September 12, 2019

ISS Releases Policy Benchmark Survey Results

Yesterday, ISS released the results of its benchmarking survey for the annual update of its voting policies. Here’s a summary:

1. Board Gender Diversity – Responses to ISS’ question about views on the importance of gender diversity on boards showed that majorities of both investors (61 percent) and non-investors (55 percent) agreed that board gender diversity is an essential attribute of effective board governance regardless of the company or its market. Among those who did not agree with that view, investors tended to favor a market-by-market approach and non-investors tended to favor an analysis conducted at the company level.

2. Director Overboarding – Investors and non-investors diverged on the question of measurement of how many boards is too many for an individual director. A plurality (42 percent) of investor respondents selected four public-company boards as the appropriate maximum limit for non-executive directors. A plurality of investor respondents (45 percent) also responded that two total board seats is an appropriate maximum limit for CEOs (i.e., the CEO’s “home” board plus one other). A plurality of non-investors responded that a general board seat limit should not be applied to either non-executives (39 percent) or CEOs (36 percent), and that each board should consider what is appropriate and act accordingly.

3. Climate Change Risk Oversight – A majority (60 percent) of investor respondents answered that all companies should be assessing and disclosing climate-related risks and taking actions to mitigate them where possible. 35 percent of investor respondents answered “Maybe” to the following statement about how companies should approach this issue: 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 percent of investors indicated that the possible risks related to climate change are often too uncertain to incorporate into a company-specific risk assessment model. Non-investor responses to those same three issues were 21 percent, 68 percent and 11 percent respectively. The actions that investors considered most appropriate for shareholders to take at companies assessed to not be effectively reporting on or addressing their climate-related risks were engagement with the company (96 responses), and considering supporting shareholder proposals on the topic (94 responses). Based on the number of non-investor responses, these two options were also ranked first and second in popularity by non-investors.

4. Mitigating Factors for Companies with Zero Women on Boards – ISS announced in 2018 that it is introducing a new U.S. Benchmark Voting Policy for 2020 to generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies when there are no women on the company’s board, but with some mitigating factors that may be taken into account.

Respondents this year were asked whether ISS should consider other mitigating factors, beyond a firm commitment to appoint a woman in the near-term and having recently had a woman director on the board, when assessing such companies. Investor respondents were less likely than non-investor respondents to say that other mitigating factors (such as adopting an inclusive Rooney Rule-style procedure for candidate searches or maintaining an active recruitment process despite the absence of a boardroom vacancy) should be considered and may be sufficient to avoid a negative recommendation on directors.

5. Combined CEO/Chair – Investor respondents cited poor company responsiveness to shareholder concerns as the most commonly chosen factor that strongly suggested the need for an independent board chair. This was followed 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). For non-investors, the most commonly chosen factor was a poorly-defined lead director role, followed by poor company responsiveness to shareholder concerns.

Is the SEC Seeking to Replace PCAOB’s Kathleen Hamm?

As I’ve blogged about several times over the years, one of the oddest provisions of Sarbanes-Oxley was Congress creating the PCAOB with a dotted line to the SEC. That means the SEC decides who gets appointed to the Board of the PCAOB. That has resulted in a few battles over time. Here’s an excerpt from this MarketWatch article by Francine McKenna:

Kathleen Hamm says her work as a member of the Public Company Accounting Oversight Board, the audit-industry regulator, is not done. But the Securities and Exchange Commission apparently thinks otherwise, and posted for her job over the summer. Hamm stepped into a term in 2017 that had approximately two years remaining, expiring this October. She is eligible for reappointment to the second five-year term, through 2024, but now she’s had to reapply for her job and she’s not sure why.

“I am seeking reappointment to continue the important work I began 20 months ago,” Hamm said in a statement provided by the PCAOB spokeswoman to MarketWatch. “My efforts have centered on protecting investors by applying my expertise and experience in technology, risk management, and compliance to upgrading and modernizing the PCAOB’s approach to cybersecurity and emerging technologies, both at the board and among the audit firms we oversee.”

Hamm was appointed to the PCAOB board after the SEC announced in December 2017 that it would appoint a full slate of five new members to replace all incumbents. The SEC had never before declined to reappoint PCAOB members who were eligible to serve another term, and it was the first time in the PCAOB’s 15-year history that the entire board was replaced all at once.

The new board members came on with staggered terms to fill out. Hamm is the second board member to have her term come up; Duane DesParte was renewed without fanfare after his original term expired after six months. Hamm said she’s pushed for an increased focus on the control systems that auditors use to ensure that they consistently deliver high-quality audits for the benefit of the investing public. “I would like the opportunity to continue to drive this vital initiative as well,” she said in her statement.

Jim Daly Retires!

Happy retirement to long-time Staffer Jim Daly! As noted in this press release, Jim served in Corp Fin for 38 years in a variety of positions – the latest being Associate Director – and mentored hundreds of folks as they came up through the ranks. He surely will be missed!

Broc Romanek