ISS unveils 2020 policy updates

To ensure its global voting policies consider the changing views and needs of its institutional investor clients and the perspectives of companies and the broader corporate governance community, ISS gathers input each year from institutional investors, companies, and other market constituents worldwide through a variety of channels and over many months. The updates, announced Nov. 12, have been informed by the careful consideration of the many inputs received, ISS said.

“This is the fifteenth year in which a broad range of institutional investors, companies and other interested market constituents globally have provided thoughtful feedback through ISS’ annual benchmark policy survey, roundtables and other meetings, and through our public open comment period on proposed changes,” said Georgina Marshall, global head of research and ISS global policy board chairperson. “ISS’ clients include some of the most sophisticated institutional investors across the world and our transparent, market-based approach to evolving the policies that are the basis of ISS’ informed, independent research and voting recommendations, continues to help support them in making considered voting decisions in any particular situation, in light of their own investment and governance philosophies, stewardship responsibilities and fiduciary duties.”

U.S.-related updates. Among the changes, ISS will update its policy approach for newly public companies in the United States by creating two distinct policies that address (1) problematic governance provisions and (2) multi-class capital structures with unequal voting rights, including providing a framework for addressing acceptable sunset requirements for problematic capital structures in newly public companies. “Numerous considerations will be considered when assessing the reasonableness of a time-based sunset provision,” ISS said. “However, sunset periods beyond seven years from the date of the IPO will not be considered reasonable.”

This update also clarifies and narrows the focus of the policy to certain highly problematic governance structures. Additional updates to the U.S. policy with broader application cover share repurchase programs and shareholder proposals on independent board chairs.

Europe-related updates. In Europe, new policies are being introduced for application in Continental Europe, the United Kingdom, and Ireland regarding board gender diversity. These policies will generally provide for recommending a vote “against” the company’s nomination committee chairperson (or other relevant directors on a case-by-case basis) where the company has no female directors, ISS said.

This policy aligns with a similar policy previously announced for 2020 in the United States. Also, as many EU member states are implementing the EU Shareholder Rights Directive II that prescribes a shareholder vote on remuneration policies and reports, policy updates are being introduced for European companies that consider the responsiveness of companies to significant shareholder dissent on pay-related votes and how remuneration committees use and explain their use of discretion in managing executive pay. This includes how companies account for relevant environmental, social, and governance matters when determining executive remuneration outcomes. Such factors may include workplace fatalities and injuries, significant environmental incidents, large or serial fines or sanctions from regulatory bodies and/or significant adverse legal judgments or settlements.

A policy change on maximum director election terms is also being announced for European companies that will take effect beginning in 2021. Following the one-year transition period, the policy update will expand to all Continental European markets the expectation that votes on directors’ elections will be for terms of a maximum of four years.

Asia-Pacific-related updates. In Japan, ISS is establishing a new policy regarding the board independence level for companies with a controlling shareholder. Under the new policy, ISS will recommend a vote against top executive(s) at a company that has a controlling shareholder unless the board includes at least two independent directors and at least one-third of the board members are independent directors based on ISS independence criteria for Japan.

The full set of ISS benchmark policy updates for 2020 also include changes covering board gender diversity in India; director accountability for governance failures in South Korea; and a price limit for off-market repurchases of shares in Singapore.

ISS is also enhancing its Pay-for-Performance model for the U.S. and Canada by incorporating the use of Economic Value Added (EVA) metrics in the model’s secondary Financial Performance Assessment (FPA) screen. EVA is a framework that applies a series of uniform, rules-based adjustments to financial statement accounting data, and aims to measure true underlying economic profit and capital productivity.

EVA provides a strong framework for comparing performance across companies of varying business models and capital structures and many of the key measures in the current FPA, such as ROIC and EBITDA growth, have comparable measures under the EVA framework.

Comments received by ISS during its public open comment period on the main 2020 policy updates can be accessed here. In sum, ISS received 26 comments, of which 14 agreed to allow for their submission to be disclosed publicly. Additionally, registration is now open for a one-hour informational webcast that ISS will hold Dec. 4 on the 2020 policy updates, as well as other developments in the governance landscape.