ISS Specialty Climate Voting Policy. ISS has a specialty climate voting policy available to subscribing investors, and the survey incudes questions focused on the development of this policy. ISS includes three survey questions on companies’ alignment with the goal of net zero emissions by 2050 (Net Zero). The survey also asks respondents to rank the importance of a number of elements in indicating a company’s alignment with Net Zero goals and whether specifically identified companies that are disproportionately responsible for GHG emissions should be subject to more stringent evaluation.