Category Pay for Performance

Are Environmental Goals the Next Big Thing?

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A number of recent stories covered the move by Royal Dutch Shell to incorporate carbon emissions into the performance goals for its executives incentives. For example, see this story by CNN, Shell is tying executive pay to carbon emissions. Here’s why it could create real impact.

Some may believe this is an appropriate action by one of the big oil companies. Other may dispute whether any such action is needed at all. But, assuming that society as a whole has focused on environmental issues to the extent that boardrooms have begun to take notice, Royal Dutch Shell may be the first in a new wave of companies adopting environmentally-focused performance goals for their executives’ incentives. The number of companies this could impact is staggering–everything from the typical companies thought of when considering environmental impact (oil companies, manufacturers, and utilities) to the less thought of, but sometimes having even more of an impact on some aspects of the environment. For example, just recall the recent focus on the types of straws folks use after it was disclosed that plastic straws lead to an overall increase in plastic pollution that endangers wildlife and the environment. Many companies immediately sought out more environmentally-friendly alternatives and suddenly paper straws are all the rage (and the one company in the U.S. that manufactures them is having a hard time keeping up with demand).

We have seen this focus on bags in the retail environment too as plastic bags have given way to reusable shopping bags or the return of paper bags for shopping needs. My point is that these matters likely will continue to surface and with a frequency unseen in history as social media makes it easier for consumers and individual citizens to gain focus on things that the wider community may want to consider. So, will fast food chains be integrating carbon emissions into their incentives? Probably not that soon. But, for large restaurant chains that have large, wide-spread distribution networks I could see them focus incentives on finding the most cost effective solution that balances environmental impact. Perhaps that means that their delivery fleets get powered by alternative fuel sources. There could be more action in this area as social awareness of environmental issues grows. It may seem far-fetched today that business leaders would be rewarded based on both how a company performs financially,  as  well as how the company manages its environmental (and social) impacts. 
However, I think in the not too distant future this will be part of incentive designs, especially at companies that take a more holistic approacg to their businesses and how they define success.

So when more companies start adopting Environmental (and Social) goals into their incentive plans, they will need to take care that they do not create any perverse incentives that could cause problems later. Adopting such goals should be done carefully and discussed and reviewed from all sides. The goals should be tested–preferably by a number of folks who enjoy finding the loopholes in things to best identify where the goals may present weaknesses. Those should be shorn up through the use of countervailing goals and/or careful monitoring. If done properly, these such environmental (and social) goals could help propel companies to greater financial returns, especially if the goals lead to behaviors that are recognized by society as appropriate.

ISS Issues Draft 2019 Voting Policies for Comment

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This morning, ISS posted its draft voting policies on its website (https://www.issgovernance.com/policy-gateway/2019-benchmark-policy-consultation/). Anyone interested in providing comments on these draft voting policies may do so before 5:00 p.m. Eastern on November 1, 2018 by emailing his/her comments to ISS at  policy@issgovernance.com. Comments will be made public by ISS when the final voting policies are released–expected the middle of November 2018.

For the US market, ISS issued two draft voting policies:

  • Board Gender Diversity, and
  • Financial Performance Assessment Methodology

Board Gender Diversity

ISS is proposing to  generally vote against or withhold from the chair of the nominating committee (or other directors who are responsible for the board nomination process on a case-by-case basis) at companies when there are no female directors on the board. Mitigating factors that may be considered include:

• a firm commitment, as stated in the proxy statement and/or other SEC filings to appoint at least one female director to the board in the near term (before the next annual general meeting);
• the presence of at least one female director on the board at the immediately preceding annual meeting; and/or
• any other compelling factors considered relevant on a case-by-case basis.

ISS is proposing to apply the policy for meetings on or after February 1, 2020 , which gives a 1-year phase-in period (roughly 2019).

ISS is interested in comments concerning: when it should recommend against directors other than chair of the nominating committee, whether there are any mitigating factors that should be considered, and, if so, what weight should be given to such factors, the appropriate time period for a commitment to appoint a female director to an all male board, and whether commenters agree with the one year transition period for this policy to take effect.

Financial Performance Assessment Methodology

ISS is proposing shifting away from using GAAP financial measures to Economic Value Added (EVA)-related metrics, such as EVA Spread, EVA Margin, and EVA Momentum. ISS indicates that companies would be provided these EVA metric data points free of charge prior to their annual meeting and ISS analysis.

ISS is not clear on when this proposed policy change would take effect.  So it might be for 2019 or 2020.

ISS is asking whether commenters believe the quantitative P4P tests should continue to emphasize TSR. ISS is also interested in finding out if the decision is made to implement the EVA measures whether people would still like the GAAP measures to be reported on an informational basis.

ISS Issues FAQs on New GICS Group

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On September 20, 2018, ISS issued a series of FAQs concerning Global Industry Classification Standard (GICS) Code 5020 Implementation (available at: https://www.issgovernance.com/file/policy/active/americas/GICS-5020-FAQ.pdf). This change caused a number of companies to be moved from the GICS 2540, Media, group to the new GICS 5020, Media & Entertainment, group.

The key points from these FAQs are:

  • Companies in the new GICS 5020 group should see higher Burn Rate Thresholds than in the old GICS 2540 group.
  • ISS peer groups being constructed for shareholder meetings starting September 15, 2018 have been updated to reflect the new GICS group.
  • ISS will continue to use a company’s legacy GICS group to assess non-employee director pay (under ISS’ excessive NED pay policy) until February 1, 2019. At that date, ISS will switch over to utilizing the new GICS group in assessing NED pay.
  • ISS will update the GICS groupings used to determine median 1-, 3- and 5-year TSR starting September 30, 2018.
  • ISS will evaluate equity plan proposals using the updated GICS group for burn rate information starting with meetings on February 1, 2019.

More Information on ISS’ 2019 Surveys

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Early this week ISS opened up its annual policy survey, the results of which will influence the new ISS policies and changes to existing policies for the 2019 proxy season (i.e., impacting shareholder meetings on or after February 1, 2019). Today, we will look a bit closer at the two surveys that ISS launched: the 2019 Governance Principles Survey, and the 2019 Policy Application Survey.

2019 Governance Principles Survey

There are five issues ISS is seeking input in on this survey:

  • Auditor Independence: What factors should be considered in addition to non-audit services and fees as a percentage of total fees when evaluating independence of auditors?
  • Audit Committee: What factors are important in evaluating the effectiveness of the Audit Committee?
  • Director Accountability: Is it relevant for ISS to examine directors’ controversies on other boards when evaluating directors? If so, what would be relevant and what length of look-back period should be used?
  • Board Gender Diversity: ISS here is repeating questions it asked last year on gender diversity to gauge whether it is concerning if there are no female directors on a board?
  • One-Share, One-Vote Principle: Should ISS adjust vote results to show the results if all shares had equal voting rights? If so, should these adjusted results inform ISS’s board responsiveness review? What is the appropriate time period for a sunset provision on unequal voting rights?

2019 Policy Application Survey

The questions in this survey applicable to the U.S. are:

  • Independent Chair: What factors are important when ISS determines its vote recommendation with respect to a shareholder proposal for an independent chair?
  • Minimum Stock Ownership Requirements for Bylaw Amendments: Asks what the minimum ownership thresholds above the required SEC Rule 14a-8’s $2,000 stock holding requirement should be, and should multiple shareholder be able to aggregate holding to meet such threshold?
  • Quantitative Pay-for-Performance Screens: ISS is considering supplementing or replacing the four (4) GAAP financial metrics used in its P4P analysis with Economic Value Added (EVA) for purposes of the Financial Performance Assessment. ISS is asking if the survey participant supports the use of EVA in the P4P analysis, and, if so, how it should be incorporated.
  • Non-employee Director Pay: In 2018 ISS identified non-employee director (NED) pay outliers and will begin to recommend against compensation committees where elevated NED pay persists over multiple years without compelling justification. ISS is asking survey participants what should constitute a compelling justification.
  • Board Qualifications Matrix: The New York City Pension Funds has advocated for the disclosure of a director matrix to help shareholders assess director fit and the mix of skills among all directors. ISS is asking survey participants what level of disclosure on directors skills they find most useful.

For links to these ISS surveys, please see my prior post:

ISS Releases Global Policy Survey

Survey Closing Times

  • 2019 ISS Governance Principles Survey closes on August 24, 2018 at 5 pm Eastern, and the
  • 2019 ISS Policy Application Survey closes on September 21, 2018 at 5 pm Eastern.