Proxy advisory firm Institutional Shareholder Services, Inc. ("ISS") recently rolled out an updated version of its governance rating system called QuickScore 3.0. In connection with QuickScore 3.0's roll out, ISS will open a free data verification site 1 to all covered corporate issuers to correct factual errors in company data used in ISS' ratings. In order to update data prior to QuickScore 3.0's launch, companies must provide feedback through the verification portal beginning November 3rd and no later than November 14th. The new governance ratings under QuickScore 3.0 will be included in proxy research reports starting November 24th.
QuickScore 3.0 includes new and updated data points to provide for broader and deeper portfolio coverage. ISS has released a technical document that details the changes to QuickScore along with an appendix that shows the new QuickScore factors by region, both of which are available on ISS' website.2 Since the QuickScore methodology is aligned with ISS' benchmark proxy voting policy, a favorable QuickScore suggests that the company is more likely to receive favorable ISS proxy review on the covered items as well. Companies should review the QuickScore 3.0 governance factors to assess potential areas of ISS and investor scrutiny, particularly as companies focus on effective disclosures for the upcoming proxy season. QuickScore 3.0 highlights are found below.
QuickScore, which was designed to help institutional investors identify and monitor potential governance risk in their portfolios and identify possible investor concerns, replaced ISS' GRId scoring method in February 2013. A revised version of QuickScore, QuickScore 2.0, was launched in February 2014. QuickScore measures a company's perceived level of risk based on market practices covering over 200 governance factors grouped into the four areas of (i) audit and risk oversight, (ii) board structure, (iii) compensation/remuneration and (iv) shareholder rights, using a hybrid qualitative and quantitative approach. Under QuickScore, companies receive overall and pillar scores based upon a company's aw score calculations against those of other companies in the company's relative index or capital markets region. Scores range from 1 to 10 (with 1 indicating lower governance risk and 10 indicating higher governance risk) and are presented using a standardized appearance.
QuickScore 3.0 Highlights
QuickScore 3.0 updates include:
- New governance factors. ISS has updated its methodology to consider several new factors, including the disclosure of annual performance evaluations for the board, the presence of a controlling shareholder, a material degradation to the rights of shareholders, the existence of a sunset provision for companies with unequal voting rights and the weighting of board gender diversity (formally a zero-weight governance factor displayed for information purposes only).
- In-depth investigation review. The Board pillar will include a new "Controversies" sub-category under which ISS will more closely analyze investigations and enforcement actions, including a review of the types of regulatory investigation and the materiality of penalties or resolutions.
- Report enhancements. Company reports will now include historical scores, a log of data changes and trending analysis, each reflected by directional icons showing improvements, degradation or static governance practices.
- Additional governance factor updates. Other governance factor updates include: (1) evaluation of whether a company's say-on-pay proposal received at least 70% shareholder support (as opposed to support below the "industry-index level"); (2) evaluation of the percentage of directors who received less than 80% shareholder approval (previously considered below "industry-index" levels); (3) consideration of whether the company's average 3-year equity grant rate exceeds the greater of 2% and the average of its industry-index peers (previously referred to the granting of awards at "an excessive rate"); and (4) consideration as to whether the board failed to address the issue underlying majority director withholds (in addition to the previous analysis given to the failure to implement a shareholder resolution supported by a majority vote).
Action Items; Contact
Given the changes to be made in the scoring of companies under QuickScore 3.0, companies should plan to verify their ISS data once the verification portal opens on November 3rd and prior to November 14th.
1 Access to company data will require a user name and password. Companies with an ISS user name and password will not need to request new login information; companies without a user name or password will need to request a login. Information regarding data verification may be found here: http://www.issgovernance.com/governance-solutions/investment-tools-data/quickscore/.
2 The ISS Governance QuickScore 3.0 Overview and Updates document along with a Factors by Region Appendix may be found at http://www.issgovernance.com/governance-solutions/investment-tools-data/quickscore-downloads/.
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