The chairs of UK nomination committees (nomcos) could face the ire of shareholders over gender diversity on their boards after proxy advisers ISS revealed a change in governance policy for the UK.
ISS said this week it will advise shareholders to vote against the chairs of nomcos if there are no female directors on their boards. The move brings the company’s UK voting policy in line with recent changes to its US policy and marks a significant step change in the pressure on companies by targeting the people in charge of appointments.
The move comes after warnings were issued this week that nomcos are about to face new scrutiny of their work. Research from headhunting firm Spencer Stuart shows that just 4.7% of nomco chairs in its FTSE 150 survey were female. That compares with 52% of remuneration committee chairs and 24% of audit committee chairs.
Nomcos’ role in diversity
ISS noted that FTSE 100 companies were advised to aim for 25% female representation on their boards following the Davies Review launched in 2011, while in 2016 the Hampton-Alexander Review recommended FTSE 350 companies make their boards 33% women by 2020. These targets were recently extended to the executive committee and direct reports to the executive committee.
According to ISS: “The advantages of a diverse board are well established and promoting diversity in UK boards is a part of mainstream conversation now.”
ISS also notes that the 2018 UK Corporate Governance Code calls on nomination committees to ensure succession plans should “promote diversity of gender, social and ethnic backgrounds and cognitive and personal strengths”.
The policy changes comes after ISS ran its 15th annual consultation on proxy-voting policies.
In its report published this week, Spencer Stuart said nomcos were joining audit and remuneration committees in the spotlight over issues such as appointments of board directors, senior management, gender and ethnicity.
Last year’s update to the UK code placed a nine-year limit on chair tenure, and gave nomcos wider responsibility for senior management in addition to board positions.
“Given new provisions on chair tenure, nomination committees need to pay even closer attention to chair and CEO succession planning,” Spencer Stuart said.
“They should certainly seek to avoid both appointments changing at the same time, if at all possible.”
ISS also made policy changes to tackle concerns over remuneration policies in Europe, asking remuneration committees to report on how they incorporate environmental, social and governance factors into “remuneration outcomes”. ISS says these factors should include “workplace fatalities and injuries, significant environmental incidents, large or serial fines or sanctions from regulatory bodies and/or adverse legal judgements”.
ISS said it would only back multi-class shares with a sunset clause of no more than seven years.
ISS noted in its report that 14% of new US public companies now include multi-class shares in their capital structure. Around 7% of Russell 3000 companies—an index of the largest 3000 traded US stocks—now have a multi-class structure.
Of the respondents to ISS consultation, 55% said a maximum seven-year sunset clause was “appropriate”.
On buybacks, ISS said it would vote on a “case-by-case” but warned that it would only support them as long as they are not used to “manipulate incentive compensations metrics” or present to a company’s “long-term viability”.
ISS said its revised policy would provide “safeguards”. It said: “While some buyback critics express concerns that boards may authorise repurchases at the expense of R&D, CapEx or worker pay, shareholders generally support the use of buybacks as a way of returning cash without creating an immediate taxable event for shareholders who retain their shares, and as a form of market discipline to reduce the likelihood of uneconomic investments and empire-building acquisitions.”
ISS recently found itself in the midst of controversy after announcing it would sue the Securities and Exchange Commission, the US financial watchdog, over new regulation for proxy advisers.
ISS claims the regulation redefines its services to subject them to tougher rules. The changes comes after a long-running debate which has seen opponents argue that proxy advisers wield too much power over corporate boards.
Gary Retelny, ISS president and chief executive, said: “We believe litigation to be necessary to prevent the chill of proxy advisers’ protected speech and to ensure the timeliness and independence of the advice that shareholders rely on to make decisions with regards to the governance of their publicly traded portfolio companies.”