Proxy advisory firm Institutional Shareholder Services, Inc. (“ISS”) will roll out a new updated and enhanced version of its governance rating system QuickScore, known as QuickScore 2.0, beginning in February 2014. QuickScore 2.0 will include new governance factors, updated weightings and event-driven data updates. A technical document detailing the changes to QuickScore was released on January 27, 2014.1 Highlights of that update are discussed below.
In connection with QuickScore 2.0’s roll out, ISS has opened a free data verification site to all covered corporate issuers to correct factual errors in company data used in ISS’ ratings. In order to update data prior to QuickScore 2.0’s launch, companies must provide feedback through the verification portal by 8:00 pm EST on February 7th. ISS has stated that it will respond to all requests to update data. QuickScore 2.0 will launch on February 18, 2014, at which time scores will be made available to QuickScore subscribers and companies. Updated scores will also be displayed at this time on ISS’ proxy research reports. QuickScore 2.0 pillar and overall scores will be accessible on Yahoo! Finance and Bloomberg beginning in early March 2014.
QuickScore, which was designed to help institutional investors identify and monitor potential governance risk in their portfolios and identify possible investor concerns, replaced ISS’ GRId scoring method in February 2013. QuickScore measures a company’s perceived level of risk based on market practices covering nearly 200 governance factors grouped into the four areas of (i) audit, (ii) board structure, (iii) compensation/remuneration and (iv) shareholder rights, using a hybrid qualitative and quantitative approach. Under QuickScore, companies receive a score that is a relative measure based upon a company’s raw score calculations in each of the four primary categories against those of other companies in the company’s relative index or capital markets region. Scores range from 1 to 10 (with 1 indicating lower governance risk and 10 indicating higher governance risk) and are presented using a standardized appearance. Since the QuickScore methodology is aligned with ISS’ benchmark proxy voting policy, a favorable QuickScore suggests that the company is more likely to receive favorable ISS proxy review on the covered items as well.
QuickScore 2.0 Highlights
QuickScore 2.0 updates include:
- Event-driven data updates. ISS will now monitor company regulatory filings and other public disclosures on an on-going basis in order to update a company’s QuickScore upon changes in a company’s governance structure. ISS indicates that one of the most important governance updates it will follow is the independence classification of new directors.
- Zero-weight governance factors. This new category of governance factors will appear in QuickScore reports as information-only factors that do not impact a company’s score.
- Addition of new governance factors and updates to previously used governance factors. New and/or updated governance factors for the U.S. market include: (1) Number of women on a company’s board of directors (a zero-weight governance factor included in reports for informational purposes only); (2) Percentage of directors who received shareholder approval rates below the average level (ISS plans to monitor director elections and re-evaluate scores under this factor for directors receiving less than 95% shareholder approval); (3) Average size of outside directors’ compensation as multiple of the median of company peers; (4) Degree of alignment between a company’s annualized three-year pay percentile rank and its three-year annualized TSR rank as compared to peers (replaces previous QuickScore factors # 226 and 227, which looked at one- and three-year periods and will still be included in ISS reports as zero-weight factors for informational purposes only); (5) Whether say-on-pay proposal received shareholder support below the industry index level, (6) Proportion of directors serving more than nine years; (7) Number of financial experts serving on the audit committee (a zero-weight governance factor included in reports for informational purposes only); and (8) Number of directors serving on the board (a zero-weight governance factor included in reports for informational purposes only).
Updated ISS and Glass Lewis Guidance
ISS and Glass Lewis have also recently updated their corporate governance policies for the 2014 proxy season.2 Updates to ISS policy include:
- Changes to ISS’ policy on board responsiveness: Starting in 2014, ISS will employ a “comply or explain” approach when reviewing shareholder proposals that receive shareholder majority support. Under this revised approach, boards must either act on a shareholder proposal receiving majority support or explain the rationale for failing to implement the proposal, in whole or in part, in the company’s proxy statement.
- Simplified methodology for calculating a company’s pay-for-performance: ISS will now calculate a company’s TSR rank and CEO’s total pay rank as compared to the company’s peers over a three-year period, weighting each of the three years equally (similar to the change in QuickScore 2.0 noted above).
- Director/qualification compensation bylaw FAQ: ISS has adopted a director/qualification compensation bylaw FAQ, discussing ISS’ views of bylaws that disqualify a director nominee receiving third party compensation.
- Changes to Glass Lewis’ proxy guidelines include:
- Declassification bylaws: Glass Lewis will now vote against all director nominees who failed to implement a shareholder proposal seeking board declassification that received majority support (excluding abstentions and broker non-votes) in the previous year.
- Short-term poison pills: If a company adopts a poison pill with a term of one year or less or extends the term of a poison pill by one year or less in two consecutive years without shareholder approval, Glass Lewis may recommend that shareholders vote against members of the company’s governance committee/board.
- Hedging and pledging policy guidance: Glass Lewis favors strict policies to prohibit executives from hedging. On pledging, Glass Lewis believes that the benefits of executive stock ownership may outweigh the risks of pledging and will review all relevant factors in evaluating pledging policies, including but not limited to the amount of shares that may be pledged, whether the pledged shares were purchased or awarded, the overall governance policies of the company, the volatility of the company’s stock and whether disclosure identifying the extent of pledging has been made.
- Compensation committee independence: Despite newly adopted NYSE and NASDAQ standards in assessing compensation committee independence, Glass Lewis will continue to use its own standards.
Action Items; Contact
Given the changes to be made in the scoring of companies under QuickScore 2.0, companies should act now if possible to verify their data on the ISS website referenced above prior to the February 7th deadline – while there is time to make corrections and no cost to do so.
If you have any questions regarding QuickScore 2.0 or the 2014 updates to ISS and Glass Lewis policies, please contact the Womble Carlyle attorney with whom you usually work or one of our Corporate and Securities attorneys.
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1The ISS Governance QuickScore 2.0 Overview and Updates document may be found at http://www.issgovernance.com/files/ISSGovernanceQuickScore2.0.pdf.
22014 ISS corporate governance policies may be found at http://www.issgovernance.com/policy/2014/policy_information.