Majority of Investors Favor Tighter “Overboarding” Standards for U.S. Executive Chairs and Adverse Director Recommendations in Wake of Dual-Class IPOs

ROCKVILLE, MD (September 29, 2016) – Institutional Shareholder Services Inc. (ISS), a leading provider of corporate governance and responsible investment solutions to financial market participants, today released the results of its annual global benchmark voting policy survey.
ISS received 439 total responses to this year’s survey, of which 120 were from institutional investors, one-third of whom each own or manage assets in excess of $100 billion. ISS also received responses from 270 members of the corporate community (including companies, consultants/advisors to companies, and other trade organizations representing companies), with the remainder comprised of academics, non-profit organizations, and other governance stakeholders. Respondents spanned the globe, hailing from Japan, Korea, Australia, South Africa, Taiwan, Russia, Malaysia, Canada and the U.S., among other jurisdictions. The survey responses, along with feedback from roundtable discussions and one-on-one meetings, assist ISS in drafting its benchmark voting policies.

This year’s survey, conducted between Aug. 2 and Aug. 30, elicited feedback on a number of key issues, including questions on respondents’ preferred frequency of say-on-pay votes, favored financial metrics used when evaluating pay-for-performance, and how to assess directors who adopted multi-class stock structures at IPO companies.
Key findings from this year’s survey include:

  • Overboarding (U.S.): Survey respondents were asked whether the “overboarding” standard which should apply to an executive chairman who is not also the company’s CEO should be the same standard as that applied to a sitting CEO (no more than three total boards) or the standard applied to a non-executive director (no more than five total boards in 2017). Among investors, 64 percent of respondents favored the tighter overboarding standard applied to CEOs, while 36 percent favored the more permissive standard. Among non-investors, the percentages were nearly reversed, with 38 percent responding that the stricter standard should be applied, and 62 percent preferring the more lenient non-executive director standard.
  • Multi-Class Structures at IPO Companies (U.S.): Respondents were asked whether ISS should consider a policy approach which recommends votes against directors at companies that go public, or emerge from bankruptcy, with a capital structure that includes multiple classes of stock with unequal voting rights. A growing number of companies, especially high-tech firms, have adopted such structures in recent years in an attempt to alleviate short-term market pressures. Critics of these structures cite the potential for abuse and the extreme difficulty of abolishing such schemes once the company goes public given corporate insiders’ voting control. Among investor respondents, 57 percent supported negative recommendations against such post-IPO board members, while 19 percent opposed them, and 24 percent opposed negative recommendations when sunset provisions would eliminate the unequal voting rights at some point in the future. Among non-investors, 46 percent opposed negative recommendations on directors altogether, while a majority either supported such recommendations (24 percent), or opposed such recommendations as long as the unequal voting rights are subject to sunset (31 percent).
  • Board Refreshment (U.S.): Investors are increasingly focusing on lengthy director tenure as a potential obstacle to adding new skill sets and diversity to boards, and as a potential risk to the independence of long-serving directors. Survey respondents were asked which tenure-related factors would give rise to concerns about a board’s nominating and refreshment processes, with multiple answers allowed. Among investors, 68 percent responded that a high proportion of directors with long tenure is cause for concern. More than one-half of the investors identified an absence of newly-appointed independent directors in recent years (53 percent) and lengthy average tenure (51 percent) as problematic. Just 11 percent of investors said that tenure is generally not a concern, although several of these investors also indicated that an absence of newly-appointed directors is a concern.
  • Say-on-Pay Frequency (U.S.): In advance of 2017 say-on-pay frequency votes mandated by the U.S. Securities and Exchange Commission, respondents were asked whether they favored annual, biennial, or triennial votes, or whether the frequency should depend on the specific company. A large majority (66 percent) of investor respondents favored across-the-board annual say-on-pay votes. Eleven percent and 7 percent favored biennial and triennial votes, respectively. The remaining 17 percent of investors believe that the frequency should depend on company-specific factors, of which financial performance and the presence or absence of recent problematic pay practices were flagged by the greatest number of investors. Annual say-on-pay votes were also favored by a plurality of non-investor respondents (42 percent), while 7 percent and 19 percent preferred biennial and triennial votes, respectively. Thirty-one percent of non-investors responded that the frequency should depend on company-specific factors, and the level of shareholder support for say-on-pay at past meetings, as well as the presence or absence of recent problematic pay practices, were the factors most often cited by non-investors.
  • Metrics Used in Pay-for-Performance Assessments (U.S., Canada, Europe): ISS’ quantitative pay-for-performance models for the U.S., Canada and Europe use total shareholder returns over various time horizons, both absolute and relative to peers, to identify companies with potential pay-for-performance misalignments, which then receive an in-depth analysis in which other metrics are examined. Survey respondents were asked whether other metrics would be useful in the initial quantitative pay-for-performance screens as well; and if so, what metrics might be most appropriate. Investor respondents were highly supportive of the idea, with 79 percent answering that they support or strongly support the use of additional metrics. Nineteen percent of investors were neutral about the idea, and only 3 percent were opposed or strongly opposed. Respondents who were neutral or supportive were asked to suggest particular types of metrics that might be appropriate for an initial pay-for-performance screen, with multiple answers allowed. Nearly one-half of the investors (47 percent) favored return on investment metrics (such as ROIC) and more than one-third of them (35 percent) supported other return metrics (ROA or ROE). Eighteen percent of investor respondents supported the use of revenue metrics (absolute revenue or revenue growth); 26 percent favored the use of earnings metrics (such as EPS or EBITDA); 25 percent supported cash flow metrics; 22 percent favored economic profit metrics; and 16 percent answered “other.”

Download a copy of this year’s survey results here.

ISS’ survey is part of its annual policy development process.  In late October, ISS will release draft policies that will be subject to a public comment period before they are finalized.  The process will culminate in mid-November with the release of final policies applicable to global shareholder meetings occurring on or after Feb. 1 of 2017.

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