On October 18, 2018, Institutional Shareholder Services (“ISS") announced a proposed U.S. proxy voting policy change to address board gender diversity. In particular, ISS is seeking comment on its proposal to recommend negative votes for certain directors on boards that lack gender diversity. ISS is also seeking comment on a proposed change to one of the metrics used to assess company performance as part of its pay-for-performance model.
The proposed U.S. policy updates are available here and are summarized below. Comments on the proposed changes can be submitted via e-mail to [email protected] until 5 p.m. ET on November 1, 2018. ISS will take the comments into account as part of its policy review and expects to release its final 2019 U.S. benchmark policy/proxy voting guidelines updates in the middle of November 2018. It is important to note that ISS's final 2019 proxy voting policies, which will apply to shareholder meetings held on or after February 1, 2019, likely will reflect additional changes beyond these on which ISS has solicited comments.
Proposed Board Diversity Policy Change
Under the proposal, ISS policy would state that, effective for meetings of public companies in the Russell 3000 and S&P 1500 held on or after February 1, 2020, ISS would generally recommend votes “against" (or “withhold" from) nominating committee chairs at companies when there are no female directors on the board. Other directors responsible for the board nomination process could also be impacted on a case-by-case basis. ISS would take into account certain mitigating factors under the proposed policy, including “a firm commitment [disclosed by the company] to appoint at least one female director to the board in the near term (before the next annual general meeting)" and “the presence of at least one female director on the board at the immediately preceding annual meeting."
By way of background, beginning in 2018, ISS proxy research reports began noting whether a company's board lacked gender diversity; however, no adverse recommendations were issued to companies based on that situation. As part of its annual process for reviewing and updating its benchmark policies that guide its proxy voting recommendations for the coming year, ISS is soliciting comments on this proposed policy change. Among other things, ISS is seeking comment on whether other mitigating factors should be considered by ISS and what circumstances should ISS consider when evaluating whether to recommend “against" directors other than the chair of the nominating committee.
ISS's proposed policy reflects the strong support investors have shown for increasing gender diversity on corporate boards. For example, in ISS's latest annual policy survey, available here, more than 80% of investors and 60% of non-investors surveyed indicated that a lack of gender diversity on corporate boards would be considered problematic, up from 69% and 54%, respectively, in response to the 2017 policy survey. The proposed policy would more closely align ISS with the voting practice of Glass Lewis, which will make negative voting recommendations against the nominating committee chairs of boards with no female members beginning in 2019. As summarized in our client alert, which is available here, Glass Lewis's voting guidelines also state that Glass Lewis will “carefully review a company's disclosure of its diversity considerations" in making voting recommendations. Glass Lewis may not recommend votes “against" directors when the board has provided a “sufficient rationale" for the absence of any female board members or there is disclosure of a plan to address the board's lack of diversity.
Proposed Change to ISS Pay-for-Performance Model
ISS has proposed to update the secondary measure used to assess company performance as part of its quantitative pay-for-performance evaluation that assesses the degree of alignment between CEO pay and company performance.
By way of background, beginning in 2018, ISS began incorporating a proprietary Relative Financial Performance Assessment (“FPA") into its quantitative pay-for-performance analysis. The FPA is a secondary screen, in addition to total shareholder return (“TSR"), that uses unadjusted GAAP accounting data to assess company performance. Now, ISS has proposed to update the FPA performance measures to use Economic Value Added (“EVA") in place of unadjusted GAAP measures. EVA measures reflect “a company's Net Operating Profit After Tax (NOPAT) less . . . the cost to the company of providing an acceptable return to all capital providers (including equity owners and debtholders)." ISS clarified that “this proposal concerns purely the metrics used under the secondary FPA screen, which impacts a limited number of pay-for-performance assessments." ISS also stated that the intent of the change is to “align the measures with the long-term interests of shareholders by replacing accounting-centric measures with economic-centric measures." ISS further stated that covered issuers will receive their EVA data free of charge in advance of their ISS analysis and annual meetings. Such data will include basic benchmarking data, EVA metric results and selected data points, as well as a data dictionary to assist issuers with understanding the information.
ISS does not believe that moving to EVA-based measures will have a significant impact on the number of companies that receive “low" and “medium" quantitative concern level results as part of ISS's pay-for-performance analysis.
Special appreciation to Lauren Assaf, Maia Gez, and Julia Lapitskaya for ther work on this briefing.r work on this briefing.