Late last month, Institutional Shareholder Services Inc. (ISS) reported its updates and enhancements to Governance QuickScore, its governance risk assessment tool, which will be used to score public companies during the 2014 proxy season.

ISS will release the first wave of company ratings on February 18, 2014, so that the ratings can be included in the proxy research reports that go out to institutional shareholders. Companies have until February 7, 2014 to use ISS's data review and verification site to review and revise their raw data on file with ISS. We strongly urge companies to do this, as in the past there have been multiple reported incidents of ISS having incorrect data on covered companies.

The updated product, called ISS Governance QuickScore 2.0 ("QuickScore 2.0"), will feature "event-driven data updates" that allow scoring for all covered companies to be updated on an ongoing basis as changes in a company's governance structure are identified through public disclosures. A full copy of the report can be viewed here. Following the release of the initial ratings on February 18, companies will be able to use the data review and verification site year-round to ensure their raw data on file with ISS remains accurate as ISS makes its "event-driven data updates" throughout the year.

QuickScore 2.0 will feature the same four historical pillars: Board Structure, Audit, Shareholder Rights and Compensation. Covered companies within the U.S. market now have 89 questions, with several of the new questions highlighted below (with commentary directly from the ISS report):

Q304—What is the number/proportion of women on the board?

This question will evaluate the number or proportion of women on the board. According to some academic and other studies, increasing the number of women on boards of directors correlates with better financial performance. Such findings could have a significant effect on the nomination of women as corporate officers.

This factor has a zero-weight impact on the scoring model and is included for informational purposes only.

Q312—What percentage of directors received shareholder approval rates below the average level?

QuickScore will consider the percentage of directors who received less than average levels of approval upon election.

Opposition to a board member typically signifies a perceived lack of accountability, responsiveness, independence, and/or competence on the part of the targeted director, warranting further evaluation. QuickScore will consider directors who received less than 95 percent shareholder approval. ISS collects meeting results as they are available and this factor will be updated and recalculated accordingly.

Q315—What is the average size of outside directors' compensation as a multiple of the median of company peers?

This relative measure expresses the prior year's average outside director's pay (based on total compensation reported for each director in the company's proxy statement) as a multiple of the median pay of its ISS-determined comparison group for the same period. The calculation for this measure is: the average outside director's total pay divided by the median average outside director total pay level for the comparator group.

Q328—Did the most recent Say-on-Pay proposal receive shareholders' support below the industry-index level?

QuickScore will consider the level of shareholder support on the most recent Say-on-Pay proposal. Companies in this comparison are based on 4-digit GICs groups and the S&P500, S&P400, S&P600, and Russell 3000-excluding S&P1500 indices.

Q329—What is the degree of alignment between the company's annualized three-year pay percentile rank, relative to peers, and its three-year annualized TSR rank, relative to peers?

This question has been added due to updates in the ISS Pay-for-Performance Evaluation.

ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. The key changes are the calculation of the first peer group alignment measure, the relative degree of alignment (RDA), from a 40/60 weighted average of one- and three-year RDA measures to a single, annualized RDA measure for the three-year measurement period (or shorter period if pay and performance data are not available for all three years).

Note, the previous QuickScore factors, 226 and 227 (three- and one-year RDA), will still be included for informational purposes only and will be zero-weight factors on the scoring model.

QuickScore 2.0 will continue with the same 1-10 scoring format (with 1 being the "best"), but according to ISS, the new product adopts more of a "hybrid" approach in the development of the new ratings. ISS will assign each governance factor a weight, with the QuickScore 2.0 algorithm then deriving each pillar's raw score based on the weights assigned to each governance factor. The exact weighting remains undisclosed, however, and thus covered companies will have no way of determining how answers to certain questions will affect their own raw score.

While ISS governance metrics have garnered much fanfare with governance activists over the past several years, the architecture of ISS's metrics and methodology remains opaque and subjective, and companies and their boards should avoid adopting governance policies and practices that cater to ratings that have not demonstrated a definitive correlation with financial performance and shareholder interests.

Nonetheless, companies and their boards must continue be mindful and informed regarding the elements considered under QuickScore 2.0, and use this awareness as a tool to evaluate where they may be vulnerable to criticism in the upcoming proxy season.