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New Factors in ISS’s Governance Score

Published on: February 12, 2022

Topics: Corporate Governance

In addition to the proxy voting reports with which most companies are familiar, ISS also scores companies on their corporate governance through Governance QualityScore. This rating is based on a variety of factors including compensation, shareholder rights, and ESG policies/practices. Although it does not inform voting results, it is a clear indication of ISS’s preferences and views regarding corporate governance.

The full list of the specific factors is here, and reflects an astonishing level of expectations for companies around diversity and ESG. In particular, ISS is stating that companies that tie climate to pay and that disclose their EEO-1 reports will score better on QualityScore.

Board Structure
This includes the quality of disclosures on board and executive diversity, both by gender and ethnicity, as well as actual diversity metrics for directors and executives. 

  • What was the greatest percentage of vote support for diversity, equity, and inclusion shareholder proposals at the most recent annual meeting? 
  • Does the company have an executive gender diversity policy with a target?
  • Does the company have a gender diversity statement for the board and/or executives?
  • Do executives exhibit diversity based on aggregate disclosure? 
  • Do executive or senior level officials and managers exhibit ethnic and racial diversity?
  • Do executive or senior level officials and managers exhibit gender diversity?

Compensation
 These are tied to the use of climate metrics, CEO pay ratio, and performance target disclosures. 

  • What is the level of disclosure on climate-related performance measures for the short-term or any long-term incentive plan for executives?
  • What is the disclosed ratio of CEO total compensation to the median total compensation of all employees?
  • What percentage of the CEO's equity pay mix by value is performance-conditioned?
  • Does the company disclose a performance measure for restricted share or stock award plans for executives?

Audit & Risk
 Broader workforce demographic data is covered under this section (or pillar).

  • Has the company publicly disclosed an EEO-1 report in the last 3 years?
  • How long ago was the most recent EEO-1 report disclosure?

Although QualityScore factors are often much more aggressive than ISS’s actual voting recommendation policies, it is unusual for them to essentially recommend that companies include a specific metric (such as climate) in the incentive plan. This may portend changes to voting policies in the future.

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