On November 2, 2020, Institutional Shareholder Services (ISS) notified companies that, for shareholder meetings held on or after January 1, 2021, ISS will no longer provide U.S.-based, S&P 500 companies the opportunity to review a draft version of their proxy research reports.
The draft review process was originally designed to enable S&P 500 companies to check data accuracy and verify interpretations that form the basis of ISS vote recommendations before advisory research reports were published to shareholders. However, in ISS’ view, their investment in data accuracy and quality control resources is yielding high factual accuracy rates, rendering the draft review unnecessary. The firm also commented that the draft review process has turned into an avenue for companies to debate underlying policies and pressure ISS to change vote recommendations before they become public, and that their institutional clients do not support issuers seeing draft reports before investors do. Accordingly, ISS states that the elimination of the draft review process will allow ISS to publish reports earlier than before, providing more time for their institutional clients to engage with companies and make voting decisions.
SEC Regulations and ISS Policy
ISS’ announcement meets an already changing landscape, with the SEC issuing final regulations regarding proxy advisor recommendations this past July. The SEC regulations state that, subject to certain exceptions, registrants generally must receive a copy of the proxy advisor’s advice no later than the time it is made available to the proxy advisor’s institutional clients; the proxy advisor must have a mechanism in place to inform clients of any written responses by registrants regarding proxy advice “in a timely manner”; and the proxy advisor must have written procedures in place to deal with conflicts of interest. (See FW Cook July 27, 2020 Alert).
To presumably abide by these recent SEC regulations and maintain transparency and accuracy, ISS explained that companies will receive a complimentary copy of the ISS report upon publication and be able to respond with comments and corrections. Any warranted updates will be distributed to ISS subscribers who received the original report through the proxy advisor’s “Alert” system. Depending on voting capabilities (in particular, voting technology infrastructure), institutional clients may then be able to change their vote instructions, in most cases in the U.S., potentially as late as the night before the shareholders meeting. Nevertheless, the discontinuation of the draft review process for S&P 500 companies is likely to increase the number of Alerts pushed to ISS subscribers next year.
ISS’ announcement comes in contrast to proxy advisor Glass Lewis’ data-verification approach. Adopted in 2015, the Glass Lewis Issuer Data Report (IDR) program provides domestic and international companies with a data-only version of their proxy research report prior to publication. Issuers have the chance to verify, correct, and/or update company information without having early access to the complete report containing Glass Lewis’ vote recommendations and underlying analyses.
Managing Director & Head of Chicago Office
Cimi Silverberg has twenty-four years of consulting experience, twenty-one focusing solely on executive compensation. Cimi’s clients include both public and private organizations in a variety of industries and company size categories. She is a frequent writer and speaker on the topic of executive compensation and a strong contributor to the firm’s technical papers and studies.
Caprice Herjavec’s consulting engagements focus on all elements of executive and board compensation. She engages with clients, both public and private, across various industries and throughout different stages of the business cycle. Caprice specializes in executive compensation trends, peer group development, IPO transactions, and annual and long-term incentive program design.