It came to my notice recently that ISS issues different sets of proxy voting advice to its clients. At first I knew of only two sets, but, on further investigation, it appears there are in fact six sets. On further investigation, it seems, Glass Lewis also offers different voting recommendations.
For ISS, the one I, like everyone else, was already familiar with is called “ISS Proxy Analysis & Benchmark Policy Voting Recommendations”. There is a second called “Social Advisory Services’ Policy Voting Recommendations”.
Then there are Taft-Hartley, Catholic, Sustainability and Public Fund recommendations. This wouldn’t be that big a deal except the reason it came to my notice is that a shareholder proponent was complaining that the “benchmark” report recommended shareholders vote AGAINST her resolution, while the “SRI” report recommended that they vote FOR it.
So I obtained copies of the benchmark and the SRI reports for ExxonMobil and Chevron, which shared an annual meeting date of 25 May this year. The AGMs saw record high votes supporting shareholder resolutions; at least for those resolutions that these two ISS reports recommended support for.
In the majority of cases, the two reports make the same recommendations to shareholders, but in three cases at each company, recommendations are directly contradictory.
At Chevron, the benchmark report recommended AGAINST the resolution to adopt quantitative GHG goals, AGAINST reporting reserve replacements in BTUs [British thermal units], and AGAINST increasing the return of capital to shareholders in light of climate change risks. The SRI report recommends voting FOR all three.
At Exxon, the benchmark report recommended voting AGAINST disclosing the percentage of females at each percentile of compensation, and AGAINST the same BTU and return of capital resolutions that it had recommended against at Chevron. The SRI report recommended voting FOR all three. Indeed, the only shareholder resolution which both reports recommended voting against was the one that called for the sale of Exxon and its assets, probably on the grounds that no one would want it, but I am being facetious.
As with all its voting recommendations, ISS gives its reasoning. What is difficult to understand is how the reports can come to such different conclusions. Take the GHG goals resolution at Chevron, for example.
The benchmark report says: “A vote AGAINST this proposal is warranted, as the company provides sufficient information regarding its greenhouse gas emissions metrics and reduction initiatives to allow shareholders to assess the company’s management of these emissions and related performance.”The SRI report says: “A vote FOR this resolution is warranted, as adoption of GHG emissions reduction goals and reporting on plans to achieve such goals would inform shareholders as to the specific policies, practices, or systems the company may implement to manage its GHG emissions.” In its conclusion, the SRI report goes further to say that “long-term GHG emission reduction goals would benefit shareholders”.
There are, of course, different opinions about shareholder resolutions, but they can’t both be true.
The same differences are seen in the recommendations and conclusions for all the other FOR and AGAINST resolutions.
The recommendations are not the only things that are different about the reports. Different researchers were involved in putting the two documents together, with the ESG researcher in the benchmark document different from the “specialty research” team member responsible for the SRI report. The Key Takeaways that head each report are also markedly different. The SRI report, which has 12 takeaways, leads with the conclusion that the board is diverse, while the benchmark report, which has six takeaways, leads with the need for an independent director.
The European best practice principles, to which both ISS and Glass Lewis subscribe, do not prohibit differing voting advice. They simply ask for disclosure of: “The extent to which custom or house voting policies or guidelines may be applied….” In addition, they note: “Shareholders may assess investee companies’ governance arrangements and make voting decisions based on their own view or “custom” voting policy. In this case, they may contract with a signatory to receive services based on their own voting policies.” This is indeed what happens at both companies.
Pat McGurn, special counsel for ISS, confirmed that the firm typically publishes numerous reports for each AGM in response to clients’ rising demand for customization. These reports include: the benchmark or house view report, and the five off-the-shelf specialty policy-based reports I listed earlier, as well as a growing number of fully-customized reports based on client-provided policies. He said: “We have around 400 clients who give us their voting guidelines and we produce customized reports based on nearly 500 custom policies provided by these investors, who year-to-date account for nearly 70% of the ballots and 82% of the shares processed by ISS.”
Each specialty policy is based on a specific set of principles; the Sustainability report is based on the PRI principles, the Catholic one on the teachings of the church, the public fund policy is based on the Council of Institutional Investors’ principles, and the Taft-Hartley report is based on AFL–CIO’s proxy voting guidelines.
“This wide array of options is designed to give our clients as much choice as possible, so that they can find a set of recommendations that best fits their view of the world and their investment goals. Clients typically choose the set of principles that is closest to their own viewpoint so that they don’t have to reverse entire subsets of recommendations. It makes their voting processes more efficient,” said McGurn.
“For the benchmark reports, for example, our analysts generally consider each E&S resolution on a case-by-case basis. In contrast, the SRI policy generally calls for support of E&S shareholder resolutions unless fatal flaws are found. In 2015, for meetings of S&P 500 firms, the benchmark reports recommended for 69% of E&S resolutions; SRI reports supported 96%, and the Sustainability reports, 81%.”
When asked to comment on the different results of analysis leading to opposing vote recommendations. McGurn explained: “Voting decisions are binary. ISS must recommend for or against a proposal under each policy we apply. We consider the same facts, but an analyst gives them different weightings based on the policy that is being applied. And it’s not just E&S resolutions that are impacted. The benchmark reports recommended against roughly 3% of S&P 500 board nominees in 2015, while the Taft-Hartley reports, with a different view regarding director tenure and independence, produced recommendations against nearly 40% of them. Even when recommendations on ratifying auditors are considered there are widely divergent outcomes since some principles set the permissible amount of non-audit fees at a much lower level.”
People familiar with the process said that in the past ISS had received a lot of requests for customized voting policies but it was a question of resources and also an issue of volume. For this reason, the separate reports were devised as a potential solution to the custom requests.
Asked how the annual ISS consultation of its clients played into this scenario and what could move proposals from the SRI silo into the mainstream, McGurn said: “All of ISS’s policies evolve. By design, ISS’s benchmark policy seeks to reflect our clients’ views rather than leading or following them. While some issues such as proxy access receive immediate widespread support from investors, other topics build their followings over time. In setting our policies, we engage with our investor clients to determine whether the reforms suggested by proponents are widely accepted or remain emerging concerns. Our annual policy consultation with clients and other market constituents helps us to determine when issues become mainstream. For some issues it takes a considerable amount of time to get to that tipping point. Notably, we also see proposals evolve as proponents get feedback from other investors.”
McGurn provided me with all six benchmark reports for three companies that I requested: eBay, Goldman Sachs and Boeing. Unsurprisingly, given the controversy surrounding the Exxon and Chevron meetings and the numerous shareholder proposals, the discrepancies between the reports were not as marked. For example, every report recommended voting for the gender pay reporting resolution at eBay. All recommended support for the independent chairman at Goldman, and for the lobbying report and “the threshold to call a special meeting” resolutions at Boeing.On the other hand, the Taft-Hartley and Public Funds reports advised shareholders to vote for the resolutions seeking to prohibit golden parachutes for executives leaving to enter government service, while all the others recommended against it. And only the benchmark and Sustainability reports recommended against the independent chairman and weapon sales to Israel resolutions at Boeing. All other reports recommended supporting them.
Robert McCormick, Chief Policy Officer at Glass Lewis, explained that the firm goes about customising its reports very differently. First, most of their clients follow custom voting policies rather than the benchmark. Many of these clients share their voting guidelines with GL, directing the firm to implement them by applying the client’s policies in deriving voting recommendations for them, while others may select what McCormick described as “off-the-shelf” custom policies with standard recommendations on some items. These are similar to the different ISS reports but, unlike ISS, the firm does not provide separate research reports, rather the custom vote recommendations are a supplement to the main research policy recommendations. Clients access their custom votes in the firm’s online voting platform, so McCormick was not able to share these reports, rather he provided the different proxy voting guidelines that are available on their website (see excerpts below). The custom vote recommendations are presented alongside the main recommendations without any additional explanation or justification, but are applied according to the voting principles that go with that particular customization – ESG, Taft-Hartley, Catholic Bishops, and so on. “It’s more of a ‘here’s how your vote should be implemented based on your policies,’” said McCormick. “For example,” he continued, “Glass Lewis might recommend against a resolution calling for a sustainability report because it believes that the company already discloses all the information in different places that you would normally find in one, but a client might have a policy that states that it supports such resolutions because it wants to see all such information presented in one place, so the custom vote recommendation would be for the resolution.”
Tim Smith at Walden Asset Management supported ISS’s different policies. “The annual consultation is important for ISS because they want and need to hear from their clients. And, since their clients’ views change over time, often ISS’s policies change with them. ISS is on a learning curve like everyone else. They’ve never sought to be a crusader on the cutting edge of an issue. If their clients convince them there is a good business case for an issue it can move out of the ‘SRI silo’ and into the benchmark. There are numerous issues where ISS has wisely taken stock and shifted their thinking from what constitutes an ‘overboarded director’ to climate change.” One example I found: in 2010 ISS recommended a vote against a resolution to split the chair/CEO role at Goldman Sachs, but this year they recommended voting for it.
“ISS does have guiding criteria, they don’t just ‘make this up’,” quipped Smith. “It should be noted that they also make different recommendations on Say on Pay for SRI and benchmark clients. I saw over a dozen of these split recommendations this year. I believe ISS assumes SRI investors have different standards governing Say on Pay votes e.g. overwhelming pay size for CEOs.”