For a decade now proxy firm ISS has gone out to the market seeking feedback on emerging corporate governance issues to help it form its policy for the next year – an unenviable task given the range and sometimes surprising responses from both investors and companies.
ISS has just released the summary results of its latest policy survey and key findings focus on the most discussed topics of the last 12 months, seeking opinions on pay for performance, unilateral adoption of bylaw amendments, boardroom diversity, evaluation of equity plans, risk oversight, cross-market companies and environmental and social performance goals.
The policy survey is based on more than 370 responses. A total of 105 individual institutional investors responded. Approximately 70% were US-based. Just over half identified themselves as investment or asset managers. In its spirit of openness, ISS also solicits responses from the corporate side and received responses from 255 corporations and their advisers, 90% of whom were based in the US. This latter figure alone points to a US corporate obsession with ISS’s alleged power, while the rest of the world seems to see little wrong with its activities and voting advice.
This dual set of responses somewhat inevitably results in two sets of very different opinions, with little agreement between the two sides. Shareholders typically wish to be consulted on everything, while corporate issuers want to be left alone to get on with it all.
The disagreements start with pay. Excessive pay, even if based on performance, is of more concern to shareholders (60%) than issuers (50%) though most agree that positive developments in pay – improvements to the structure of incentive plans, for example – will mitigate concerns. Almost half of investors feel that if lower performance targets are set, target bonuses should be reduced, in contrast to 3% of issuers. Rather, two-thirds of issuers feel that remuneration committees should have “broad discretion” to determine goals and target awards.
Disagreements between owners and managers continue with bylaws – a topic of interest only in the US market. Unsurprisingly, nearly three-quarters of investors do not approve when companies adopt amended bylaws that diminish shareholder rights and a further 20% indicated that “it depends”, in other words they will evaluate such actions case by case.Among issuers, 44% say they should be free unilaterally to adopt bylaws. Considering that such bylaw changes might include classifying the board (thus making it extremely difficult to unseat unsatisfactory directors), increasing authorized capital, and making it harder for shareholders to call special meetings, shareholder opposition to such moves are hardly surprising. The same divergence of opinion is echoed on the subject of pre-IPO shareholder unfriendly actions and board accountability, reflecting the frustration shareholders feel as each new Silicon Valley dual class share IPO hits the market.
One area of agreement, on the other hand, is on boardroom diversity, with 60% of investors and 75% of issuers – reversing the usual trend – indicating that they consider overall diversity in board evaluations. With three-quarters of largely US issuers using a diversity measure to evaluate boards it is perhaps surprising that so little progress is being made on, at least, gender diversity there.
Opinions were sought on equity plans in two very different areas – ISS’s new balanced scorecard approach to vote advice on US share incentives, and on share plans in other markets. The new scorecard approach judges equity plans on three broad issues: cost, plan features and grant practices. While issuers largely wished to focus on cost to the exclusion of the other two issues, investors favoured a 40:30:30 weighting. In other markets, particularly those where disclosure is poor, all factors were deemed important in determining whether to approve equity incentives, but the choice of performance conditions was the most crucial issue.
Oddly, board risk oversight subsequent to an “incident”, such as the General Motors recalls or the News Corp. phone hacking scandal, was the most important factor determining voting decisions on directors among shareholders. Similarly, issuers felt behaviour after an incident was the most important issue. This would seem to be a classic case of shutting the stable door after the horse has bolted. I recognize that disclosures surrounding risk oversight tend to be generic – all companies say they are focused on this issue and have all the relevant risk and compliance policies in place. Nevertheless, preventing some of the infamous risk-based failures of the last few years would seem to cost shareholders less than reacting to them once they had happened.
I would suggest that some research needs to be done to identify board structures, board/management relationships, and where words are just words rather than actions in order to get behind the risk management verbiage and identify those companies actually in danger because of lack of real oversight. Wasn’t BP’s CEO focused on health and safety just prior to the Deepwater Horizon tragedy, for example?
Similarly, and with the same potential for preventable disaster, both issuers and investors feel that environmental and social (E&S) goals are most appropriate when a company’s performance in this area is “showing a negative trend” or when it has experienced controversies. I would contend that that is too late. Prevention is both more effective and less costly than remedial action, for both companies and shareholders. If E&S goals are in place they will not necessarily prevent risky behaviour but they will at least ensure that managers are not rewarded for it.
Assessment of cross-market companies – US companies that incorporate in Ireland and Chinese companies that incorporate in the US, for example – also received broad agreement from issuers and investors.Both sets of respondents largely felt that evaluation should be conducted against the company’s main market.
Since many of these decisions are predicated on tax avoidance and/or incorporation in a more lax regime, it is surprising that more shareholders don’t favour evaluation against the toughest standards possible.
I don’t envy ISS having to make sense of these divergent and often surprising opinions to formulate policy.
In an interesting addendum, because the document mentions the names of some issuers – JPMorgan, Target, News Corp. – in relation to scandals, it also makes specific disclosures surrounding client relationships: “Issuers mentioned in this document may have purchased self-assessment tools and publications from ISS Corporate Solutions (ICS)… or ICS may have provided advisory or analytical services to the issuer. No employee of ICS played a role in the preparation of this document.”
Paul Hodgson is an independent governance analyst.