ISS recently released the results of its 2017-2018 global policy survey. The respondents, mostly from the U.S., included 131 investors, 382 corporate issuers, 46 consultants/advisors, 28 corporate directors and 13 organizations that represent or provide services to issuers. Highlights of the survey are summarized below:

Multi-class capital structures. In many instances, there was a substantial divergence between the responses of investors and non-investors. For example, with regard to multi-class share structures with unequal voting rights, 43% of investors said that these structures are not appropriate and 43% viewed multi-class structures as appropriate in certain circumstances, such as for new public companies subject to sunset provisions or periodic reapproval by the holders of the low-vote shares. For some investors, the key issue was how to demonstrate board independence.  In contrast, half of the non-investors responded that companies should be allowed to choose whatever capital structure they see fit, and only 27% would require a sunset or reapproval provision; only 11%  opposed these capital structures under any circumstances. Some non-investors contended that shareholders that oppose the structure can just chose not to invest.

Board gender diversity. Apparently, just about everyone is on board with the concept of board gender diversity—almost 70% of investors viewed as problematic the absence of any women on a board. However, making board diversity a reality seems to be a tougher proposition. According to ISS, despite the recent heightened attention given to the issue, “there have been varying levels of progress amongst companies in increasing the number of female directors on boards and some institutional investors continue to express frustration with a perceived lack of progress in boosting gender diversity in certain markets or industry sectors.”

The answers cited by investors to address this issue were, in order, engagement or supporting shareholder proposals or supporting a shareholder-nominated candidate. About a quarter of investors also indicated that disclosure of a board’s approach to increase gender diversity would be mitigating, while 43% saw the absence of women as indicative of problems in the recruitment process.  Fewer than 10% thought an absence of women directors was not problematic, with board composition best left to the board. Of investors, 23% would assess the issue on a case-by-case basis, taking into account “the appropriateness of the existing directors based on their experience and skill sets; whether the board is composed of people who are capable of representing shareholders; company size; and turn-around situations.”

Of non-investors, 54% thought the absence of a woman director on a board was problematic, while over half of those said that disclosure would be mitigating.  The most favored remedy was engagement, while non-investors also favored votes against members of the nominating committee rather than support for a shareholder nominee to the board. Only 19% thought the absence of women was not problematic. Those preferring a case-by-case approach would take into account considerations similar to those of investors, and some expressed concerns about quotas.

Share issuances and buybacks.  In contrast to many European markets, U.S. markets do not require shareholder votes on share buybacks or on issuances up to the amount authorized in the company’s charter except in specified circumstances. More than seven out of ten of the investors favored votes on share issuances while less than half called for votes on share buybacks, leaving that instead to the board’s discretion. Of non-investors, 61% thought both share issuances and buybacks were matters best left entirely in the board’s discretion.

Virtual/hybrid shareholder meetings.  Holding a meeting online can allow shareholders to participate remotely, thus potentially increasing participation, while reducing costs associated with physical meetings.  However, ISS observes, critics have charged that “virtual-only meetings may hinder meaningful exchanges between management and shareholders.”

Almost 20% of investors thought either virtual-only shareholder meetings (where the meeting is held entirely with no physical location) or hybrid shareholder meetings (where physical meetings are supplemented by real-time audio or video, with a variety of types of online participation by shareholders) were acceptable, and 8% thought neither were acceptable. However, 36% were fine with hybrid meetings, but not virtual-only shareholder meetings, and 32% were fine with either, so long as virtual-only meetings afforded the same shareholder rights as physical meetings.

Among non-investors, 42% viewed either virtual-only or hybrid shareholder meetings to be acceptable without reservation.  The majority of non-investors, however, did not agree with that view, with 22% finding hybrid meetings acceptable, but “virtual-only” meetings acceptable only if they provided the same shareholder rights as a physical meeting, and 15% did not approve of either.

Pay Ratio. Contrary to many predictions, ISS found that investors were actually planning to use the pay-ratio data that will start to appear in proxy statements in 2018.  Only 16% said they were not planning to use the data.  Almost three-quarters of investors replied that they intended  either to compare the ratios across companies/industry sectors and/or to assess year-over-year changes at individual companies. The remainder appeared to be in wait-and-see mode.  Investors advised shareholders to use the data as one data point or as background for engagement.

Of non-investors, 21% indicated that they intended to follow the same practices as the majority of investors above.  However, 44% of non-investors expressed skepticism about the usefulness of the data, citing issues such as demographic and geographic disparities among peer companies as well as differences in the use of part-time or contract workers. Respondents were also asked how shareholders should use disclosed data on pay ratios. For the most part, non-investors did not think the data would be meaningful to shareholders.

Posted by Cydney Posner