ISS Releases Enhancements to Governance Quality Score

ISS has announced enhancements to inputs that result in its Governance QualityScore (GQS) effective December 1st.

• For the U.S. two new questions will be included around change-in-control and severance agreements for non-CEO executives:
  
  
  1. “What is the multiple of pay in the change-in-control or the severance agreements?”
  2. “What is the basis for the change-in-control or severance payment?”

ISS has historically focused on the CEO only, not other NEOs, when it comes to severance. However, ISS called out severance and change-in-control provisions in its recent paper on “Golden Parachutes Face Investor Scrutiny,” noting that shareholder proposals related to severance increased 156% this year. ISS emphasized the importance of the topic, indicating that “macroeconomic factors could heighten urgency around reining in goodbye packages that fly outside of market norms.”

• Globally, 14 factors will be expanded relating to board structure, compensation, audit and risk oversight into new markets – primarily Canada and Nordic countries. Many of these focus areas are already included in the scoring for U.S. companies.
  
  
• Enhancements announced in 2022 will now be included in the scoring. These include new factors on DEI, CEO pay benchmarking (including pay ratio) and climate performance metrics.

Why it matters? The GQS score, while not currently used in Say-On-Pay voting recommendations, is often scrutinized internally by companies because it provides insights for investors on where a specific governance practice is outside the norm and could signal higher risk and lower effectiveness. Board directors may review these scores and ask if the company should adopt a different governance practice related to the factors with a low score, since the methodology is similar to how ISS assesses proxy data. Companies should ensure that their company data on record is correct by using the data verification portal here between November 6-17.