ISS recently released updated methodology for its Governance QualityScore (GQS) rating system for institutional investors.  The new factors relate to areas of emerging concern to investors, with 11 of the 17 new factors addressing information security risk and oversight.  Other new factors relate to board matters, such as diversity, inclusion, practices and composition, and to compensation matters, such as whether and the extent to which special grants have been made to executive officers.  ISS also extended to the U.S. market certain factors regarding the number of boards on which directors serve and shareholder voting rights.  ISS further indicated that the updated methodology reflects the rebalancing of certain existing factors in the categories of Board Commitments and Litigation Rights.

ISS reviews its methodology annually to ensure that its approach remains closely aligned with ISS’ benchmark voting policies and reflects developments in regulatory and market practices.  Key updates to ISS’ benchmark voting policies for the 2021 proxy season are summarized in our December 11, 2020 post. The new factors and factors newly applied to the U.S. market include:

New Factors as of January 29, 2021:

Audit (Information Security Risk Oversight)

• What percentage of the committee responsible for information security risk is independent? (Q403)
• How often does senior leadership brief the board on information security matters? (Q404)
• How many directors with information security experience are on the board? (Q405)

Audit (Information Security Risk Management)

• Does the company disclose an approach on identifying and mitigating information security risks? (Q402)

For companies knee deep in proxy statement drafting and 2021 executive compensation decisions, we recommend a quick refresher on Glass Lewis’ December 2020 Approach to Executive Compensation in the Context of the COVID-19 Pandemic and ISS’ October 2020 COVID-19-related compensation FAQs, as well as ISS’ more general December 2020 compensation-related FAQs and equity plan-related FAQs.  Highlights include:

Glass Lewis Approach to Executive Compensation in the Context of the COVID-19 Pandemic

Glass Lewis released this December 2020 guidance to illustrate how it will apply its executive compensation policies in 2021 in the wake of COVID-19.  Glass Lewis noted that the pandemic has not changed its approach to executive pay, which is a “pragmatic, contextual approach that applies in good times and bad.”  Some of the key topics covered are:

Pay-for-Performance Analysis.  Glass Lewis does not expect the macroeconomic climate to have a drastic impact on its pay-for-performance model and will continue to take a holistic approach when evaluating the alignment between executive pay and company performance within the context of the pay-for-performance model and the pandemic.

Say-on-Pay Proposals.  Glass Lewis notes that how companies respond to changing macroeconomic conditions resulting from the pandemic will dominate say-on-pay votes.  Given that an executive’s base salary represents a relatively low portion of his or her total compensation, Glass Lewis will view temporary base salary reductions in the face of the pandemic to be token gestures.  Glass Lewis will instead look closely at overall pay levels, including scrutinizing mid-cycle pay

Institutional Shareholder Services (“ISS”) and Glass Lewis recently released their respective policy updates for the 2021 proxy season.  Key updates are summarized below.