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From Audits to Pay, Owners and Managers are Split

ISS voting policy survey finds differences of opinion across the ESG spectrum.

Investors and company management are at odds on a number of key ESG issues, according to a new report by Institutional Shareholder Services (ISS), the corporate governance and investment services group.

These included whether auditors should comment on climate-related matters, the acceptability or otherwise of different classes of voting shares, executive pay and racial equity audits.

On the investor side, ISS surveyed 205 respondents, including asset managers, asset owners, and advisors to institutions for its 2022 Global Benchmark Policy Survey. Regarding non-investors. ISS surveyed 212 respondents, including public companies, board members and advisors to such businesses.

The survey is part of ISS’s annual global voting policy development process. The firm will release key draft policy updates in November and open a public comment period on key proposed changes to its voting policies for next year.

Action versus no-action

Asked if they favoured commentary from company auditors in their reports on climate-related matters, 75% of investors said yes, while only 34% of non-investors did so. Just 18% of investors said no, against 58% of non-investors.

The survey raised the question of whether climate risk should be classified as either a critical audit matter (CAM) – something required to be reported to the audit committee – or a key audit matter (KAM), defined as those matters judged by the auditor to be of most significance. Close to two thirds (64%) of investors said yes, against almost one third (31%) of non-investors, while 21% of investors said no, against 56% of non-investors.

Should the company in question refuse to include climate-risk considerations as CAM/KAM, 42% of investors said shareholders should vote against the re-election of audit committee members, while only 18% of non-investors agreed. Of investors, 35% said they should vote against the re-appointment of the auditors, against only 9% of non-investors.

The option to support a related shareholder proposal was backed by 52% of investors, against 20% of non-investors, while 25% of investors supported taking no voting action against 62% of non-investors.

Sharp divide on pay

On the question of different classes of voting shares, ISS has already said that, from next year, it will recommend voting “against certain directors at US companies that maintain a multi-class capital structure”. But it said it will apply a de minimis exception where it judges that the structure does not seriously disenfranchise other shareholders.

Asked about this, 32% of investors said there should be no de minimis exception, against 15% of non-investors; 27% of investors and 26% of non-investors said it should be limited to no more than 5% of the total voting power; 25% of both investors and non-investors said the limit should be 10%, and 7% of investors and 18% of non-investors set it at no more than 20% of total voting power.

There was a sharp division on the question of executive remuneration. Asked whether top pay should increase in line with pay for the general workforce, or whether, in the context of rising inflation and cost of living challenges, it should rise more slowly, 20% of investors said it would rise in line with other pay against 9% of non-investors.

To the statement that each board should decide executive pay in the context of the company’s needs, 38% of investors agreed, against 72% of non-investors. And of the suggestion that executive pay should rise more slowly than general pay in percentage terms, 34% of investors agreed, against 14% of non-investors.

Asked their opinion on third-party racial equity or civil rights audits, 13% of investors said most companies would not benefit from such an audit, against 25% of non-investors. Regarding the statement: “Where permissible, most companies would benefit from an independent racial equity or civil rights audit”, 42% of investors agreed, against 19% of non-investors.

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