Growing Proportion of Investors, Non-Investors Believe Lack of Gender Diversity Indicates Problem with Board Recruitment Process

ROCKVILLE, Md. (Sept. 18, 2018) – 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 Governance Principles survey.

In total, ISS received 669 responses to this year’s Governance Principles Survey, from 638 different organizations. The figure represents an 11 percent increase from the total number of responses received for last year’s Governance Principles survey. Responses were received from 109 institutional investor representatives while 469 representatives of corporations also weighed in. Consultants, corporate directors, academics, trade associations, and other non-investor entities made up the rest.

This year, survey topics covered a small number of fundamental and high-profile issues, including: auditors and audit committees, director accountability, board gender diversity and the “one-share, one-vote” principle. Key findings from this year’s Governance Principles survey include:

  • Auditors and Audit Committees. ISS asked respondents to identify the audit-related factors (other than fees paid to the auditor for non-audit services) that they consider when evaluating the independence and performance of external auditors. Investor respondents most often cited regulatory fines or other penalties imposed on the auditor for weaknesses or errors in audit practices as a significant matter of interest. The second most frequent response was around significant audit controversies. Non-investors’ most frequently cited factor was consideration of the identity of the audit partner and any links he or she has to the company or its management, followed by regulatory fines or other penalties imposed on the company related to financial disclosure practices or weaknesses not identified in the audit report.
  • Board Gender Diversity. ISS asked respondents in last year’s Governance Principles Survey if they considered it problematic if there were zero female directors on a public company board. This year, ISS revisited the same questions to identify any year-over-year changes on this topic. This time around, a higher number of both investors and non-investors responded that a lack of gender diversity on corporate boards would indicate a problem in the board recruitment process. More than 80 percent of investors indicated that they considered it to be problematic. That was up from 69 percent last year. Specifically, 45 percent of investors replied “Yes, the absence of at least one female director may indicate problems in the board recruitment process,” while 37 percent replied “Yes, but concerns may be mitigated if there is a disclosed policy/approach that describes the considerations taken into account by the board or the nominating committee to increase gender diversity on the board.” More non-investors, meanwhile, also migrated toward a “yes” from a “maybe” response while moving more decisively away from “no.” This year, more than 60 percent of non-investors replied “yes” in some form, up from 54 percent last year. This year, “Yes, the absence of at least one female director may indicate problems in the board recruitment process” was the most frequently chosen response for non-investors, with one-third selecting this choice.
  • One-Share, One-Vote. The “one-share, one-vote principle” is increasingly in focus with some emerging companies seeking to access public capital markets while insulating themselves and their management teams from perceived short-term pressures through unequal voting rights. When asked if ISS should provide vote results where possible to show what the vote results would have been if all votes were counted equally, respondents overwhelmingly say they want such information. Ninety-two percent of investors and 59 percent of non-investors responded that they would like to see such information displayed. Only 4 percent of investors responded that they would not like to have that information noted. Thirty-one percent of non-investors replied that ISS should not provide voting results in such a manner.

Geographically and as in past years, the bulk of the respondents–more than 400 in all–represented organizations based in the U.S.  Europe, with 94 respondents, and Canada, with 53, had the next largest blocks of respondents by location. Responses also came from at least 20 organizations based in Asia, seven based in Latin America, and five based in Africa. Responses were also received from organizations based in both Australia and New Zealand.

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

ISS’ survey is part of its annual policy development process.  During the second half of 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 2019.

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