ISS announced the results of its annual Benchmark Policy Survey (see our prior reports here: "Society Submits Comments on ISS Annual Policy Survey" and here: "ISS Launches Annual Policy Survey for 2021 Proxy Season"), which garnered 519 responses (175 institutional investor and other investor representatives + 344 non-investors including 276 corporate executives). Half of the respondents represented US-based organizations (26% of investor respondents and 43% of non-investor respondents). The number of respondents varied by question. The Society submitted a comment letter but did not complete the online survey due largely to the limitations imposed by the multiple choice answer selections.
Key takeaways from the online survey include:
COVID-19 related questions (Global)
- ISS policy guidance in response to COVID-19 pandemic: Majorities of both investors (62%) and non-investors (87%) indicated that ISS should carry this or similar guidance into 2021 and continue to apply flexible approaches where warranted through at least the 2021 main proxy seasons.
- AGM formats – virtual meetings: Absent continuing COVID-19 health and social restrictions, most investors (77%) prefer hybrid meetings and a plurality (42%) of non-investors prefer in-person meetings, with virtual meetings used only when there is a compelling reason (such as pandemic restrictions).
- Expectations regarding compensation adjustments: When asked about the respondent organization's view of executive compensation in the wake of the pandemic, 70% of investors said the pandemic's impact on the economy, employees, customers and communities and the role of government-sponsored loans and other benefits must be considered by boards, incorporated thoughtfully into compensation decisions to adjust pay and performance expectations, and should be clearly disclosed to shareholders, whereas non-investors most commonly (53%) responded that pandemic is different from previous market downturns and many boards and compensation committees will need flexibility to make decisions regarding reasonable adjustments to performance expectations and related changes to executive compensation.
- Adjustments to short-term/annual incentive programs: Regarding short-term/annual incentive programs, more than half of both investors (51%) and non-investors (54%) indicated that: (1) making mid-year changes to annual incentive metrics, performance targets and/or measurement periods to reflect the changed economic realities, and (2) suspending the annual incentive program and instead making one-time awards based on committee discretion, could be reasonable, depending on circumstances and the justification provided.
Non-Covid-19 pandemic-related questions (Global)
- Climate change risk – director accountability to assess and mitigate: Asked what actions are considered appropriate for shareholders to take at a company that they consider to be not effectively reporting on or addressing its climate change risk, engagement with the board and company management on their concerns garnered the most support from both investors (92%) and non-investors (93%).
- Sustainable Development Goals: When asked whether the respondent considers the UN's SDG framework to be an effective way for companies to measure E&S risks and to commit to improving environmental and social disclosures and action, majorities of both investors (56%) and non-investors (51%) said "no." Of those who said "no," investors and non-investors ranked SASB (82% investors and 60% non-investors) and the TCFD (73% investors and 43% non-investors) as the top alternative frameworks.
- Auditors: When asked in principle what factors other than the relative level of non-audit services and fees compared to audit-related services and fees the respondent considers relevant to shareholders’ evaluations of the independence and performance of the external auditor (when disclosed), investors top choice was significant audit controversies (88%), whereas non-investors selected significance/frequency of material restatements of financial results by the company due to errors, omissions or misconduct (67%). When evaluating performance and independence of the external auditor, most investors (79%) and non-investors (67%) said they would consider whether the lead audit partner has been identified as being linked with a significant auditing controversy at one or more other companies (in markets where the lead audit partner is disclosed).
- Audit committees: When asked what information should be considered by shareholders in evaluating a company’s audit committee, investors favored significant controversies relating to financial reporting, financial controls or audit (93%) and skills and experience of audit committee members (including presence of financial expertise) (92%), whereas non-investors overwhelmingly selected skills and experience of audit committee members (including presence of financial expertise) (97%).
- Racial and ethnic diversity:
- Asked whether all corporate boards should provide disclosure of the demographics of their board members including directors' self-identified race and/or ethnicity, 73% of investors and 36% of non-investors indicated all boards should disclose this information to the full(est) extent possible and permitted under relevant laws.
- Asked about their view of the importance of ethnic and racial diversity on corporate boards, most investors (61%) indicated that boards should aim to reflect the company's customer base and the broader societies in which they operate by including directors drawn from racial and ethnic minority group, whereas the majority of non-investors indicated that while board diversity with respect to race and ethnicity is desirable, expectations may reasonably differ based on many factors, for example local laws, company size, geographic location, and other factors.
- When asked what actions may be considered appropriate for investors to consider taking to encourage increased racial and/or ethnic diversity on the boards of their portfolio companies, engagement with the board and company management to encourage the inclusion of racial and ethnically diverse directors garnered the most support from both investors (85%) and non-investors (92%).
Independent chair (US)
Asked about the organization's view regarding an independent board chair, a plurality of investors responded that an independent chair is generally the preferred model, but there are company-specific circumstances that can justify other models, whereas nearly half of non-investors responded that their organization has no single preferred model for board leadership and any assessment should take company-specific factors into account.
The Annual Policy Survey is part of ISS's annual policy development process. ISS will release key draft policy updates for public comment in October and release final policies in mid-November applicable to shareholder meetings occurring on or after February 1, 2021. See ISS's release, and additional information & resources on our Proxy Advisors page.