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Article | Executive Pay Matters

Latest ISS survey focuses on director-related topics

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August 1, 2019

ISS released its annual policy survey to obtain feedback on possible changes to the proxy advisor’s benchmark voting policies for 2020.

Institutional Shareholder Services (ISS)'s annual global policy survey is now open, and board gender diversity and director overboarding are clearly on the radar as 2020 proxy advisor voting policies are considered.

ISS released its annual global policy survey this week to obtain feedback from institutional investors, public companies and other interested parties on possible changes to the proxy advisor's benchmark voting policies for 2020. ISS press release contains a link to the survey.

While most of the largest institutional investors rely on their own policies and procedures, proxy advisor voting policies can influence proxy voting decisions, or signal broader areas of focus by institutional investors. For this reason, companies are encouraged to review the survey. This year's questions are posed in one survey, a streamlining effort, as opposed to the two surveys (Governance Principles and Policy Application) we've seen in the past few years.

Director-related topics

Last year in the US, ISS introduced a new voting policy for the chairs of nominating committees for companies in the Russell 3000 and/or S&P 1500 with no female directors serving on their boards. ISS wants to know whether mitigating factors should be considered before a negative vote recommendation. Factors include a firm commitment stated in the definitive proxy to appoint at least one female in the near term (e.g., within the next year), service of at least one female on the board at the time of the annual meeting, or other relevant case-by-case factors.

For non-US companies, ISS is also soliciting opinions on board gender diversity, with specific questions for Indian companies, where there is now a regulatory requirement to have female directors.

ISS notes that institutional investors' views on director overboarding have been evolving. ISS generally follows local best practice codes and recommendations which apply upper limits on board memberships. Where no such limits exist, ISS would like to know what a reasonable limit might be (it is worth noting that six board seats is the highest possible number a survey respondent can give).

The survey also includes a number of country-specific issues targeted at Asia Pacific companies, including:

  • Director accountability in Korea: ISS appears to be considering a policy of tracking directors indicted or convicted of felony-level offenses against companies and recommending against those director nominees at other companies at which they serve.
  • ROE performance in Japan: Currently, ISS Japan policy recommends opposing top executives at a Japanese company that has underperformed in terms of capital efficiency (i.e., when the company has posted average return on equity (ROE) of less than five percent over the last five fiscal years) , unless improvement is observed. ISS is considering a change to this policy, exempting companies with a three-committee system from the ROE policy. Unlike companies employing a two board structure, three-committee companies have a separate nomination and compensation committee with a majority of outside directors and therefore shareholders can expect that outside directors will play a key role in director appointments and executive succession decisions (rather than management controlling that process at two committee companies).

Compensation topics in the spotlight

The policy survey focuses primarily on director-related (non-compensation) questions. However, the survey again poses questions about the use of EVA metrics in the U.S. and Canada and Board responsiveness to low support for remuneration proposals in Europe.

  • In early 2019, ISS began providing EVA company performance as an information-only piece in its US and Canadian research reports. This year's review indicates that in the US and Canada ISS plans to move beyond information-only by incorporating EVA in the pay-for-performance model, and the policy survey seeks input on whether to supplement or replace the GAAP-based financial metrics. The existing Quantitative Financial Performance Assessment (FPA) test would be secondary. ISS notes that some of the key measures in the FPA, such as earnings before interest, taxes, depreciation and amortization growth, have comparable measures under the EVA structure.
  • The ISS survey also asks what type of interventions (such as voting against compensation committee chair) would be appropriate when a European company receives significant vote opposition to a remuneration-related proposal (even though the proposal passes) and the board is insufficiently responsive to investors concerns.

Timing and next steps

The survey is open for participation until 5:00 AM Saturday 10 August, Beijing/ Hong Kong/ Singapore time. Results are typically released approximately three weeks after the survey closes. An open public comment period will occur after release of the final proposed policy changes.

It's too early to predict which, if any, changes or updates will ultimately be adopted for 2020. It should also be noted that ISS does not always include potential policy updates in the survey. Final policy updates are typically released in November, and final policies become effective for shareholder meetings taking place on 1 February 2020 or later.

We encourage companies to stay current on evolving policies for shareholder voting on executive compensation and to weigh in via the ISS policy survey and the broader policy formation process.

*This is based on an article written by Brian Myers and Jim Kroll, Willis Towers Watson Executive Compensation team.