& Securities

On July 30, 2018, Institutional Shareholder Services (ISS) launched its annual global benchmark policy survey as part of the review of its proxy voting policies. As in 2017, the 2018 survey is being conducted in two parts – the Governance Principles Survey and the Policy Application Survey. The Governance Principles Survey covers four high-level topics on auditors and audit committees, director accountability, board gender diversity and the “one-share, one vote” principle. The more in-depth Policy Application Survey addresses key issues by region as well as by topic. The key issues for the Americas region include excessive non-executive director compensation, independent chair proposals, share ownership requirements for binding bylaw amendments and pay-for-performance metrics.

Institutional investors, companies, corporate directors and other market constituents are asked to participate in the survey. The Governance Principles Survey will be open until August 24, 2018 at 5 pm ET and the Policy Application Survey, which respondents have the option to take after completing the Governance Principles Survey, will remain open until September 21, 2018 at 5 pm ET. ISS will then review the results to inform any updates to its policies ahead of 2019 annual shareholder meetings. The survey is available here.

Governance Principles Survey

• Auditors and Audit Committees. ISS is exploring what other audit-related services factors (in addition to non-audit services and fees) should be considered in evaluating the independence of the external auditors (e.g., tenure of firm/partner, regulatory fines). ISS is also asking what other information should be considered by shareholders in evaluating the audit committee (e.g., skills, quality of financial reporting, disclosure on auditor independence, meeting frequency, refreshment).
• Director Accountability and Track Record. Where ISS previously recommended against the election of a director due to oversight failures identified by ISS, ISS is asking (i) whether it is useful for ISS to cite such negative recommendation in another company’s proxy research report, (ii) what type of oversight failures should trigger the commentary (e.g., related to fraud or business operations, oversight failures regarding shareholder rights, pattern of poor compensation practices) and (iii) what look-back period is appropriate.
• Gender Diversity on Boards. In light of a cited lack of progress since the 2017 survey, ISS is revisiting certain questions on board gender diversity:
  • Is it problematic if there are no female directors on a public company’s board?
  • What actions do you consider appropriate for shareholders to take at a company that lacks gender diversity? (e.g., engage with board/management, support a shareholder-nominated candidate, vote against nominating/governance committee or chair, vote against board chair or lead director)
• One-Share, One-Vote Principle. Following up on questions from last year’s survey, ISS is considering whether to provide “adjusted” analysis of shareholder vote results illustrating what the vote would have been had all the votes been counted under the one-share, one-vote principle. For the second year in a row, ISS is inquiring as to whether respondents believe there is an appropriate sunset provision for multi-class capital structures with unequal voting rights.

Policy Application Survey (Americas)

• Non-Employee Director Pay (US). The 2019 proxy season may see the first round of ISS voting recommendations against directors at companies that ISS views as having outlier non-executive director compensation. ISS is seeking feedback on what may be a reasonable rationale to justify high non-executive director compensation (e.g., special payments related to corporate transactions or other special circumstances, payments in consideration of specific expertise, payments to reward performance or “extraordinary service”).
• Independent Chair (US). ISS is reevaluating the factors that it should take into consideration in determining whether to recommend support for an independent chair proposal.
• Minimum Stock Ownership Requirements for Binding Bylaw Amendments (US). ISS is considering whether there should be a minimum stock ownership requirement (in excess of that required by SEC Rule 14a-8) for shareholders to propose binding bylaw amendments, what those levels should be, and whether shareholders should be permitted to aggregate their holdings to meet such requirement.
• Quantitative Pay-for-Performance Screens (US and Canada). ISS is exploring ways to improve the financial metrics used in its pay-for-performance (P4P) analysis, and is considering supplementing or replacing existing GAAP-based accounting metrics in the Financial Performance Assessment with Economic Value Added (EVA) based metrics to measure corporate economic performance.

ISS typically announces its proposed policy changes and seeks further comment approximately two months after the survey closes.  More information on ISS’s policy development process is available here.