Investors Encourage Action on Diversity on Boards

ROCKVILLE, Md. (Sept. 25, 2020) – 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 policy survey. In total, ISS received 519 responses to this year’s survey. Responses from institutional investor representatives jumped by 37 percent this year to 175 responses. There were 276 responses from corporate executives while corporate directors, corporate consultants, academics, trade associations, and others made up the rest.

The Policy survey questions covered a broad range of topics, including: continuation of ISS’s COVID-19 related policy guidance or similar into the 2021 main proxy seasons, director accountability relating to climate change risk, auditors and audit committees, board racial and ethnic diversity, independent chair roles in the US, executive remuneration in Europe, and board independence in Japan.

Key findings from this year’s survey include:

  • ISS’s 2020 policy guidance in response to COVID-19 pandemic (Global): With regard to ISS’s policy guidance issued in response to the pandemic, a significant majority of investor respondents (62 percent) and non-investor respondents (87 percent) indicated that ISS should carry this or similar guidance into 2021 and continue to apply flexible approaches where warranted through at least the 2021 main proxy seasons.
  • Climate change risk – director accountability to assess and mitigate (Global): The top three actions that responding investors indicated they may take at a company they considered not to be effectively reporting on or addressing climate change risk, are to: (1) engage with the board and company management about their concerns (92 percent); (2) consider support for shareholder proposals seeking increased disclosure related to greenhouse gas (GHG) emissions or other climate-related measures (87 percent); and (3) consider support for shareholder proposals seeking establishment of specific targets for reduction of GHG emissions, possibly including targets for reducing the carbon footprint associated with the company’s products and services (84 percent). Notably, three-quarters of investors indicated that they would consider voting against directors deemed accountable for poor climate change risk management. Non-investor responses overwhelmingly favored engagement with the board and company management as the most appropriate action (93 percent) while other possible actions were far less popular.
  • Auditors and audit committees (Global): When considering criteria beyond the audit/non-audit fee ratio to evaluate the potential independence and performance of external auditors, investors’ top focal points were significant audit controversies (88 percent), followed by significance/frequency of material restatements of financial results by the company due to errors, omissions or misconduct (83 percent). Regarding company audit committee evaluation, investors’ top criteria were significant controversies relating to financial reporting, financial controls or audit (93 percent) closely followed by skills and experience of audit committee members (including presence of financial expertise) (92 percent).
  • Racial and ethnic diversity (Global): Close to three-quarters (73 percent) of investor respondents indicated all boards should disclose the demographics of their board members, including directors’ self-identified race and/or ethnicity, to the full extent possible and permitted under relevant laws. A plurality of non-investors (36 percent) indicated the same response. Of the actions investors indicated they may consider taking to encourage increased racial and/or ethnic diversity on the boards of their portfolio companies, engagement with the board and management team to encourage the inclusion of racial and ethnically diverse directors was the most popular choice (85 percent). Supporting shareholder proposals urging the company to set workforce diversity targets or to be more transparent about workforce diversity levels (78 percent) and supporting shareholder proposals asking the board to consider at least one member of an underrepresented group in the slate of candidates for every open senior position (58 percent) were ranked second and third, respectively. And 56 percent of investors indicated they would consider voting against members of the nominating committee (or other directors) where board racial and ethnic diversity was lacking.
  • Independent Chair roles (US): When asked about the respondent’s views on whether the board chair be an independent director, 85 percent of investors responded that an independent chair is their preferred model. 47 percent of investors said that company-specific circumstances may justify other models.38 percent considered that non-independent chairs should only be allowed in emergency or temporary situations. Nearly half of non-investor respondents indicated that there was no single preferred model for board leadership.
  • Executive and director remuneration (pan European): When asked to rate the importance of several different considerations when evaluating a company’s remuneration report, 86 percent of investors and 79 per cent of non-investors responded that “pay for performance alignment or misalignment” was “very important”, with “internal pay ratio” registering as a factor that only 19 percent of investors thought was “not important.”
  • Board independence (Japan): When asked whether ISS should harmonize its policy approach and require at least one-third of members of Japanese boards with a statutory auditor system to be outside directors, both investors (86 percent) and non-investors (79percent) strongly supported making the change.

Geographically, half of the respondents to the online survey– 258 in all – represented organizations based in the United States. One hundred and forty nine respondents were based in Continental Europe or the U.K. and 49 respondents were based in Canada. Responses came in from 29 organizations based in Asia. Most investor respondents had a market focus that goes beyond their own home country or region.

Download a copy of this year’s survey results report here. The survey is part of ISS’s annual benchmark policy development process.  During October, ISS will release key draft policy updates for a public comment period before they are finalized.  The process will culminate in mid-November with the release of final policies applicable to shareholder meetings occurring on or after Feb. 1 of 2021.

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