ISS announced the results of its annual Benchmark Policy Survey for the 2023 proxy season (see our prior reports here: "Society Submits Comments on ISS Annual Policy Survey" and here: "ISS Launches Annual Policy Survey for 2023 Proxy Season"). There were 417 responses to the benchmark policy survey consisting of 205 responses from investors or investor-affiliated organizations and approximately 212 responses from non-investors, which consisted of public companies, public company board members, public company advisors, corporate interest organizations, and a handful (at most based on the breakdown) of academics. The number of respondents varied by question.
The Society submitted a comment letter but did not complete the online survey due largely to the limitations imposed by the prepopulated, multiple choice answer selections.
Key takeaways from the online survey include:
Climate-related (global questions)
Board Accountability
Survey Question: For companies considered to be significant greenhouse gas (GHG) emitters (defined as the Climate 100+ Focus Group), what actions or lack of actions may be considered to demonstrate such poor climate change risk management that rise to the level of “material governance failure," which would call for an ISS recommendation against a director or directors?
- More than half of investor respondents and non-investor respondents indicated that the absence of adequate disclosure with regards to climate-related oversight, strategy, risks and targets according to a framework such as the TCFD would call for an ISS recommendation against a director or directors. Half of investor respondents (compared to 27% of non-investor respondents) also said that a company’s failure to set realistic medium-term targets (through 2035) for Scope 1 & 2 only (including direct emissions and those associated with purchased power) would warrant such a recommendation. Just 16% of investors, compared to 40% of non-investors, said that a lack of climate change risk management disclosure and performance should not result in a vote against directors
Transition Plans
Survey Question: With regards to the ISS global policy guidelines on Management Say on Climate proposals, what do you consider to be the top three priorities when determining if a company's transition plan is adequate?
- Investor respondents identified as their top three priorities: (i) whether the company has set adequately comprehensive and realistic medium-term targets for reducing operational and supply chain emissions (Scopes 1, 2 & 3) to net zero by 2050 (42% of respondents); (ii) whether the company’s short- and medium-term capital expenditures align with long-term company strategy and the company has disclosed the technical and financial assumptions underpinning its strategic plans (41% of respondents); and (iii) the extent to which the company’s climate-related disclosures are in line with TCFD recommendations and meet other market standards (37% of respondents). Few investor respondents said they consider a company’s year-over-year increase in direct or indirect emissions a priority in this context.
- The top three priorities among non-investor respondents were: (i) the extent to which the company’s climate-related disclosures are in line with TCFD recommendations and meet other market standards (54% of respondents); (ii) whether the company discloses a commitment to report on the implementation of its plan in subsequent years (35% of respondents); and (iii) whether the company has comprehensive and realistic medium-term targets for reducing operational emissions (Scopes 1 & 2) to net zero by 2050 (23% of respondents).
Climate Risk as Critical Audit Matter
Survey Question: Do you favor seeing commentary from the auditors, in the auditor report, on climate-related issues (in the case of significant emitters)?
- Three-quarters of investor respondents answered “Yes” and 58% of non-investor respondents answered “No.”
Survey Question: In your view, should climate risk considerations be included among the Critical Audit Matters / Key Audit Matters?
- Nearly two-thirds of investor respondents answered “Yes” and 56% of non-investor respondents answered “No.”
Survey Question: Which of the following actions would you consider appropriate for shareholders to take if climate risk considerations are not included among a company’s Critical Audit Matters/Key Audit Matters?
- A majority of investor respondents said supporting a related shareholder proposal would be an appropriate response, while 42% said this would warrant voting against re-election of audit committee members. In contrast, 62% of non-investor respondents indicated that no voting action would be appropriate compared to 25% of investor respondents.
Financed Emissions
Survey Question: Thinking about 2023, what do you consider to be appropriate investor expectations for large companies in the banking and insurance sectors regarding the GHG emissions associated with their lending, investment, and underwriting portfolios (choose all that apply):
- A majority of investor respondents identified disclosure (such companies should fully disclose financed emissions) (54% of respondents) and targets (such companies should have clear long-term and intermediary financed emissions reduction targets for high emitting sectors) (51% of respondents) as appropriate investor expectations. In addition, nearly 30% of investor respondents said that companies should commit to cease financing or underwriting new fossil fuel projects. None of the answer choices garnered majority support from non-investor respondents; however, a plurality of such respondents indicated that such companies should not be expected to comply with shareholder requests regarding financed emissions.
US market-specific questions
Potential Exceptions to Adverse Recommendations Under ISS Policy on Multi-Class Capital
Structures
Survey Question: For purposes of a de minimis exception to ISS’s policy on multi-class capital structures with uneven voting rights, what percentage of total voting power, held by the owners of the super-voting shares, would you consider to be "de minimis"?
- A plurality of investor respondents (32%) (compared to 15% of non-investor respondents) indicated that there should be no de minimus exception.
Survey Question: What other factors do you consider relevant to the question of whether a company should be exempt from adverse ISS vote recommendations under this policy?
- A majority of investor respondents indicated that none of the survey's enumerated factors was relevant—that any capital structure that disenfranchises public shareholders is problematic. Comparatively, a plurality of non-investor respondents (45%) indicated that limitations on super-voting rights would be relevant.
Survey Question: Which directors do you consider appropriate targets for adverse vote recommendations due to a capital structure with unequal voting rights? (Please choose all that apply)
- A plurality of investor respondents (41%) selected the Governance Committee Chair, whereas the plurality of non-investor respondents (31%) selected any director who holds super-voting shares.
Survey Question: At some multi-class companies, public shareholders do not have the ability to vote on certain directors, such as the CEO, board chair, or members of the founding family. Where shareholders may only vote on a limited number of independent directors, do you consider they should vote against such directors if they wish to protest against the multi-class structure?
- A majority of investor respondents (57%) and a plurality of non-investor respondents (46%) answered “Yes.”
Problematic Governance Structures
Survey Question: While recognizing that the sunset of a classified board may take multiple years, what is the most appropriate time period from the date of their IPO for companies to begin sunsetting problematic governance structures?
- A plurality of investor respondents and non-investor respondents (43% and 37%, respectively) selected between three and seven years.
Survey Question: In your opinion, should smaller companies be exempted from negative ISS recommendations for maintaining a classified board or supermajority vote requirements? If so, which companies would you consider to be sufficiently small to be exempt from adverse recommendations?
- A majority of investor respondents indicated that smaller companies should not be exempt. A plurality of non-investor respondents (44%) indicated that smaller companies should be exempt from negative recommendations for both classified boards and supermajority vote requirements.
Survey Question: In your opinion, should a supermajority vote requirement of two-thirds of shares outstanding to amend governing documents generally be considered acceptable?
- A majority of investor respondents responded “No” and 84% of non-investor respondents answered “Yes.”
Diversity, Equity & Inclusion
Survey Question: What is your opinion about third-party racial equity or civil rights audits?
- A narrow plurality of investor respondents(45%) and a majority of non-investor respondents (56%) indicated that whether a company would benefit from an independent racial equity or civil rights audit depends on company-specific factors including outcomes and programs. Nearly as many investor respondents as the plurality (42%) indicated that most companies would benefit from an independent racial equity or civil rights audit where permissible.
Survey Question: For those who believe third-party racial equity or civil rights audits should depend on company-specific factors or who disagreed that most companies would benefit from such an audit, which of the following company-specific factors do you consider relevant in indicating whether a company would benefit from an independent racial equity or civil rights audit (where permitted to do so)? (Please select all that apply)
- The vast majority of investor respondents and non-investor respondents (83% and 77%, respectively) identified company involvement in significant diversity-related controversies, and more than half of investor respondents also identified the company’s failure to provide detailed workforce diversity statistics, such as EEO-1 type data.
The Annual Policy Survey is part of ISS's annual policy development process. ISS will release key draft policy updates for public comment and release final policies in November applicable to shareholder meetings occurring on or after February 1, 2023.
See ISS’s release and additional information & resources on our Proxy Advisors page.