Institutional Shareholder Services Issues Governance QualityScore Updates and Opens Data Verification Period

ISS’ Governance QualityScore assigns each company in the S&P 500 and Russell 3000 (as well as companies in several foreign indices) a numeric, decile-based score indicating its corporate governance risk relative to other companies in the applicable index or region. Scores range from 1 to 10, with a score of 1 indicating the lowest level of governance risk (and best governance quality). ISS analyzes a company’s corporate governance risk based on specified factors across four topical categories: Board Structure, Compensation, Shareholder Rights & Takeover Defenses and Audit & Risk Oversight.

New Factors Applicable to U.S. Companies

Effective November 25, ISS will evaluate U.S. companies based on 127 factors total, including three new questions relating to Environmental & Social (E&S) matters and one modified question about the level of disclosure on performance measures for short-term incentive plans.

Recognizing the growing trend of linking executive compensation to sustainability goals, ISS added two new questions to the Compensation category asking whether companies disclose any E&S performance measures for their executive incentive plans:

• What is the level of disclosure on E&S performance measures for the short-term incentive plan for executives? (New Q394)
• What is the level of disclosure on E&S performance measures for any long-term incentive plan for executives granted in the last fiscal year? (New Q395)

For these factors, ISS will consider various environmental, social or general sustainability performance measures disclosed by the company, “such as those focusing on climate change and energy usage or labor conditions in the supply chain.”

ISS also added a new E&S-related question to the Shareholder Rights & Takeover Defenses category:

• What was the greatest percentage of vote support for environmental or social shareholder resolutions at the most recent annual meeting? (New Q393)

ISS noted that significant shareholder support for an E&S shareholder proposal may indicate inadequate company disclosure or performance relating to sustainability. For this factor, ISS will calculate vote support based on shares voted for the proposal divided by shares voted for plus against.

These three new E&S-related factors will initially be provided only for informational purposes and will not impact a company’s Governance QualityScore for the first year following inclusion.

In addition, ISS modified the question text for one factor in the Compensation category to allow for evaluation of all company-disclosed performance measures:

• What is the level of disclosure on performance measures for the short-term incentive plan for executives? (Modified Q113)

Previously, the question asked: Does the company disclose a performance measure for the short-term incentive plan for executives?

Data Verification Period

ISS announced November 4–15 as the dates of its annual data verification period during which companies have the opportunity to verify their data against Governance QualityScore’s methodology. Companies should verify their data prior to Friday, November 15 at 8 p.m. (ET), and reference public filings where appropriate when providing corrections. The data verification window will reopen on November 25 after the new Governance QualityScore methodology updates take effect.

The data verification tool is free for companies and is accessible here. Companies that do not already have a login for the ISS Governance Analytics platform may request login information by sending an email to contactus@isscorporatesolutions.com. ISS has specified that data verification logins will be issued only to representatives of the subject company – not law firms, compensation consultants, proxy solicitors or others. Companies that anticipate filing a proxy statement in the near future should be aware that data verification is not available during the period between the filing of a proxy statement and the publication of ISS’ proxy voting recommendations for the annual meeting.

In reviewing these methodology changes and verifying data, companies should bear in mind that Governance QualityScores are relative, and scores may be average or below average even if the company has adopted many best practices advocated by ISS. Directors and management should continue to ensure that a company’s governance structure is appropriate for that company and resist the temptation to make governance decisions for the purpose of positively impacting Governance QualityScores.

Peer Group Submission Window to Open November 18

ISS announced that the window for its semiannual peer group submission will be November 18 to December 6, during which time companies may notify ISS of any changes to their self-selected peer groups for purposes of benchmarking 2019 CEO compensation. If a company (i) is in the Russell 3000 or Russell MicroCap Index, (ii) has an annual meeting scheduled to be held between February 1 and September 15, 2020 and (iii) made or intends to make changes to its peer group used to set compensation for the fiscal year that will be disclosed in the next proxy statement (i.e., for 2019 compensation decisions), it should notify ISS of updates to its self-selected peer companies by Friday, December 6 at 8 p.m. (ET).

Companies may submit peer company updates using the Governance Analytics platform — information about which is available here. If a company does not provide an updated peer group to ISS, then ISS will consider in its peer group construction process the company-selected peer companies disclosed in the company’s last proxy filing.

A company’s self-selected compensation peer companies are a key input to ISS’ peer group construction process. However, ISS makes clear in its Peer Group Selection Methodology FAQs¹ that there are instances in which a company’s self-selected peer may not appear in the ISS peer group — such as when it does not meet the applicable size constraints or inclusion would lead to an overrepresentation of a particular industry within the ISS peer group. 

 

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¹ISS, U.S. Peer Group Selection Methodology and Issuer Submission Process – Frequently Asked Questions (Jan. 7, 2019).