ISS recently released the results of its 2019 Global Policy Survey. In this year’s integrated survey, the topics included board gender diversity, overboarding, sunsetting of multi-class capital structures, combined chair and CEO roles and climate change risk. The respondents included 128 investors (including 88 asset managers, 24 asset owners, four advisors and 12 other investors), and 268 non-investors (including 227 corporate issuers, 19 advisors, six corporate directors and 16 other non-investors). Highlights of the survey are summarized below.

Board Composition

Global–Board Gender Diversity: Apparently, just about everyone is on board with the concept of board gender diversity—only 3% of respondents thought that board gender diversity was not a significant factor that should be considered. Healthy majorities of both investors (61%) and non-investors (55%) agreed that “board gender diversity is an essential attribute of effective board governance regardless of the company or its market.” But among those who did not agree, investors (27%) tended to favor a market-by-market approach looking at whether the company’s boardroom recruitment practices were in line with the local market’s laws, standards and practices, while non-investors (24%) tended to favor a company-level analysis, looking at the company’s market cap, industry sector and applicable laws, standards and practices.

U.S.—Mitigating Factors for Zero Women on Boards: Among its 2019 policy updates, ISS announced that, starting with 2020, for a company in the Russell 3000 or S&P 1500 indices, if there were no women on the company’s board, ISS would generally recommend a vote against the chair of the nom/gov committee (or other directors on a case-by-case basis). Mitigating factors include a firm commitment—stated in the proxy statement—to appoint at least one woman to the board in the near term or the inclusion of a woman on the board at the preceding annual meeting. (See this PubCo post.) As part of the current survey, respondents were asked whether there should be other mitigating factors that may be taken into account, in addition to the firm commitment or having recently had a female on the board. Companies and other non-investors (62%) were more likely to view other mitigating factors—such as adoption of the Rooney rule for the next board candidate or a commitment to conduct an active search regardless of whether there is a vacancy—as acceptable; 46% of investors were opposed to considering other mitigating factors. A commitment to use the Rooney Rule was the favored other mitigating factor among both investors and non-investors.

Global—Director Overboarding: Not surprisingly, investors and non-investors had different takes on overboarding. A plurality of companies and other non-investors believed that there should not be a limit that applies across the board for either non-CEO directors (39%) or CEO directors (36%); rather they thought that each board should consider the appropriate maximum and act accordingly. However, a plurality (42%) of investors thought that the limit for non-CEO directors should be four public-company boards, and a plurality (45%) of investors responded that two board seats was the best maximum for CEO directors. Presumably, investors were concerned with the increasing expectations and levels of responsibility of directors and CEOs.

ISS observes that some “large institutional investors have recently tightened their limits on director overboarding.” For example, under BlackRock’s voting guidelines, where a director serves on an excessive number of boards, BlackRock will consider voting against committee members and individual directors. BlackRock views overboarding as an impediment to a director’s ability to focus on each board’s requirements. For a non-CEO director, BlackRock considers four boards to be the maximum and, for a CEO-director, BlackRock believes that the CEO should sit on only one additional board, a change from its prior position that two external board positions were manageable. In its 2019 Annual Stewardship Report, Blackrock indicates that the focus on board overcommitment “has contributed to the reduction in the average number of boards on which directors sit: today, the percentage of non-CEO directors sitting on more than four boards has decreased from 8.8% in 2008 to 6.7% in 2019. In addition, more than three-quarters of S&P 500 boards have established some limit on their directors’ ability to accept other corporate directorships, an increase from 56% in 2008.” As a result, the number of BlackRock votes against directors on the basis of overcommitment declined from 105 in 2015-6 to 69 in 2018-9. By comparison, the number of votes against CEO directors for overcommitment has increased over the same periods from 36 to 94, presumably reflecting the change in BlackRock’s policy regarding CEO directors.

U.S.—Combined CEO/Chair: There does not seem to be a uniform view on the merits and drawbacks of an independent board chair, and many consider a CEO chair to be acceptable so long as there is a strong lead independent director. ISS policy is generally to recommend support of shareholder proposals requesting an independent board chair, after taking into consideration a wide variety of factors. The survey asked “which factors or circumstances would most strongly suggest the need for an independent board chair?” Investors most frequently cited “poor responsiveness to shareholder concerns” followed closely by “governance practices that weaken or reduce board accountability to shareholders (such as a classified board, plurality vote standard, lack of ability to call special meetings and lack of a proxy access right).” Non-investors most often cited “a poorly-defined lead director role, followed by poor responsiveness to shareholder concerns.”

Board /Capital Structure

U.S.—Sunsets on Multi-Class Capital Structures: Here, ISS assumed that, for multi-class capital structures (typically providing for unequal voting rights), some type of sunset provision was de rigueur. The question asked in the survey was whether seven years was the appropriate sunset and, if not, what was appropriate? A majority of investors (55%) viewed a seven-year sunset as appropriate, while a majority (53%) of non-investors viewed it as not appropriate. Of respondents who viewed seven years as inappropriate, the plurality (35%) of investors viewed a multi-class structure as never appropriate; in contrast, 36% of non-investors indicated that ten years or more was appropriate and 35% opted for “other.” Pure speculation: might that be a reference to no sunset at all?


U.S.—Quantitative Pay-for-Performance Assessment EVA in FPA Secondary Screen: In response to requests for financial metrics other than TSR, ISS has introduced new measures of company performance called Economic Value Added (EVA) metrics. According to ISS, “EVA is a framework that applies a series of uniform, rules-based adjustments to financial statement accounting data, and aims to measure a company’rue underlying economic profit and capital productivity. ISS believes that EVA metrics often provide an improved framework for comparing financial performance across companies with varying business models and capital structures, as compared to using purely GAAP-based financial metrics.” As a result, ISS will be incorporating EVA metrics into part of its pay-for-performance models, the Financial Performance Assessment (FPA) screen. The survey asked whether, to provide points of comparison, ISS should continue to also show separately in the ISS report the GAAP metrics that were previously used. Substantial majorities of both investors (84%) and non-investors (71%) preferred to have the previous GAAP-based metrics displayed in the ISS report, and only 13% of investors and 9% of non-investors thought that display of the GAAP-based metrics was unnecessary.

Risk Oversight on Climate Change

Global—Climate Change Risk Oversight: With the increasing interest of investors in ESG, and especially climate change (see, e.g., this PubCo post, this PubCo post and this PubCo post), the survey asked whether “climate change should be a high priority component of companies’ risk assessments?” Again, there were divergent views: 60% of investors (21% of non-investors) responded that “all companies should be assessing and disclosing climate-related risks and taking actions to mitigate them where possible,” while 68% of non-investors (35% of investors) opted for a more nuanced position, that “each company’s appropriate level of disclosure and action will depend on a variety of factors including its own business model, its industry sector, where and how it operates, and other company-specific factors and board members.” Only 5% of investors and 11% of non-investors thought that the “possible risks related to climate change are often too uncertain to incorporate into a company-specific risk assessment model.”

The survey then asked respondents to identify the actions, if any, that would be appropriate for shareholders to take if a company were not effectively reporting on or addressing its climate change risk. Both investors and non-investors identified most often engagement with the board or management (96 investor/169 non-investor responses), followed by support for a shareholder proposal seeking increased disclosure related to greenhouse gas (GHG) emissions or other climate-related measures (94/50 responses). The third most favored action for investors was support for a shareholder proposal seeking establishment of specific targets for reduction of GHG emissions or other climate-related measures (75/25 responses), while for non-investors, the third most favored action was to consider divesting (with announcement to the company or the public) (33/29 responses). Notably, companies and other non-investors overwhelmingly preferred engagement and had a significantly less favorable view of shareholder proposals than did investors.