ISS has just released the results of its 2021 global benchmark policy survey, which, this year, actually comprises two surveys-one related to a broad array of policies and the other specifically addressing climate change. Along with issues related to executive pay and governance, the broad survey also addressed issues such as non-financial ESG performance metrics in executive compensation, racial equity audits and virtual-only shareholder meetings. The climate survey solicited views on topics such as board oversight of climate risks, say-on-climate proposals and other issues relevant to ISS' climate voting policy.
In total, ISS received 409 responses to the broad survey and 329 responses to the climate survey. For the broad survey, there were 159 responses from investors and investor-affiliated organizations (25% U.S.), 246 responses from companies and corporate-affiliated organizations (46% U.S.), and four from academic and non-profit responders. For the climate survey, there were 164 responses from investors and investor-affiliated organizations (18% U.S.), 152 responses from companies and corporate-affiliated organizations (41% U.S.) and 13 from academic and non-profit responders (38% U.S.)
Broad policy survey
Key findings of the broad survey identified by ISS include the following:
Non-Financial ESG Performance Metrics in Executive Compensation. More than half of investor respondents said that ESG metrics should be targets for executive comp if they are specific, measurable and transparently communicated to the market, while about a third said ESG metrics should be used even if the metrics were not financially measurable, because they could still be effective in incentivizing positive results. Non-investors also preferred the use of ESG metrics even if not financially measurable. Few investors indicated that companies should limit themselves to only traditional financial metrics.
In BlackRock Investment Stewardship's 2021 commentary, BIS observed that ESG-related metrics have increasingly been incorporated as performance measures in companies' incentive plans. BIS cited a recent study from the GECN Group, which showed that 67% of companies in the study used ESG measures (but only 56% in the U.S. alone) and that COVID-19 had accelerated the incorporation of ESG factors into incentive plans. Importantly, however, BIS cautioned that, to the extent that companies included sustainability metrics in their incentive plans, they should "be material and aligned with a company's long-term strategy. It is important that companies using sustainability performance metrics explain carefully the connection between what is being measured and rewarded alongside business goals and long-term performance. Failure to do so may leave companies vulnerable to reputational risks and undermine their sustainability efforts." In this article, consultant Semler Brossy suggests that "[l]inking ESG metrics to executive pay is a powerful way to drive change. But compensation is a sensitive instrument, so we urge caution. As with any other new metric, a board should craft it to reflect the company's context and ESG priorities-and to complement the existing pay incentives. The board should also test a metric before including it in compensation, to reveal unintended consequences or the possibility of gaming. Rather than a single decision, new pay metrics involve a journey that begins with elevating certain issues internally and externally." As described by the authors, the journey undertaken by some early adopters began with "asking pointed questions, customizing ESG goals and metrics for their company, and measuring them. They began holding themselves accountable, and the board oversaw the process to make sure it happened. Eventually, where it made sense, they linked compensation to some of those metrics, along with other reward and recognition practices." (See this PubCo post.)
Racial Equity Audits. The responses here were split. Almost half of investors thought that "most companies would benefit" from an independent racial equity audit and almost half thought "it depends on company-specific factors," such as whether the company had been involved in significant racial or ethnic controversies or even, for investors, failure by the company to provide detailed workforce diversity statistics, such as EEO-1 data. The division reflects, in ISS's view, a broader "philosophical split between those who preferred a case-by-case analysis based on a retrospective examination of corporate practices and those who believed that the evidence of poor practices could be found in disparate outcomes that different communities experience and therefore the case was good for almost all companies to benefit from an independent racial equity audit." About 10% thought that only a minority of companies would benefit from a racial equity audit. Most non-investors preferred the case-by-case analysis approach.
Virtual-Only Meetings. Since the onset of the pandemic, companies have been holding virtual-only annual meetings. The question then became whether that practice would continue once physical in-person meetings became possible, and if so, what practices would be problematic. Over 90% of investor respondents viewed each of these three practices to be troubling: "management unreasonably curating questions, the inability to ask live questions at the meeting, and question and answer opportunities not provided." Also high on the list were an "inability for a shareholder proponent to present and explain a shareholder proposal" and muting participants and allowing only an option to watch the meeting. These (and other problematic practices that restrict shareholder rights and participation) were considered sufficiently troubling that 70% of investor respondents indicated that they could warrant votes against directors; only 17% thought these practices did not warrant votes against directors. Not surprisingly, non-investors felt quite the opposite: 65% said that votes against directors would not be warranted.
Long(er) Term Perspective on CEO Pay. Most respondents favored a longer-term (three years as opposed to one year) perspective on CEO pay.
Mid-cycle Changes to Long-term Incentive Programs. Over half of investors viewed "mid-cycle changes to long-term incentive programs" in response to the pandemic to be problematic; 40% viewed those changes as reasonable for companies that "experienced long-term negative impacts from the pandemic." Among non-investors, considered them reasonable.
Pre-2015 Poor Governance Provisions. In 2015, ISS adopted a new policy to vote against directors of newly public companies that retained certain governance provisions that ISS disapproved, including companies with multi-class capital structures with unequal voting rights (in the absence of a reasonable sunset), classified boards and companies with supermajority vote requirements to amend governing documents. However, ISS grandfathered companies that already had those provisions. Among investors, 94% advocated that ISS revisit the grandfathering policy, and 57% of non-investors had the same view. The vast majority of both investors and non-investors ranked multi-class capital structures with unequal voting rights first on the list to be reconsidered.
Recurring Adverse Director Recommendations. Where the company has solicited shareholder approval to remove a provision that ISS views as a poor governance practice-the example used is supermajority vote-but has failed to obtain approval, almost half of investors favored continuation of negative director recommendations so long as there was no management proposal on the ballot to reduce the supermajority vote requirement. That preference was followed by cessation of the against recommendation once the company has tried and failed for a number of years. A majority of non-investors tended to favor discontinuation of the negative vote after a single try by the company.
SPACs. Currently, ISS evaluates de-SPAC transactions on a case-by-case basis, with particular focus on the market price relative to the redemption value. However, given the structure of SPAC transactions, SPAC investor voting practices and the SPAC redemption feature, ISS is considering a policy change to "generally favor supporting the transaction." While most investors indicated that they did not own SPACs, a slight majority among SPAC owners expressed a preference against changing ISS's policy.
Proposals with Conditional Poor Governance Provisions. When, in connection with a transaction, shareholders are presented with a proposal to approve a new governing charter "with poor governance or structural features" as a condition to closing (which condition may be waived), ISS's policy has been to support the transaction but disapprove any poor governance provisions. A "strong majority" of both investors and non-investors favored that policy going forward.
Key findings of the climate survey identified by ISS include the following:
Climate-Related Board Accountability. The survey asked respondents to identify, for companies that are strong contributors to climate change, the types of disclosures they should provide at a minimum. Highest on the list, for both investors and non-investors, was "clear and appropriately detailed disclosure of its climate change emissions governance, strategy, risk mitigation efforts, and metrics and targets," such as under the Task Force on Climate-Related Financial Disclosures (TCFD) framework. Next, for investors, was declaring a "long-term ambition to be in line with Paris Agreement goals," followed by demonstrating that "it is improving its disclosure and performance (even if it is not yet in line with peers or with Paris Agreement goals), reporting "to show that its corporate and trade association lobbying activities are in alignment (or are not in contradiction) with limiting global warming in line with Paris Agreement goals," and disclosing "a strategy and capital expenditure program in line with GHG reductions targets that could reasonably be seen to be in line with limiting global warming to 'well below 2 degrees C' (Paris Agreement goals)." In these instances, the responses from non-investors reflected lower percentages than for investors. According to ISS, corporate responders were also "strongly supportive of disclosure and demonstrating improvement, although support drops precipitously for ambition and targets in line with Paris goals."
Market Scope of Expectations. What about companies that are not considered strong contributors to climate change? Should they be held to the same minimum standards? The survey showed that one-third of investors respondents and a majority of non-profits thought they should, but most often, investors and corporate responders set their expectations lower.
Say on Climate-Voting on Climate Transition Plans. When asked to identify "dealbreakers" for approval of a management-proposed climate transition plan, investor respondents identified the absence of "detailed disclosures (such as according to the TCFD framework), a long-term ambition to be aligned with Paris-type goals, a strategy and capital expenditure program, reporting on lobbying aligned with Paris goals, and a trend of improvement on climate-related disclosures and performance."
Climate Transition Plans-Vote Targeting. When a climate transition plan is presented for approval, the largest percentages of both investors and non-investors indicated that they considered the plan proposal to be "the primary place to vote to express sentiment about the adequacy of climate risk mitigation but that escalation to votes against directors may be warranted in future years if there is multi-year dissatisfaction."
Say-on-Climate Shareholder Proposal Requests. Views were mixed on whether to support a say-on-climate shareholder proposal. Companies most often responded that it should be a case-by-case determination, based on whether 'the company's climate transition plan or reporting fell short." Investors most often responded that they would always support a say-on-climate proposal because it "tests the efficacy of the company's approach and promotes positive dialogue between the company and its shareholders." Among investors, 14% said never (they preferred voting directly against directors) and slightly over 30% of corporate respondents agreed but for a different reason, believing that "it was a matter for the company to decide."
"Say on climate" is a new proposal that, just like "say on pay," asks companies to hold annual advisory votes on their climate policies and strategies. According to the 2021 proxy season review from Alliance Advisors, say on climate was one of the new entries among the shareholder proposals that received support averaging around 30%, a level that Alliance characterizes as "remarkably" good for first timers. Alliance acknowledged that these results did not come entirely out of the blue, as large asset managers such as BlackRock and Vanguard had previously signaled that they might take steps this past season to more closely align their proxy voting records with their advocacy positions. Alliance reported that the proponent of say-on-climate plans to submit the proposal to 100 companies in the S&P 500 by the end of 2022. Of the four proposals that went to a vote, three received over 30% support, and one that was framed as a binding bylaw received only 7%. Two companies that just went ahead and requested votes on say on climate received over 90% approval. Interestingly, there seem to be mixed views on these proposals. For example, Alliance points out that Glass Lewis "expressed concern that SOC votes could result in a rubber stamping of weak climate strategies." (See this PubCo post.)
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