Every year around this time, ISS opens its “benchmark voting policy consultation period,” during which ISS solicits views from “governance stakeholders” on certain proposed voting policies for 2019. Generally, only the “big picture” policy changes are discussed during this period. The final and more granular policy changes effecting executive compensation usually come out around the last week of November.
In addition to the board gender diversity issues that I have discussed in this blog a couple time already, the key change under consideration is ISS proposal to update its secondary Financial Performance Assessment screen by replacing existing unadjusted GAAP accounting measures with “improved” Economic Value Added (EVA)-based measures. The announced intent is “to align the measures with the long-term interests of shareholders by replacing accounting-centric measures with economic-centric measures. Specifically, the FPA would shift its capital productivity and profitability measures from GAAP-based measures of ROA, ROE, and ROIC to EVA concepts of EVA Spread and EVA Margin, measured over a three-year period.” Measures of company progress no longer would be based on EBITDA growth and cash flow growth. “EVA Momentum,” denominated by capital and sales, would be used to measure a company’s economic growth trajectory.
The primary performance assessment screens will continue to rely on TSR. Additionally, ISS will only use the FPA to (i) potentially adjust upwards the concern level of companies that receive a marginal “low” concern on the primary screens, but demonstrate poor economic performance, and (ii) adjust downwards the concern level of companies that receive a “medium” concern on the primary screens, but have shown strong economic performance.
ISS will provide EVA data free of charge to all covered issuers for their own company in advance of their annual meeting and ISS analysis. (ISS acquired the business of EVA Dimensions LLC, earlier this year.) This free data will include EVA metric results, basic benchmarking data, and selected data points along with a data dictionary to help understand the information. This information will be made available well in advance of a company’s annual meeting.
The benchmark voting policy consultation period will run through 5:00 p.m. ET on November 1.
