ROCKVILLE, Md. (November 21, 2023) – ISS Governance, a leading global provider of independent and objective shareholder meeting research and recommendations, multiple voting policy choices and end-to-end workflow solutions for institutional investors, and a unit of ISS STOXX, today announced the launch of its open comment period on proposed changes to its benchmark voting policies. The open comment period elicits views from governance stakeholders globally with regard to a number of ISS Governance’s proposed voting policy changes for 2024 and beyond, and will run through 5:00 p.m. ET on November 30, 2023.
To ensure ISS Governance’s benchmark voting policy changes take into consideration a broad range of perspectives, including the views of institutional investors globally and those of the broader corporate governance community, ISS Governance gathers input each year from institutional investors, companies, and other market constituents through a variety of channels and mediums. Following the recent release of the results of our 2023 Global Benchmark Policy Survey, we now make available for public comment a number of proposed changes to ISS Governance’s benchmark voting policies for 2024. This year there are fewer proposed changes than in the last few years, and we invite views and comments from all interested parties on four proposed voting policy changes for 2024, specifically related to the Canadian, Japanese, and the Asia-Pacific policy guidelines. Feedback is invited from all interested parties on the proposed policy changes, on the following topics:
Board Diversity – Canadian Policy
In 2022, a new board diversity policy was announced for Canadian S&P/TSX Composite Index constituents with a one-year grace period to February 1st 2024. As we approach the end of the previously announced grace period, the transition language will now be removed and the final policy framework, to be effective as of February. 1st, 2024, is being updated to provide transparency on the policy framework. Since 2020, Canada has broadened disclosure requirements on board diversity for publicly traded corporations beyond gender, mandating businesses to report on four employment equity groups (women, visible minorities, Indigenous peoples, and persons with disabilities) through new requirements introduced to the Canada Business Corporations Act (CBCA) in Bill C-25. According to the Government of Canada, these measures aim to foster diversity at the highest levels of corporate leadership in Canada, improve shareholder democracy, and help investors make better and more informed decisions through better transparency.
Distributing corporations established under the CBCA are required to disclose both to their shareholders (through their proxy circulars), and to Corporations Canada, information regarding the diversity of their boards and senior management. The disclosure must include the representation of various designated groups on the board and among senior management. These designated groups include women, Indigenous peoples (First Nations, Inuit and Métis), persons with disabilities and members of visible minorities. In addition, the CBCA requires distributing corporations to disclose whether they have a diversity and inclusion policy, and if not, to provide an explanation why not. This “comply or explain” approach is not prescriptive but is intended to foster a dialogue between distributing corporations and their shareholders, increase corporate transparency and support the push for increased diversity on boards and in senior management. The full implementation of this benchmark policy, following the end of the previously announced grace period, will align the ISS policy for Canadian S&P/TSX Composite Index more closely with the ISS US policy guidelines for Russell 3000 and/or S&P 1500 indices’ on racial/ethnic diversity.
Election of Directors – Japan Policy
This proposed policy change will reinstate the application of the ‘return on equity’ (or ROE) policy for Japanese companies under ISS’ benchmark policy. Until 2020, ISS’ Japan benchmark policy generally recommended votes against the re-election of the top executives at companies that underperformed in terms of capital efficiency (i.e., when the company had posted average ROE of less than 5 percent over the previous five fiscal years), unless an improvement (defined as ROE of 5 percent or greater for the most recent fiscal year) was observed. However, it was decided that the impact of the COVID-19 pandemic on companies’ operating performance reduced the appropriateness of using ROE to measure capital efficiency, and the application of the ROE policy had been suspended since June 2020.
However, now that the pandemic has receded, the previous temporary suspension is no longer relevant. Overall, Japanese companies’ operating performance has generally improved, and the median ROE of Japanese companies with fiscal years ending March 2023 improved to 6.8 percent. In response to the ISS 2023 Policy Survey, out of 184 investor respondents to the question “Do you think it is appropriate for ISS to resume the application of the ROE policy for Japanese companies?” 77 percent of respondents answered “yes.” Out of 86 corporate respondents to the question, 60 percent answered “yes”.
Takeover Defense Plans (Poison Pills) – Japan Policy
In Japan, there has been a reduction in the number of companies with poison pills. Nonetheless, in recent years, with an increase in shareholder activism in Japan, some companies have implemented newly introduced poison pills, often designed to work against specific shareholders. Meanwhile, overall board independence of Japanese companies has improved and, based on ISS data, as of June 2023, 84.3 percent of Japanese boards were comprised of at least one-third outside directors, meeting the board independence criteria set forth among necessary conditions of the current ISS Japan benchmark policy regarding poison pills. However, only 8.8 percent of companies covered by ISS from January to June 2023 had a majority-independent board, based on ISS criteria. The proposed poison pill policy update reflects the improving board independence in the market, and signals that board independence is critical if a company seeks to deploy a poison pill, and, particularly when pills are designed for specific shareholders, is intended to prevent a non-independent board from arbitrarily using a poison pill mechanism for management entrenchment.
Equity Compensation Plans – Asia-Pacific Regional Policy
The ISS Asia-Pacific Regional policy is being updated to clarify and codify the policy approach regarding equity compensation plans for companies in Indonesia, Malaysia, Pakistan, Sri Lanka, Thailand, and Vietnam.. The proposed update outlines ISS’ approach already being applied for the evaluation of stock option plans and restricted share plans for those markets and provides greater transparency of the existing framework applied on the analysis of such proposals.
Access the proposed policy changes for comment here.
Comments received will be considered as ISS Governance finalizes the updates to its 2024 benchmark voting policies.
ISS Governance expects to announce its final 2024 benchmark policy changes in December 2023.
About ISS Governance: Founded in 1985 as Institutional Shareholder Services (ISS) Inc., ISS Governance is a leading global provider of independent and objective shareholder meeting research and recommendations, providing multiple voting policy choices as well as end-to-end workflow solutions for institutional investors. More than 1,600 clients worldwide utilize ISS Governance’s actionable expertise to help them make informed investment stewardship decisions, and to help them manage their voting responsibilities. Covering over 50,000 meetings annually, ISS Governance leverages its extensive global footprint, deep experience, high quality data and analysis, unified client support, and technology infrastructure to continuously evolve and extend its innovative suite of solutions to meet clients’ evolving portfolio, fiduciary, and stewardship requirements. Learn more at: https://www.issgovernance.com/solutions/proxy-voting-services/
About ISS STOXX: ISS STOXX GmbH, through its group companies, is a leading provider of comprehensive and data-centric research and technology solutions that help capital market participants identify investment opportunities, detect qualitative and quantitative portfolio company risks, and meet evolving regulatory requirements. With roots dating back to 1985, we today deliver world-class benchmark and custom indices across asset classes and geographies and serve as a premier source of independent corporate governance, sustainability, cyber risk, and fund intelligence research, data, and related offerings. Our products and services give clients the scale and leverage they need to grow their business more effectively and efficiently. ISS STOXX, which is majority owned by Deutsche Börse Group, is comprised of more than 3,400 professionals operating across 33 global locations in 19 countries. Its approximately 6,400 clients include many of the world’s leading institutional investors who turn to ISS STOXX for its objective and varied offerings, as well as companies focused on ESG, cyber, and governance risk mitigation as a shareholder value enhancing measure. Clients rely on ISS STOXX’s expertise to help them make informed decisions to benefit their stakeholders.
Sarah Ball, Executive Director, Communications