13 November 2020
The Institutional Shareholder Services (ISS) has published its updated proxy voting guidelines for the UK and Ireland. These guidelines apply for shareholder meetings on or after 1 February 2021. The guidelines can be accessed here.
The key changes for “incentives” in the guidelines concern:
- remuneration policy provisions covering pensions and post-employment shareholding;
- gender diversity;
- “overboarding”; and
- the exceptional grounds for votes against individual directors.
Remuneration policy votes
The guidelines have been updated following the publication of the 2018 UK Corporate Governance Code (the Code). Shareholders are still expected to decide how to vote on a case-by-case basis. They are now also asked to consider:
- the extent to which pension contributions are aligned with those available to the wider workforce, as recommended by the Code; and
- whether an appropriate post-employment shareholding requirement is in place.
The guidelines set out a number of other considerations for shareholders, which are unchanged. These include checking if the overall remuneration policy, specific scheme structures and components and caps (as well as items like malus and clawback) are straightforward, clear and appropriate and in-line with market practice, ensuring performance conditions are clearly aligned with the company's strategic objectives, limiting notice periods to 12 months, and ensuring non-executives do not receive performance related remuneration.
ISS have made a number of adjustments to the guidelines to secure greater levels of gender diversity. Following the recommendations of the Hampton-Alexander Review of FTSE 350 companies to improve the representation of women on their boards, ISS proposes that:
- larger (FTSE350) companies in the UK and Ireland have a board comprised of at least 33 percent women; and
- smaller companies (e.g. FTSE SmallCap and larger AIM listed companies) have at least one woman on the board.
ISS will generally recommend against the chair of the nomination committee (or other directors on a case-by-case basis) if these guidelines are not followed.
Mitigating factors include compliance with the relevant board diversity standard at the company’s preceding AGM and a public commitment to comply with the relevant standard within a year.
ISS’ default stance remains unchanged: they may recommend a vote against directors who hold an excessive number of board roles. This would be applied strictly for directors on boards of complex companies, those in highly regulated sectors, or directors who chair a number of key committees.
ISS has expanded this guidance to provide that a more lenient approach is acceptable “for directors who serve on the boards of less complex companies (for example, externally managed investment companies)".
Votes against directors
In certain extraordinary circumstances, ISS will recommend a vote against an individual director. The guidelines previously stated that these circumstances would include:
- material failures of governance, stewardship, or risk oversight; or
- egregious actions related to the director's service on other boards that raise substantial doubt about that individual's ability to effectively oversee management and to serve the best interests of shareholders at any company.
These guidelines remain. ISS has expanded the first item to include "demonstrably poor risk oversight of environmental and social issues, including climate change".
The changes concerning remuneration policies are expected. The pension and post-employment holding period rules were two of the more challenging innovations found in the Code and many companies have approached implementation by waiting to see market sentiment. Whilst not as prescriptive as other voting guidance (such as that issued by the Investment Association) the recommendations on remuneration are a reminder that “waiting and watching” the market is probably not going to be acceptable to shareholders. The ISS is expecting demonstrable action here.
Likewise, the moves to drive greater levels of women membership of boards provide another indicator in the inexorable direction of travel to a more representative and balanced executive population in listed companies. It is clear that companies need to be taking steps to address gender imbalance on boards – and soon, given that shareholders have been given another hammer to help bring down the glass ceiling.
One notable absence from the guidelines is any update on the ISS’ approach to COVID-19 in the context of executive remuneration. Whilst the ISS did issue some guidance on their approach to COVID-19 in this context back in April 2020 (see here), the ISS has not taken this opportunity to update its approach. Instead, it has said that it will ‘carry this or similar policy guidance into 2021 and update going forward as needed’. An update on the ISS’ approach would have been valued by many December year-end companies, given many will soon be at the point where decisions have to be made on executive remuneration for 2021.
Finally, we agree with the moves to expand the grounds to vote against directors to reflect bad management of environmental and social issues. These are undeniably of huge importance from a public policy perspective and climate change might be the overriding issue of this generation, as well as several generations to come. Failure to address these issues will have dire consequences for us all – not just shareholders! The move feels like a mild rebuke to certain executives (and politicians) who have been less than optimal in their approach to these hot button topics.
If you have any questions about this alert, please do let us know.
Chris Fallon and Emma Parker