Institutional Shareholder Services (ISS) recently updated its U.S. Procedures & Policies (Non-Compensation) Frequently Asked Questions (FAQs) which describes ISS’ approach to providing guidance on certain issues in the context of preparing proxy analyses and determining vote recommendations for U.S. public companies. ISS updated several questions, with key updates and material changes summarized below.
Questions on ISS Procedures
FAQ 4. Does ISS review company materials filed after the ISS proxy report is published?
Yes – ISS reviews all proxy, 8-K and exempt filings on EDGAR filed between publication of the ISS research report and the date of the shareholder meeting. Proxy “Alerts”, which serve to update a previously issued ISS research report, are issued when ISS identifies information material to the issued report or that might impact the voting decisions of the institutional clients to whom the research report was delivered. 10-Qs are generally not reviewed so companies should inform ISS of material information contained in 10-Qs.
Issuers are urged to inform ISS directly via the ISS Help Center if they file new material that they want ISS to consider for a potential change to a voting recommendation.
FAQ 5. How does a company inform ISS that it has filed a response to an ISS report?
ISS reviews EDGAR filings made between the time of the publication of the ISS research report and the date of the shareholders meeting to which the research report relates. If a company has filed what it considers to be a direct “response” to a published ISS report, the company should provide the link to this proxy filing through the ISS Help Center and clearly state in the notes accompanying the submission that it is a response to the ISS report.
FAQ 6. How should a company inform ISS of an updated Corporate Social Responsibility (CSR) or other environmental/social report?
Corporate Social Responsibility (CSR), Sustainability, or other environmental/social responsibility (E&S) reports are generally posted on the company’s website, not filed on EDGAR. ISS reviews these documents annually, but not necessarily on a basis tied to annual shareholder meetings. If a company wants to maximize the probability that a newly released E&S-related report is incorporated into the E&S related ratings displayed in ISS’ Proxy voting report, they will want to: 1) use their Governance Analytics account to submit data verification updates to their Environmental and Social QualityScore data; and/or 2) submit a link to the new E&S-related report to the ISS Help Center. The data updates and submission should be done no later than the filing of the proxy or 30 days prior to the meeting, whichever is earlier.
FAQ 8. What topics are generally discussed during off-season issuer engagements?
During off-season (August through February), the U.S. Research team schedules engagements requested by issuers regarding more general discussions of the company’s situation and governance. Engagements are prioritized for companies with substantive governance issues: e.g., companies facing low shareholder support on say-on-pay or director elections, majority-supported shareholder proposals, ISS recommendations against management proposals at the prior election, or companies undergoing major transitions. These discussions occur prior to the filing of the proxy.
ISS has multiple teams that work on broader E&S issues (including data collection and company ratings), so engagements requests through the ISS Help Center for E&S should be made through the “Engagement-Other” tile, not the “Engagement-Proxy Research” tile.
Questions on Data in ISS Reports
FAQ 19. Has ISS changed its approach to Stock Ownership Guidelines?
ISS has updated its approach to Stock Ownership Guidelines, to account for the fact that a small number of companies’ guidelines allow some types of equity awards that are not actually owned shares to be counted towards the goals. If the guidelines allow for the inclusion of unearned performance awards or unexercised options (or any portion thereof, such as the current "in the money" value) towards meeting the guidelines, the company will no longer receive credit for having stock ownership guidelines.
FAQ 47. How are SPACs (Special Purpose Acquisition Companies) counted for overboarding purposes?
CEOs of SPACs (special purpose acquisition companies) are subject to the CEO overboarding policy, with SPAC boards counting the same as other public boards. In general, each SPAC will count as a separate board also for directors.
FAQ 50. How does ISS profile directors for racial and ethnic diversity?
Racial and ethnic characteristics are identified and sourced directly from corporate filings, as well as direct feedback in response to ISS’ outreach to U.S. companies. Where definitive information is not disclosed, ISS classifies directors—largely along standards put forth by the U.S. Office of Management and Budget’s Directive 15—by carefully assessing race and ethnicity through a variety of publicly available information sources. These include company investor relations websites, LinkedIn profiles, press releases, leading news sites, as well as through identifying affiliations between individuals and relevant associations and organizations focused on race and/or ethnicity.
Currently board ethnic/racial diversity is considered in voting recommendations for two ISS Specialty Policies: Socially Responsible Investing (SRI) and Catholic Faith-Based. Starting in 2021, under the U.S. benchmark policy ISS will identify U.S. companies that have no apparent racial or ethnic diversity amongst directors; adverse vote recommendations based on a lack of apparent racial/ethnic diversity will start for meetings on or after Feb 1, 2022 at Russell 3000 or S&P1500 companies.
FAQ 83. What does ISS mean when it says an anti-pledging policy is non-robust?
A robust anti-pledging policy has all of the following features:
- Applies to both executives and directors;
- Applies to all shares held (regardless of how the shares were obtained);
- Contains either a broad prohibition on pledging, or prohibits pledging in margin accounts and pledging stock for loans;
- Pledging prohibition cannot be waived via pre-clearance; and
- No executive or director has a current pledged position.
Any exceptions within the policy that would allow pledging to occur will cause the policy to be considered non-robust.
Contested Elections: Proxy Contests and Proxy Access
FAQ 91. Is there a fundamental change in ISS' approach towards independent chair shareholder proposals?
No - ISS will continue to take a holistic review of all of the factors related to the company's board leadership structure, governance practices, and performance. The most recent policy update has codified the factors that are likely to increase the likelihood of a favorable recommendation.
Regarding the scope of the proposal, consideration will be given whether the proposal is precatory or binding and whether the proposal is seeking an immediate change in the chair role or the policy can be implemented at the next CEO transition. If the proposal is seeking an immediate change in the chair position, greater emphasis will be weighted towards the proponent's rationale.
Under the review of the company's board leadership structure, the following scenarios would increase the likelihood of a "for" recommendation absent a compelling rationale:
- The presence of an executive or non-independent chair in addition to the CEO;
- A recent recombination of the role of CEO and chair; and/or
- Departure from a structure with an independent chair.
ISS will also likely support the proposal if the designation of a lead director role is not considered sufficiently robust to effectively counterbalance a combined chair/CEO role.
When considering the governance structure, ISS will consider the overall independence of the board, the independence of key committees, the establishment of governance guidelines, board refreshment activities, and any other factors that may be relevant. A majority non-independent board and/or the presence of non-independent directors on key board committees will weigh in favor of support for the proposal.
The review of the company's governance practices may include, but is not limited to, excessive or problematic compensation practices, material failures of governance, lack of responsiveness to shareholder concerns, governance practices that weaken or reduce board accountability to shareholders, related-party transactions or other issues putting director independence at risk, corporate or management scandals, and actions by management or the board with potential or realized negative impact on shareholders. Any such practices may suggest a need for more independent oversight at the company thus warranting support of the proposal.
ISS will also take into consideration evidence the board has failed to oversee and address material risks facing the company which may have damaged the company's reputation, resulted in material regulatory penalties or a significant loss in shareholder value, and/or had other adverse impacts on shareholders. Such instances may suggest the need for greater independent boardroom leadership or independent oversight in the form of an independent chair.
ISS' performance assessment will generally consider one-, three-, and five-year TSR compared to the company's peers and the market as a whole, with an emphasis on long-term performance.
FAQ 94. Will ISS consider a company's rationale for maintaining a non-independent chair?
Yes, ISS will consider the company's rationale as a factor that may be applicable in the holistic review. A "compelling" rationale will be subject to a case-by-case evaluation. Boilerplate rationales will be viewed less favorably.
FAQ 103. What is ISS’ general approach on environmental and social-related shareholder proposals?
When evaluating shareholder proposals, ISS follows a series of steps to ensure that consistent analysis and appropriate voting recommendations are applied to all environmental and social (E&S) topics. Since some risks and values may be difficult to quantify, ISS analysts use a number of techniques to evaluate the potential benefit of a shareholder proposal.
Generally, ISS seeks to determine if the disclosure or action requested by a shareholder resolution relates to an area that is material to the company, is not already adequately addressed by existing disclosures and practices and could be a reasonable approach to the risk the shareholder proponent is concerned with.
In general, ISS will recommend support for proposals that ask for additional disclosure if it is deemed a positive contribution to the company's understanding of its risks and is not burdensome, and proposals that request a feasibility study given the issue is material and there is sound rationale it will benefit shareholders, and will support direct action requests if there are significant controversies and/or the company’s policies and practices lag accepted norms.
FAQ 113. What disclosures and publicly available information does ISS look at when evaluating a pay gap-related shareholder proposal request?
Shareholder proponents have filed proposals requesting reporting on the median gender/racial/ethnic pay gap at companies that are mainly in the IT and financial sectors, where the median pay gaps in these categories are believed to be the highest. Many U.S. companies have begun reporting statistically adjusted equal pay statistics but mostly have not reported median pay gaps. Equal pay statistics address whether people get paid equally for similar jobs. However, equal pay statistics do not reflect differences in opportunity or structural biases that may lead to situations where more men or racially/ethnically white people hold higher-paying jobs than women or people of color.
In its analysis of these proposals, ISS takes a case-by-case approach and considers the company’s disclosure of policies and practices related to fair and equitable compensation, as well as its diversity and inclusion initiatives. Specifically, ISS looks to assess whether the company is actively trying to improve the representation of women and people of color and people from different ethnic backgrounds in senior leadership and technical positions and whether it is making progress in these efforts. Additionally, ISS considers the company’s efforts in this area compared to its industry peers. ISS also takes into account whether there are any related significant controversies that could result in reputational risks.
Should ISS assess that the company is lagging in its efforts to improve the median pay gap, or there are significant controversies, it will generally recommend support for proposals requesting a median gender/racial/ethnicity pay gap report as it could provide shareholders with useful information about how effectively management is assessing and mitigating risks that may rise from inequitable employee treatment.
ISS will generally not recommend support for proposals that request a global median race or ethnicity pay gap report, due to the fact that types of racial/ethnic disparities, issues of discrimination, and the racial/ethnic composition of underrepresented groups can be entirely different depending on the countries in which a given company operates.