New Governance Factors Previewed; Details to be Published on October 31; Data Verification Period to Follow Through November 14
Institutional Shareholder Services, the proxy advisory firm, has announced that it will publish the details of an update to its QuickScore corporate governance rating system, styled as “QuickScore 3.0,” this Friday, October 31, including several new governance factors that will apply to U.S. companies for the 2015 proxy season.
This will be followed by a data verification period lasting from 9am EST on November 3 through 8pm EST on November 14. During this period, companies may access the underlying data that ISS will use to construct their QuickScore rating through ISS’s website. New scores will then be released on November 24 and begin appearing in ISS research reports. ISS indicates that the format of the reports will be revised to show historical scores, data changes and a trend analysis, rather than just a static rating.
Because some institutional shareholders may rely, in part, on a company’s corporate governance ratings to make voting and investment decisions, companies should take appropriate steps to ensure that the information on which these ratings are based is accurate. Information on QuickScore, including the technical documentation and information on data verification, is and will be made available on ISS’s website at www.issgovernance.com.
In 2013, ISS introduced a new corporate governance metric, referred to as ISS Governance QuickScore, which replaced its Governance Risk Indicators, or GRId. This system provides each covered company with a risk score, from 1 to 10, in each of four governance-related categories or “pillars” (Board,
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Compensation, Shareholder Rights, and Audit), as well as an overall governance risk score. The scoring is such that “1” means lower governance risk and “10” means higher governance risk. The score is based on dozens of factors relating to governance structure. Unlike the GRId system, QuickScore is a relative measure, with the score indicating a company’s rank relative to other covered companies in its market index and/or geographic region. The weighting of the factors is not fixed but is based on an undisclosed formula measuring each factor’s correlation with various financial metrics. The scores are included in ISS’s proxy analyses and are made publicly available through Yahoo! Finance and Bloomberg. The
factors were last updated in January.1
NEW AND AMENDED FACTORS FOR U.S. COMPANIES
ISS has circulated a table with short-form versions of its QuickScore 3.0 factors.2 The table shows only the text of the factors; the detailed technical document to be released on Friday will contain more information about the application and assessment of these factors. Based on the table, ISS has made modest changes to the factors for U.S. companies. These changes are summarized below, and a list of the factors for U.S. companies, marked to show changes from QuickScore 2.0, is attached as Annex A.
New factors. The following new factors have been added:
- “Has the board … failed to address the issue underlying majority director [withhold votes]?” This has been added as part of the existing factor assessing board implementation of a shareholder resolution supported by a majority of votes in the prior year.
- “Has ISS’ review found that the Board of Directors recently took action that materially reduces shareholder rights?” The addition of this factor is consistent with the results of ISS’s recent survey of institutional investors and public companies, which indicated strong responses from investors against boards that unilaterally adopt bylaw amendments that reduce shareholder rights. There is no indication whether this factor will be triggered only by substantive changes (e.g., limiting special meeting or written consent rights) or also by common procedural changes (e.g., enhancing advance notice requirements or adopting an exclusive forum provision, which the ISS survey showed as less of a concern for investors).
Existing factors now applied to U.S. companies. The following factors applied to issuers in other regions and will now be applied to U.S. companies as well:
- “Does the company disclose a policy requiring an annual performance evaluation of the board?” The existing factor on this topic looks at not just the existence of an evaluation process but also takes into account the nature of the evaluation (e.g., frequency, individual, outside assessment).
- “Is there a sunset provision on the company’s unequal voting structure?” This factor previously applied only to Canadian companies. The existing factor does not indicate any particular duration of a sunset provision that will be acceptable.
- For a discussion of QuickScore 2.0, see our firm’s publication, dated January 30, 2014, entitled “2014 Proxy Season Developments”.
- This table is available at http://www.issgovernance.com/file/products/qs3-appendix-final.pdf.
- “Does the company have a controlling shareholder?” This factor, which previously applied only to Japanese companies, looks at “whether the company has a shareholder or shareholders acting in concert and holding a majority of the voting rights” on the basis that “[w]hen there is a controlling shareholder, the minority shareholders may face challenges in matters where their interests diverge from those of the majority shareholder.”
Amended factors. A number of existing factors have been revised, in most cases to reflect more objective metrics:
- “What percentage of directors received shareholder approval rates below 80%?” Previously this factor did not specify a percentage, but referred to approval rates below “industry-index levels.”
- “Did the most recent Say on Pay proposal receive shareholders’ support below 70%?” Again, the prior factor did not specify a percentage, but referred to support levels below “industry- index levels.”
- “Does the company’s average 3-year equity grant rate exceed the greater of 2 percent and the average of its industry/index peers?” This factor previously referred to the granting of awards at “an excessive rate,” which was measured as the greater of 2 percent of outstanding shares over the past three years or one standard deviation from the 3-year industry mean.
- “Has a regulator initiated enforcement action against [the company or a director or officer of the company] in the past two years?” Previously, this factor referred only to securities regulators, and referred to the taking, rather than the initiation, of enforcement action. The ISS announcement notes that QuickScore 3.0 will include a “deeper dive view of investigations, including reviewing the type of regulatory investigation and the materiality of penalties or resolutions to such cases.”
Unlike the table that accompanied QuickScore 2.0, the new table does not distinguish between factors that affect the quantitative score and factors that are merely for informational purposes. For example, under QuickScore 2.0, a number of factors (including those relating to board size, gender diversity on the board, presence of former employees and family members on the board, the number of audit committee financial experts, and certain pay-for-performance metrics) are “zero-weight” factors that do not count toward the score. It is unclear whether all of these factors will now have a quantitative impact, but the ISS announcement indicates that, at a minimum, the gender diversity factor will be given a weight.
ANNEX A: QUICKSCORE 3.0 FACTORS (MARKED AGAINST QUICKSCORE 2.0 FACTORS)
The following is a list of the QuickScore 3.0 factors listed as applicable to U.S. companies in the ISS table made available at http://www.issgovernance.com/file/products/qs3-appendix-final.pdf, marked against the comparable list from QuickScore 2.0. The numbers below are part of ISS’s internal numbering system, and will tie to the related explanation in the QuickScore technical document, which will be published on October 31.
1 Non-Audit fees represent what percentage of total fees?
2Didhe udior ue n ae opnin n he ptear?
3Hs he pnyreatedanalsr anyperiodihinhe ptoear?
4Hs he pnyade on-ielyinanaldilreilns inhe ptoear?
securities rgular takeninitiated eoentionagaithe mpnyinhe pato ear?
securities rgular takeninitiated eoentionagaita dirr or ier fhe
company in the past two years?
201s he mpan,a director r
anyofficer of its directors and officers, the company urntyunder inigain bya regularybd?
8 Has the company disclosed any material weaknesses in its internal controls in the past two years?
6 How many financial experts serve on the audit committee?
9 How many directors serve on the board?
304 What is the number / proportion of women on the board?
10 What is the independent director composition of the Board?
13trooin of o-eeive dierson he bad hs lenghyenue?
14tis e cliatn of e Chan f he oad?
16 Has the company
an identified senior a Senior Independent Director or an independent directorLead Director?
205teenge f he oadoiss f imedatemlymbs ofaoiyhaehode, eeut,andr eeuts (ihinhe pte ear)?
206teenge f the oadae omer r rentpoees f hempany
percentageis the independent status of the nominating committee members are independent based on ISS standards?
25 What is the independent status of the compensation committee members?
31 What is the independent status of the audit committee members?
37Dos heCOe onn ee er f ouidea
/ How many boards does the
38Howmanynoeeuts re onan eener f ouideoa?
45 Did any directors attend less than 75% of the aggregate board and applicable key committee meetings without a valid excuse?
49 How many directors received withhold/against votes of 50% or greater at the last annual meeting?
312 What percentage of directors received shareholder approval rates below
the industry-index level?80%?
iswas the average size of outside directors’director’s total compensation as a multiple of the
of company peers?
144 Do all directors with more than one year of service own stock?
243 Did any executive or director pledge company shares?
41 Does the company disclose a policy requiring an annual performance evaluation of the board?
46 Does the company disclose board/governance guidelines?
143 Are directors subject to stock ownership guidelines?
244 Does the company have a robust policy prohibiting hedging of company shares by employees?
50teentf he dios ee oed inmaeialR?
51Do he dros ih RPTsiton eyboadmie?
216 Are there material related-party transactions involving the CEO?
99 Has the board failed to implement a shareholder resolution supported by a majority vote, or failed to address the issue underlying majority director WHs?
345 Has ISS’ review found that the Board of Directors recently took action that materially reduces shareholder rights?
54Dos heanyhaeles f k ih dieentotg righ?
55re hee anydies on heboad ho ae notupor eeionbyalllaesf mn hrhole?
56Is there a sunset provision on the company’s unequal voting structure?
77 Are all directors elected annually?
83 Is the board authorized to issue blank check preferred stock?
78Dos heanyhae aoon pill(haeoldrrihtspln) ine?
79tis e riggr heholdor he pon pil?
80Dos he oion pillhe anetrison?
81 Does the poison pill have a TIDE provision?
82Dos he oion pillhe aualifed erla?
91 What is the expiration date of the poison pill?
220 Is the poison pill designed to preserve tax assets (NOL pill)?
222n s he oion pillpend orened?
223Dos hean’s poon pllinlue aodid slow-hd orda-hnd rison?
290 Does the company have a controlling shareholder?
224 If the company has a majority voting standard, is there a plurality carve-out in the case of contested elections?
89Dos heanyrequre aupmajoiyoteo apreeens o he ar ad
90 Does the company require a super-majority vote to approve mergers/business combinations?
97tis e pentae ofre apialnedd o cnenea spialmeein?
98Canhrholes tbyrien en?
52 Does the company have a majority vote standard in uncontested elections?
225re heeateralrriosas o ing r opis o beded,or oehp eelsequred o callheeeig?
226tis e dere of algmntbeeen he an’s mulaie -ear paypeenilera, relae o pe,and s -ear ulae R ra,reate o pe?
227tis e dere of algmntbeeen he an’s
cumulative 1-ear paypeenilera, relae o pe,and s -ear cumulative TR ra,reate o pe?
228tis e sie f he COsear
cumulative pa,as a uliple of e edan payor mpanypee?
229tis e dere of algmntbeeen he an’s TR andane n CEOayoer he patie ear?
232 What is the ratio of the CEO’s total compensation to the next highest paid
329 What is the degree of alignment between the company’s annualized 3-year pay percentile rank, relative to peers, and its 3-year annualized TSR rank, relative to peers?
156 Are any of the NEOs eligible for multiyear guaranteed bonuses?
237 What is the ratio of the CEO’s non-performance-based compensation (All Other Compensation) to Base Salary?
129 Do the company’s active equity plans prohibit share recycling for options/SARs?
138 Do the company’s active equity plans prohibit option/SAR repricing?
238Dos hean’s ae euiyplans rohbitopionRah buou?
239Do hean’s aie euiyplans ae anrgen poio?
240Do hean’s aie euiyplans ae alibelCCdniion?
139 Has the company repriced options or exchanged them for shares, options or cash without shareholder approval in the last three years?
130 Does the
company grant company’s average 3-year equity awards at an excessive grant rate, according to ISS policy exceed the greater of 2 percent and the average of its industry/index peers?
155 Did the company disclose a claw back or malus provision?
minimum eig peos madaed ine pln dontsor eeut’ok opios or RSinheequiyplas aopedmeded n e at3 ear?
minimum eig peos madaed ine pln donts,aopedmeed inhe
last three years, for executives’ restricted stock/stock awards?
134tis e holdngeteionperod orok opins(or eute)?
135tis e holdngetenionperod or ericd saeok aads or eeut)?
145 What proportion of the salary is subject to stock ownership requirements/guidelines for the CEO?
113 Does the company disclose a performance measure for the short-term incentive plan (for executives)?
246 What is the level of disclosure on performance measures for the latest active or proposed long- term incentive plan?
328 Did the most recent
say-Say on -pay Pay proposal receive shareholders’ support below the industry-index level?70%?
148 What’s the trigger under the change-in-control agreements?
153 Do equity based plans or other long-term
plansawards vest completely upon a change-in-control?
161 What is the multiple of
the change-pay in -control/ the severance paymentagreements for the CEO (upon a change-in-control)?
247 What is the basis for the change-in-control or severance payment for the CEO?
162Dos heanypode eie axgo-psoran-nntrolaen?
163tis e engthf mplomentagementih he CO?
300Hs ’qualiate eewieniid apa-opromae algnt?
301Hs Sidentid apoblmic paypaie oroliyhatrais or?