On January 29, 2021, Institutional Shareholder Services (ISS) updated the ISS ESG Governance QualityScore (“QualityScore") product to include 17 new factors and various other changes, representing what ISS calls “the largest Governance QualityScore methodology release in recent years."
Background
QualityScore is ISS's ESG ratings product that in the U.S. covers the S&P 500 and Russell 3000. U.S. public companies are rated in four categories—Board Structure, Shareholder Rights & Takeover Defenses, Compensation/Remuneration, and Audit & Risk Oversight—based on publicly available data applicable to over 147 data points. This data is updated on an ongoing basis to reflect company disclosures and is “augmented by proprietary analytics and information stemming from ISS analyses, interpretations, and proxy voting policies and subsequent recommendations to [ISS] clients for these shareholder meetings." Companies receive scores in each of the four categories as well as an overall score. The scores range from 1 to 10 with a score of 1 reflecting “higher quality and relatively lower governance risk," compared to a score of 10 reflecting “relatively lower quality and higher governance risk."
Summary of January 2021 Updates
The January 2021 QualityScore updates include:
- Eleven new factors in the Audit category that are in two new subcategories: Information Security Risk Oversight and Information Security Risk Management.
- Three new factors in the Board Structure category, including: whether the board “exhibit[s]" ethnic and racial diversity, in the Diversity and Inclusion subcategory; the percentage of the sustainability committee that is independent (or the committee that oversees sustainability issues if not a separate committee), in the Board Practices subcategory; and an unscored question that is for informational purposes only regarding the percentage of the board that has familial relationships with other directors, in the Board Composition subcategory.
- Three new factors in the Compensation category, including: evaluating the level of disclosure of diversity and inclusion performance metrics in executive incentive plans, in the Communications and Disclosure subcategory; the presence of special grants to executives other than the CEO, in the Compensation Controversies subcategory; and the proportion of the CEO's total compensation from special grants, in the Compensation Controversies subcategory.
- The application of two new factors in the Board Structure category to U.S. companies, which concern overboarding of executive directors and the board chair.
- The application of two new factors in the Shareholder Rights category to U.S. companies, which concern the percentage of “multiple voting rights or voting certificates relative to total voting rights" and the percentage of “issued share capital [that] is composed of non-voting shares."
More details on these changes are set forth below in the Exhibit.
QualityScore also rebalanced certain existing factors into two new subcategories: a new “Board Commitments" subcategory that is largely focused on director overboarding and attendance issues, and a new “Litigation Rights" subcategory that focuses on exclusive forum and fee-shifting provisions.
The QualityScore technical document explaining the mechanics of QualityScore is available at: https://www.issgovernance.com/file/products/qualityscore-techdoc.pdf.
Exhibit
January 2021 QualityScore Updates
A. New Factors for U.S. Companies
1. Audit (Information Security Risk Oversight)
- What percentage of the committee responsible for information security risk is independent? (Question 403)
- How often does senior leadership brief the board on information security matters? (Question 404)
- How many directors with information security experience are on the board? (Question 405)
2. Audit (Information Security Risk Oversight)
- Does the company disclose an approach on identifying and mitigating information security risks? (Question 402)
- What are the net expenses incurred from information security breaches over the last three years relative to total revenue? (Question 406)
- Has the company experienced an information security breach in the last three years? (Question 407)
- What are the net expenses incurred from information security breach penalties and settlements over the last three years relative to total revenue? (Question 408)
- Has the company entered into an information security risk insurance policy? (Question 409)
- Is the company externally audited or certified by top information security standards? (Question 410)
- Does the company have an information security training program? (Question 411)
- How long ago did the most recent information security breach occur (in months)? (Question 412)
3. Board Structure (Diversity and Inclusion)
- Does the board exhibit ethnic or racial diversity? (Question 390)
4. Board Structure (Board Practices)
- What percentage of the sustainability committee is independent? (Question 396)
5. Board Structure (Board Composition)
- What percentage of the board has familial relationships with other directors? (Question 401) (not scored, for information only)
6. Compensation (Communications and Disclosure)
- What is the level of disclosure on diversity and inclusion performance measures for the short-term or any long-term incentive plan for executives? (Question 398)
7. Compensation (Compensation Controversies)
- Has the company made special grants to executives excluding the CEO in the most recent fiscal year? (Question 399)
- What percentage of the CEO's total compensation was due to special grants in the most recent fiscal year? (Question 400)
B. Application of Existing Factors to U.S. Companies
1. Board Structure
- How many executive directors serve on an excessive number of outside boards? (Question 36)
- Does the Board Chair serve on a significant number of outside boards? (Question 39)
2. Shareholder Rights
- What is the percentage of multiple voting rights or voting certificates relative to total voting rights? (Question 57)
- What percentage of issued share capital is composed of non-voting shares? (Question 63)