The Center filed comments with ISS last week in response to the proxy advisory firm’s annual policy survey, which often precedes proxy voting policy changes for the upcoming year. This year, ISS released
two policy surveys for the 2022 proxy season: the Annual Benchmark Survey and a separate Climate Survey. The first relates to compensation, corporate governance, and broad ESG concerns while the second focuses on climate risk disclosures and mitigation strategies (but no questions on linking executive compensation to climate-related metrics).
Though the Center is monitoring climate disclosure statements from ISS, our comments pertained to the policy survey. Consistent with past practice, the Center based its comments on a Subscriber survey in addition to individual discussions with Subscribers.
Linking Pay to Non-Financial ESG Metrics
As with financial metrics, the Center’s letter highlighted that boards remain best placed to determine which ESG metrics or milestones align best with the long-term growth strategy. As highlighted by a Subscriber, “[ESG] can be considered as part of an overall compensation decision process but companies should retain discretion on whether to include specific ESG metrics/weightings in their compensation plans and which metrics are most applicable.” Similarly, boards should have the flexibility to decide if ESG incentives are most appropriate in the short- or long-term incentive plans based on their business strategy and time horizon for meaningful change.
The Society for Corporate Governance highlighted
similar concerns in its comment letter, highlighting several key dynamics that should prevent ISS from enacting new policies, including no definitional consensus on ESG metrics, variances in materiality of ESG metrics across companies and industries, and the mixed views about whether and under what circumstances sustainability-linked pay increases shareholder value.
Racial Equity Audits
The use of racial equity audits should be determined on a case-by-case basis and consider other specific efforts the company is already taking to promote racial equity. While audits may be considered a useful tool among several options in addressing long-standing inequalities, they will need to transparently account for different reporting capabilities, internal demographic data maintained by companies, and regional/national variability if any comparisons are to be reliable. A broad-based policy requiring the use of racial equity audits or blanket support for shareholder proposals requesting them would be inappropriate.
Longer-term Perspective on Pay Quantum and Midcycle Adjustments to Equity
Noting some concerns with how ISS evaluates pay and performance, the Center recommended that ISS continue to display both the annual and longer-term multiple of median.
As to adjustments to equity awards, the Center highlighted that flexibility and resiliency will be hallmarks of corporate governance and executive compensation for the near future. Reasonable, well explained modifications to long-term equity incentives may be an appropriate response in specific, rare crisis conditions. We encouraged ISS to incorporate this flexibility into executive compensation evaluations and related vote recommendations.
We appreciate the Subscriber responses that we received on ISS’s 2022 policy survey. ISS will release the survey results in the near future and draft policy changes for 2022 are expected by the fourth quarter of 2021.
