New Questions and Methodology Updates to ISS’ Governance QualityScore Will Take Effect on November 29; Companies May Verify Data Through November 16
Institutional Shareholder Services (ISS) recently announced new questions and other methodology updates to its ISS Governance QualityScore corporate governance scoring tool that will take effect on November 29, 2018. These and additional updates are reflected in the Governance QualityScore technical document ISS published on November 5, 2018. This Sidley Update summarizes the Governance QualityScore updates applicable to U.S. companies and reminds companies to verify their data against Governance QualityScore’s methodology until Friday, November 16, 2018 at 8:00 p.m. (ET).
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 1 indicating the highest level of governance quality and lowest level of governance risk. ISS analyzes a company’s corporate governance risk based on specified factors across four topical categories: Board Structure, Compensation, Shareholder Rights and Audit & Risk Oversight.
New Factors Applicable to U.S. Companies
Effective November 29, 2018, ISS will evaluate U.S. companies based on 123 factors total, including eight that are new or newly applicable to U.S. companies which are highlighted in bold below.
A new Diversity subcategory under Board Structure will consist of five existing factors relating to board diversity and refreshment1 plus the following four new factors relating to board and executive officer diversity:
- How many women serve in leadership roles on the board? (New Q386)
- ISS will consider the following positions “leadership roles” for purposes of this factor: board chair, chair of key committees and lead director.
- How many women are named executive officers at the company? (New Q387)
- ISS noted that companies with no women as named executive officers will lose credit and that maximum credit will be given to companies having over two women as named executive officers.
- What is the standard deviation of director age? (New Q388)
- ISS will assign credit as follows based on the range of director ages present on a board as expressed through the sample standard deviation of ages within the Governance QualityScore universe:
- no credit for companies lower than the 25th percentile
- increasing levels of credit for companies between the 25th and 75th percentiles
- maximum credit for companies above the 75th percentile
- ISS will assign credit as follows based on the range of director ages present on a board as expressed through the sample standard deviation of ages within the Governance QualityScore universe:
- What is the standard deviation of director tenure (in years)? (New Q389)
- This factor will not be scored for the first year, and ISS will track it solely for informational purposes. If it becomes a scored factor in the future, ISS will make allowances for a lack of tenure diversity at newly public companies.
To assess whether shareholders are satisfied with company leadership, ISS added two new factors to the Board Controversies subcategory under Board Structure:
- What was the most recent percentage of vote support for the CEO? (Q391)
- This factor will be taken into account only at companies where the CEO serves on the board.
- What was the most recent percentage of vote support for the Board Chair? (Q392)
For both of these factors, ISS will evaluate the level of support based on the company’s most recent meeting where a director election for the CEO / Board Chair took place.
To further identify shareholder concerns relating to corporate governance matters, ISS added the following factors relating to shareholder support for director elections and say-on-pay proposals:
- What was the lowest percentage of vote support received by management-nominated directors at their most recent election? (Q383)
- At companies with classified boards, ISS will count the lowest support for any sitting director at his/her most recent election regardless of whether it occurred at the company’s most recent meeting.
- What was the percentage of vote support received from shareholders on the most recent say-on-pay/remuneration proposal? (Q385)
- For this factor, ISS will display the actual percentage level of shareholder support on the most recent say-on-pay proposal at the last annual meeting where such a proposal was on the ballot.
For the four questions above, ISS calculates vote support by dividing votes “for” by votes “for” plus “against/withheld.” Abstentions are not included.
ISS will update and recalculate the percentages for these factors as vote results become available. For each of these factors, ISS will display “meeting results in progress” between the date ISS publishes its proxy research report for the company and the date the company announces the vote results from the meeting.
Other Updates
Relative Performance Metrics – ISS updated the explanatory text to the factor asking if the company uses at least one metric that compares its performance to a benchmark or peer group (relative performance) (Q353). When evaluating whether a company pre-established metric in an incentive plan is set relative to an external group, ISS added that it will only consider a metric that falls above the thresholds of determining either 15% of the overall compensation, or as a modifier able to adjust payouts both positively and negatively by at least 15%.
Board Independence – ISS updated the explanatory text to the factor asking what percentage of the board is independent according to ISS’ local market classification (Q10). ISS specified that best practice suggests that 70% - rather than half – of the shareholder-elected board should be independent of the company, of which at least two members should be independent of major shareholders.
Related-Party Transactions – For the factor asking whether there are related-party transactions with significant shareholders (Q263), ISS clarified that it will analyze any such transactions that exist as of the annual meeting.
Data Verification Period
ISS announced November 5-16 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 16, 2018 at 8:00 p.m. (ET), and reference public filings where appropriate when providing corrections. 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 only be issued 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 19
ISS announced November 19-December 7 as the dates of its semiannual peer group submission window during which companies may notify ISS of any changes to their self-selected peer groups for purposes of benchmarking 2018 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, 2019, 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 2018 compensation decisions), it should notify ISS of updates to its self-selected peer companies by Friday, December 7, 2018 at 8:00 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, 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 FAQs2 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.
1 These existing factors include: What proportion of non-executive directors on the board has lengthy tenure? (Q13), What is the number of women on the board? (Q304), Does the board have any mechanisms to encourage director refreshment? (Q349 – non-scored question), What is the proportion of women on the board? (Q354) and What proportion of non-executive directors has been on the board less than 6 years? (Q355).
2 ISS, U.S. Peer Group Selection Methodology and Issuer Submission Process –Frequently Asked Questions (Nov. 9, 2017), available here.
Sidley Austin LLPはクライアントおよびその他関係者へのサービスの一環として本情報を教育上の目的に限定して提供します。本情報をリーガルアドバイスとして解釈または依拠したり、弁護士・顧客間の関係を結ぶために使用することはできません。
弁護士広告 - ニューヨーク州弁護士会規則の遵守のための当法律事務所の本店所在地は、Sidley Austin LLP ニューヨーク:787 Seventh Avenue, New York, NY 10019 (+212 839 5300)、シカゴ:One South Dearborn, Chicago, IL 60603、(+312 853 7000)、ワシントン:1501 K Street, N.W., Washington, D.C. 20005 (+202 736 8000)です。