Last week, proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) released information about the updated version of its corporate governance benchmarking tool, ISS Governance QuickScore 3.0 (“QuickScore 3.0”), which will launch on November 24, 2014. Companies should take certain actions now and in early November to prepare for the launch of new QuickScore 3.0, as discussed below. QuickScore 3.0 includes both new data points and updates to existing data points for U.S. companies. ISS is expected to release the details of these changes later this week, but below is a summary of the changes we have been able to determine based on the preliminary information released by ISS.
New Factors QuickScore 3.0 will add several new data points for U.S. companies:
- Board Action Reducing Shareholder Rights: whether, based on ISS’s review, the board “recently took action that materially reduces shareholder rights;”
- Annual Board Performance Evaluation: whether the company discloses a policy requiring an annual performance evaluation of the board;
- Sunset Provision on Unequal Voting Structure: whether, for companies with unequal voting rights, there is a sunset provision on the company’s unequal voting structure; and
- Controlling Shareholder: whether a company has a controlling shareholder.
Updated Factors In addition, QuickScore 3.0 includes updates to several existing data points for U.S. companies, as described below.
- Gender Diversity: While the existing data point in the Board Structure category on the number and percentage of women on the board carries no weight, it now will be a weighted factor that will impact a company’s QuickScore 3.0 scores.
- Regulatory Investigations: In the Audit & Risk Oversight category (formerly, the “Audit” category), ISS will undertake a “deeper dive” into whether the company or any of its directors or officers was subject to an enforcement action by a regulator in the past two years. ISS will review the severity of an investigation based on “the type of regulatory investigation” and “the materiality of [potential] penalties or resolutions,” with the QuickScore impact depending on the severity of the investigation.
- Say-On-Pay Voting Results: Instead of evaluating whether the most recent say-on-pay proposal received shareholder support below the “industry-index level” average, QuickScore 3.0 will evaluate whether the proposal received shareholder support below 70%.
- Director Election Voting Results: Instead of evaluating the percentage of directors that received less than 95% shareholder approval (which ISS considered the “industry-index level”), QuickScore 3.0 will consider the percentage of directors that received less than 80% shareholder approval.
- Failure to Address Majority Opposition to Directors: It appears that QuickScore 3.0 will expand an existing data point that considers whether the board has failed to implement majority-supported shareholder proposals to also apply to votes in director elections by taking into account whether the board has failed to address the issues underlying a majority against/withhold vote relating to a director.
ISS also indicated that, going forward, company proxy reports will include historical QuickScore scores, a log of data changes, and an analysis of trends in a company’s governance practices with “directional icons showing improvements, degradation, or static governance practices.
Implementation Timeline The timeline for the QuickScore 3.0 launch is as follows:
- Beginning at 7:00 AM Eastern Time on October 31, ISS will suspend publication of QuickScore scores in ISS proxy research reports through November 24. On October 31, ISS also will publish a comprehensive technical document that describes the key changes in QuickScore 3.0.
- Beginning at 9:00 AM Eastern Time on November 3 through 8:00 PM Eastern Time on November 14, ISS will open a data verification period for companies to verify, through the data verification site on Governance Analytics, ISS’s data for governance factors to be included in QuickScore 3.0.
- QuickScore 3.0 scores will be released at 9:00 AM Eastern Time on November 24. At that time, QuickScore 3.0 scores will be published in ISS proxy research reports.
Actions Companies Should Take Now and in Early November In preparation for the launch of QuickScore 3.0, we encourage companies to pull their QuickScore 2.0 data verification data and scores on or before October 30. This will facilitate comparing, and determining the impact of the change from, QuickScore 2.0 to QuickScore 3.0. In addition, during the data verification period from November 3 through 8:00 PM Eastern Time on November 14, companies should access ISS’s data verification site on Governance Analytics to verify ISS’s raw data to be included in the company’s QuickScore 3.0 scores. Any updates or corrections should be submitted to ISS by November 14.