Institutional Shareholder Services Inc. (ISS) announced the release of QualityScore methodology updates for Australian companies on 22 May 2018.
Company directors may have already noticed that the ISS QualityScore appears on every ASX 300 ISS proxy advice report sent to company investors that subscribe to the service. How the score is derived, in terms of weighting underlying factors that make up the score, remain largely a mystery. To get closer to understanding this issuers and investors have to pay for more indepth reports. It is off the back of this that ISS makes a significant proportion of its profit, mainly from issuers who believe that institutional investors take heed of the ISS QualityScore.
ISS QualityScore provides a score for each company in its coverage universe that measures the company’s level of corporate governance risk, both overall and within four broad pillars: board structure, compensation/remuneration, shareholder rights, and audit & risk oversight. Importantly, ISS QualityScore subscribers have the ability to access and analyze the underlying data from which the scores are generated, allowing them to screen portfolio companies against hundreds of corporate governance factors or perform detailed side by side comparisons of two or more companies’ profiles.
Since private equity took over ISS (twice! See HERE), it has rolled out the method globally for a so far successful expansion of sales to listed companies despite various enquiries related to proxy adviser conflicts of interest (see HERE).
Additional board-level factors now applicable to Australian companies include those detailing the lowest level of support received by management-nominated directors at their most recent election as well as the proportion of non-executive directors on the board for less than six years. With respect to the latter, board refreshment has become an important topic globally and ANZ companies have reacted well in this regard. An ISS Analytics analysis finds that 77 percent of ANZ companies covered by QualityScore satisfy the goal of having at least one-third of their board comprised of non-executives with less than six years tenure each.
Methodology changes will also cover areas related to remuneration, including weighing the level of support received from shareholders on the most recent remuneration report proposal. Only 17.8 percent of ANZ covered companies receiving less than 90 percent support at their most recent annual meeting, according to ISS Analytics data.
The ISS press release also notes other remuneration-related methodology changes cover:
- the degree of alignment between the subject company’s annualized 3-year pay percentile rank, relative to peers, and its 3-year annualized total shareholder return (TSR) rank, relative to peers;
- the degree of alignment between the company’s TSR and change in CEO pay over the past five years; and
- the size of the CEO’s 1-year cumulative pay, as a multiple of the median pay for company peers.
These remuneration methodology changes were actually introduced at about this time last year, and still seems to get a lot of attention despite its obvious flaws (see HERE) .
The main problem with the above has been that the remuneration measure uses the accounting standard, and not realisable remuneration. Only the latter varies with performance. So if issuers get a bad score on this factor they should not panic. Pay may vary appropriately with performance, but the ISS QualityScore might not indicate it.
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