On 27 October 27, proxy advisory firm Institutional Shareholder Services (ISS) announced the opening of its 2017 benchmark voting policy consultation period. Following the 29 September release of its 2016-2017 policy survey results, the ISS is soliciting views from governance stakeholders from around the world on proposed changes to voting policies for 2017. The comment period runs until 10 November.
Specifically, the ISS is seeking comments on 15 voting policy areas, seven in the Americas, and eight in Europe and Asia. In Europe these include: European pay-for-performance methodology, director overboarding, non-executive director pay and, specifically for the United Kingdom and Ireland, remuneration, audit, and remuneration committee composition for smaller companies. In Asia, comment is sought on creation of advisory posts (Japan), and director elections (Asia, excluding Japan but including Taiwan). The updates will apply to shareholder meetings on or after 1 February next year, and the final changes will be announced in the second half of November.
The September survey elicited 439 total responses, with some 120 from institutional investors. The ISS also received responses from 270 “companies, consultants/advisors to companies, and other trade organizations representing companies.” The remainder of the responses came from academics, non-profit organizations, and other governance stakeholders. The survey itself was conducted in August.
NEW FACTORS IN JAPAN
Below is a look at ISS QuickScore's new factors in Japan as of November 2016.
Appointment of Lead Director or avenues for effective collaboration among independent directors, management and statutory auditors
Regularly holding meetings of independent director
Existence of performance-based pay or other incentives for executives
Disclosure of a policy on executive remuneration and computation basis for pay
Audit & Risk Oversight
Disclosure of a policy on evaluating the competence and independence of the external auditor
The existence of class shares with full or multiple voting rights
The number of days before a general meeting for publication of proxy materials
The provision of English-language proxy materials
Disclosure of cross-shareholding voting and related policies
Whether the company collaborates with intermediaries to accommodate beneficial owners seeking to attend shareholder meetings
Whether the company participates in an electronic voting platform
Application of Existing Factors to Japan:
Classification of the chairman of the board
Independence level of the nomination committee
Classification of the chairman of the nomination committee
Independence level of the remuneration committee
Classification of the chairman of the remuneration committee
Independence level of the audit committee
Classification of the chairman of the audit committee
Percentage of directors attending 75 percent of board and committee meetings
Disclosure of a policy requiring an annual performance evaluation of the board
Whether or not the company has an equity-based compensation plan
Disclosure of details of individual executives’ remuneration
Shareholder RightsNumber of board vacancies
Audit & Risk OversightDisclosure the metrics used to evaluate performance-based compensation in the most recent Yuho Filings
Disclosure of numerical figures related to performance-based compensation
Disclosure of the set up of a compensation committee in the most revent Yuho filings
United Kingdom and Ireland. The issuance of ‘C shares’ in the United Kingdom and Ireland—which trade separately from an investment trust's ordinary shares for a specified period before being exchanged for a proportional number of ordinary shares—are, depending on Net Asset Value (NAV), regarded as being dilutive of ownership by the ISS, an attitude that continues to be supported by investors and most commentors. Across Europe, most respondents also welcomed the use of additional metrics to test pay for performance, though there was little agreement on which metrics would be best to add. The pay-for-performance test introduced to the United Kingdom and Europe last year will be formalized in 2017, and requests for comment are being sought regarding excessive pay as a governance problem, whether abuse of discretion should lead to a vote against remuneration committee members, and what role the absolute amount of pay ultimately plays in investor analysis.
Because of work done by the Executive Remuneration Working Group aiming to simplify executive pay packages in the United Kingdom, the ISS also is considering its approach to any companies taking this approach. To that end, the ISS is considering a number of key points, including: (1) How far the proposals are consistent with the good practice principles set out in ISS voting guidelines; (2) The linkage between the proposals and the company's strategic objectives; (3) Whether or not the proposals have an appropriate long-term focus; (4) The extent to which the proposals help simplify executive pay; and (5) The impact on the overall level of potential pay. Any proposal which provides for a greater level of certainty regarding the ultimate rewards should be accompanied by a material reduction in the overall size of awards.
Furthermore, the ISS is considering recommending a vote against the re-election of the chair of the remuneration committee (or, where relevant, another member of the remuneration committee) in cases where a serious breach of good practice is identified, and typically where issues have been raised over a number of years.
Also in the United Kingdom and Ireland, the ISS is proposing to bring its vote recommendations in line with the governance code for the Quoted Companies Alliance for small and mid-sized companies, which requires that all remuneration and audit committee members are fully independent.
Comment is also sought in Europe on an extension of recommendations against any kind of performance-based pay for non-executive directors. To address an oversight in considering non-executive chair positions, the ISS is also proposing a vote against if in addition to his/her non-executive chairmanship position, he/she holds (1) more than three non-chair non-executive director positions, (2) more than one other non-executive chair position and one non-chair non-executive director position, or (3) any executive position.
Singapore. The Singapore governance code calls for the appointment of a lead director and the ISS sought advice on whether it should recommend against voting for directors if this were not so. Most investors supported a no vote for directors, though this was less popular among non-investor respondents. Also in Singapore, the ISS asked if the ability to carve out of issuances of up to 20 percent of issued capital without preemptive rights should be extended from REITs to regular investment trusts. Most investors, again, were generally supportive.
Japan. The largest changes outside the US are as a result of significant changes to governance for Japanese companies. A proposed new policy will entail generally recommending against the creation of new advisory positions such as “sodanyaku” or “komon,” positions which are generally held by former executives whose activities, since they are generally not on the board, are unknown to shareholders. If the advisors are to serve on the board of directors, and thus be accountable to shareholders, the ISS is proposing to allow them. The full set of voting recommendations can be found in a related sidebar at right.
DIRECTOR VOTING RECOMMENDATIONS – TAIWAN
Below is an excerpt from the Taiwanese voting policy on independent directors.
When the company employs the nomination system, generally vote for all non-independent directors and supervisor candidates. Generally vote for the independent director nominees, unless:
The nominee is deemed non-independent under ISS classification
The nominee is a legal entity or a representative of a legal entity
The nominee has attended less than 75 percent of board and key committee meetings over the most recent fiscal year, without a satisfactory explanation. The calculation of director attendance (or that of the representatives appointed by a legal entity which serves as a corporate director in the company) will not include meetings attended by alternate directors (or the proxy of those representatives). Acceptable reasons for director absences are generally limited to the following:Medical issues/illness;
The director (or the representative) has served on the board for less than a year; and
Missing only one meeting (when the total of all meetings is three or fewer);
The nominee sits on more than six public company boards (ISS will consider a commitment by an overboarded director to step down from one or more boards at the next annual meeting of the company or companies in question, if that will bring the total number of boards to no more than six. Such commitment should be made in relevant meeting materials, such as meeting notice, circular, or annual report, and disclosed prior to the AGM.)
The nominee has been a partner of the company's auditor within the last three years, and serves on the audit committee
Under extraordinary circumstances, vote against directors or supervisors, members of a committee, or the entire board, due to:Material failures of governance, stewardship, risk oversight, or fiduciary responsibilities at the company;
Failure to replace management as appropriate; or
Egregious actions related to a director's or supervisor's service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.
In making any of the above recommendations on the election of directors, ISS generally will not recommend against the election of a CEO, managing director, executive chairman, or founder whose removal from the board would be expected to have a material negative impact on shareholder value.
Source: Taiwan’s policy
China and Hong Kong. Here, the ISS generally supports debt issuance requests as long as certain information is disclosed, but the standards are higher for Hong Kong than for China. Most investors and a large minority of non-investors felt that the same standards should be applied to China. In Taiwan, there was a question about the independence of directors sitting on non-mandated audit committees, but investors felt that voting against directors who were less independent than the ISS’s standards where a small company had gone beyond the necessary mandates to establish an audit committee was unnecessary. On the other hand, most respondents overall felt that a vote against a director who failed to meet a 75 percent attendance record was warranted.
Taiwan. Policy changes proposed for Taiwanese director elections are much more widespread than they are for China and Hong Kong. Chief among these are recommendations against the election of directors under Taiwan’s ‘non-nomination’ process, which is largely akin to pulling names out of a hat at the general meeting. The full set of voting recommendations, which are generally in place across Asia except for Japan, can be found in a related sidebar at right.
India. The vast majority of respondents supported a vote against ‘overboarded’ directors in India. Indian governance code rules hold that directors should not serve at more than seven listed companies, and, if they are an executive director, at no more than three listed companies. The ISS’s proposal, however, is to vote against directors if they sit on more than six boards. This brings the policy for India in line with policies in place in Hong Kong and Singapore. It is also proposed that director attendance expectations are harmonized in Bangladesh, Pakistan and Sri Lanka with other Asian markets.
Worldwide. Elsewhere, the ISS also issued a rebranded and redesigned global governance scoring solution for institutional investors. The ISS QualityScore measures a company’s governance risk with an overall score, as well as a sub-score for each of: “board structure, compensation/remuneration, shareholder rights, and audit & risk oversight.” While many of the enhancements affect the U.S. markets, methodology changes will affect coverage in other countries. These changes include the “implementation of ISS’ pay-for-performance quantitative evaluation for the entire universe of European companies (ex-Russia).” In addition, company evaluations will be harmonized “across connected capital markets such as China, Singapore, and Hong Kong.” Coverage is also increasing with new companies in Singapore and Korea, and further increases planned for 2017 in the broader Asia-Pacific region.