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Article | Executive Pay Memo North America

ISS policy survey focuses on COVID-19 related changes and ESG

Governance Advisory Services |Executive Compensation
COVID 19 Coronavirus

By Michael Biggane , Heather Marshall and Brian Myers | July 30, 2021

Building towards 2022 policy, the survey includes questions around compensation and ESG-related topics.

Institutional Shareholder Services’ (ISS) annual benchmark policy survey is now open, with a focus on social and governance questions (the “S” and “G” of ESG). Separately, ISS released a survey focused on climate and environment, or the “E” in ESG. The surveys collect feedback from institutional investors, corporate issuers and other interested parties to inform the ISS 2022 voting policy, which is typically published in November each year. A copy of the ISS press release (which contains links to the surveys) can be found here.

While most large institutional investors rely on their own policies and procedures, proxy advisor policies can influence voting decisions and signal broader areas of focus by institutional investors. For this reason, stakeholders are encouraged to respond. Both surveys will close to participation on August 20, 2021 (5:00 p.m. ET).

CEO pay-related questions – magnitude and timeline for review (U.S. and Canada)

Overall compensation quantum has increasingly found its way onto the radars of investors and proxy advisors alike. Under its pay-for-performance testing, ISS currently considers total pay on a one-year basis relative to the median of peer CEOs. The survey seeks to understand if the screening should focus on a longer time period, noting three years as an example.

COVID-19-related questions – ISS policy and annual general meeting formats (Global)

In 2020, ISS asked for views on annual general meeting (AGM) formats longer-term, absent social restrictions, given the general trend toward virtual meetings and increased flexibility amid the uncertainty of the pandemic. Investors overwhelmingly noted a strong preference for a hybrid meeting approach (in-person meeting with facilities for virtual shareholder attendance). ISS is again asking for views on AGM formats, related specifically to virtual-only meetings and what practices might potentially be problematic. The survey also asks how shareholders could voice concerns with the operation of virtual meetings (e.g., limiting the ability to ask questions live and registration requirements), ranging from engagement with the company to negative votes for directors.

COVID-19 related questions – compensation adjustments (U.S. and Canada)

On the topic of executive compensation, ISS solicits feedback around in-cycle adjustments to long-term incentive programs (LTIPs). Throughout 2021 adjustments to in-flight awards have generally not been well received, with a preference from ISS and investors to allow LTIPs to complete their cycle despite short-term disruptions. Given the ongoing nature of the pandemic and the severe impacts to some industries, ISS asks for updated viewpoints around in-cycle adjustments going forward with a binary response of continuing to view as problematic or assessing reasonability on a case-by-case basis.

It is notable that ISS did not solicit views on long-term incentive changes in the 2020 survey. One could reasonably infer this means more of an openness to consider changes to LTIPs based on individual facts and circumstances. In any case, companies that have made changes to their long-term incentives will need to continue carefully thinking about how to explain this in their compensation discussion and analysis.

Questions related to ESG

Perhaps not surprising, given the growing momentum around ESG matters in the investor community and coupled with an acceleration in boards’ focus on human capital during COVID-19 and social unrest in the U.S., the survey poses questions on various ESG-related topics:

  • Nonfinancial ESG performance metrics in executive incentive compensation plans (Global)
    • Citing the increasing prevalence of ESG metrics finding their way into incentive compensation plans, ISS queries whether nonfinancial metrics should be incorporated into executive compensation programs. Responses range from it generally not being appropriate to inclusion either on a measurable or more judgment-based basis. Willis Towers Watson research indicates that around half of the S&P 500 currently utilize some form of ESG factor in either their short-term or long-term incentives (including traditional factors like employee safety and customer satisfaction), a rate consistent with what we have seen over the past three or four years. While the percentage of companies moving to use ESG factors is increasing, the growth has been very slow to date.
  • Racial equity audits (Global)
    • In response to racial justice protests, stakeholders have sought out enhanced disclosures around diversity and representation in the workforce. While noting differing legal and cultural realities around the globe, ISS asks for opinions around third-party racial equity audits, ranging from indication of being beneficial to no benefit.
  • Preexisting poor governance practices (U.S. only)
    • Beginning in 2015, ISS has recommended against directors of IPO companies where poor governance policies were in place. Items like classified board structures and unequal voting rights (with no reasonable sunset period) have been scrutinized and serve as vote recommendation drivers. ISS is now asking whether companies that implemented practices prior to 2015 (which ISS grandfathered for protection) should now face scrutiny, and which practices should be reviewed.

Timing and next steps

The survey is open for participation until the close of business (5:00 p.m. ET) on Friday, August 20, 2021. 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 2022. 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 followed by a FAQ release in December. The final policies become effective for shareholder meetings taking place on February 1, 2022, 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.

Authors

Associate Director, Executive Compensation (Cincinnati)

Senior Director, Executive Compensation (New York)

Governance Team Lead, North America & Director, Executive Compensation (Arlington)

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