ISS Data Verification Period Open Until November 11 for New ISS QualityScore
Today proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) opened the data verification period for its corporate governance rating system, which was formerly known as QuickScore. ISS also announced that it has revised and rebranded the rating system, which will now be referred to as QualityScore. QualityScore is the successor to ISS’s QuickScore, which in turn succeeded ISS’s Governance Risk Indicators (“GRId”) and Corporate Governance Quotient (“CGQ”) benchmarking tools.
The data verification period will remain open through 8 pm EST on November 11, and updated QualityScore scores will be released when QualityScore launches on November 21. The updated Quality Score technical document is available here.
Companies Should Verify ISS’s Data by November 11
During the data verification period, we encourage companies to access ISS’s data verification site on Governance Analytics to verify ISS’s raw data that will be included in the company’s QualityScore scores. Companies that do not already have a login for ISS’s Governance Analytics platform may request one via the email address provided here. Any updates or corrections should be submitted to ISS by November 11.
New QualityScore Factors
For U.S. companies, QualityScore adds fifteen new factors. As was previously the case, the weighting assigned to each factor is not disclosed by ISS. QualityScore ratings will continue to be assigned in four categories (referred to as pillars), together with an Overall rating, and ratings will reflect relative benchmarking against other U.S. companies in the S&P 500 or Russell 3000. The new factors for each of the four pillars are described below.
- What proportion of non-executive directors has been on the board less than six years? This factor will grant increasing credit for increasing proportions of the board represented by directors with less than six years of tenure, with no additional credit granted where the proportion of non-executive directors with less than six years of tenure exceeds one-third.
- Does the board have any mechanisms to encourage director refreshment? This factor will evaluate whether the company has a board refreshment mechanism such as rigorous annual evaluation of all directors, a mandatory retirement age for directors, or director term limits. (Non-scored factor for informational purposes only)
- Does the company disclose the existence of a formal CEO and key executive officer succession plan? This factor will consider whether the company has disclosed a board-approved succession plan for “the CEO, other senior management, and key executive officers” that is evaluated on a periodic basis.
- What is the proportion of women on the board? This factor is in addition to the existing data point that evaluates the number of women on the board.
- Has the board adequately responded to low support for a management proposal? This factor will consider the company’s response to shareholder support of less than 50% of the votes cast in director elections and less than 70% of the votes cast for the say-on-pay proposal, as well as the company’s adoption of a say-on-pay frequency that received lower support than the frequency preferred by a majority or plurality of shareholders.
Shareholder Rights and Takeover Defenses
- Does the company have an exclusive forum provision? According to ISS, exclusive forum provisions “are restrictions on shareholders’ rights, and, in the absence of past harm, it is not always clear the restrictions are justified.
- Does the company have a fee shifting provision? This factor will consider whether the company has a provision that shifts litigation expenses to an unsuccessful plaintiff “who does not obtain a judgment on the merits that substantially achieves the full remedy sought.” ISS notes that for Delaware corporations, Delaware law now prohibits these provisions for claims arising under state law but not federal law.
- Does the company have a representative claim limitation or other significant litigation rights limitations? This factor will evaluate whether the company requires “a minimum level of support . . . for a shareholder to initiate a lawsuit against the company” or another type of limitation on shareholders’ litigation rights.
- What is the ownership threshold for proxy access? ISS notes that most companies have adopted a 3% ownership threshold but does not specify how it will apply this factor under QualityScore. (Now scored, previously incorporated in non-scored proxy access factor)
- What is the ownership duration threshold for proxy access? According to ISS, ownership duration thresholds longer than three years will be considered excessive under this factor. (Now scored, previously incorporated in non-scored proxy access factor)
- What is the cap on shareholder nominees to fill board seats from proxy access? ISS notes that investors generally approve of a cap on proxy access nominees within the range of 20-25% of the board but does not specify how it will apply this factor under QualityScore. (Now scored, previously incorporated in non-scored proxy access factor)
- What is the aggregation limit on shareholders to form a nominating group for proxy access? ISS notes that an aggregation limit of 20 shareholders has generally been considered reasonable but does not specify how it will apply this factor under QualityScore. (Now scored, previously incorporated in non-scored proxy access factor)
- Can the board materially modify the company’s capital structure without shareholder approval? ISS notes that companies “generally are required to put authorized capital increases or reduction to a shareholder vote, as such changes represent significant potential dilution of shareholder value.”
- Does the company employ at least one metric that compares its performance to a benchmark or peer group (relative performance)? This factor will consider whether the company has a pre-established metric in any short- or long-term incentive plan that is measured relative to an external group such as a peer group, index or competitors.
Audit and Risk Oversight
- What is the tenure of the external auditor? (Non-scored factor for informational purposes only)
In addition, ISS updated several existing factors for U.S. companies, including:
- in the Board Structure category, a factor that evaluates whether the board recently took action that materially reduces shareholder rights so that it also will cover whether, in ISS’s view, the board has had any other governance failures (with excessive pledging of shares and failure to opt out of state laws requiring a classified board identified as common types of governance failures);
- in the Shareholder Rights and Takeover Defenses category, a factor that considers whether all directors are elected annually so that it also will consider, even if the board currently is not classified, whether the company could classify the board without shareholder approval; and
- in the Shareholder Rights and Takeover Defenses category, a factor that considers whether a supermajority vote is required to approve amendments to the charter or bylaws so that it also will consider whether shareholders have the right to amend the bylaws.
Finally, ISS indicated that it has made selected adjustments to the scoring methodology for “a small number of questions” in each of the four categories “to address evolving corporate governance expectations.”
Special thanks to Kasey Robinson for compiling the summary above.