ISS Plans to Vote Against All Male Boards, Use "EVA" Metrics to Assess Performance

November 02, 2018

ISS has proposed two major changes for its 2019 policy update, including a change to its financial performance assessment that is likely to generate more demand for ISS consulting services, further raising conflict of interest issues.

Starting in 2020, ISS will begin voting against the chair of the nominating committee (or the committee responsible for board nominations) for companies that have no female directors.  ISS will consider mitigating factors such as a firm public commitment to appoint a female director before the next annual meeting or the presence of a female director at the preceding annual meeting.  In a comment period ending November 1, ISS sought feedback on other mitigating factors, an appropriate time frame to appoint a female director to an all-male board, and whether a one-year grace period is appropriate.

The changes are based in part on the ISS policy survey, in which 70 percent of the responses were from issuers and just 17 percent from investors—specifically larger institutional investors.  

EVA metrics to replace current ISS "Financial Performance Assessment."  Despite relatively low support for the change from both investors and issuers in its recent policy survey, ISS has now proposed to replace its GAAP-based Financial Performance Assessment with new Economic Value Added (EVA) metrics.

First Attempt at Broader Financial Performance Review Roundly Criticized.  ISS implemented the Financial Performance Assessment in the 2018 proxy season as a secondary screen in reaction to criticism that its total shareholder return-based tests were too narrow.  Investors and issuers both noted that the use of the standardized accounting (GAAP) metrics for all companies was problematic.

However, the decision to replace those metrics with EVA measures has raised equal levels of concern.  EVA measures economic profit—the value created in excess of the required return to the company's shareholders.  EVA is less well known than the financial measures it replaces, and the Association's Center On Executive Compensation noted in comments on the ISS policy survey that "the calculation of EVA is not yet standardized and there are many nuances to methodologies around this metric that would render its use in an ISS quantitative screen confusing at best and misleading or inaccurate at worst."

Is one motivation more ISS consulting opportunities?  ISS intends to provide companies with its EVA metric results, basic benchmarking and a "data dictionary" for free in advance of each company's annual meeting.  However, it seems likely that if implemented, ISS will offer—and many companies may purchase—additional consulting services through its recent acquisition, EVA Dimensions, founded by EVA originator G. Bennett Stewart.

The ISS proposed policy changes were announced as the SEC prepares to review proxy advisory firm issues as part of a public “Roundtable Discussion” on November 15.  Among the topics: conflicts of interest where proxy advisors provide “independent” research to investors while providing consulting services to public companies.