Consultants comment on proxy advisor plan to
present evaluations of metrics for corporate performance as well as stock
The Harvard Law School Forum on Corporate Governance and Financial
Regulation, November 26, 2016 post
Financial Results in ISS Reports
Posted by Abe Friedman, CamberView
Partners, on Saturday, November 26, 2016
Editor’s Note: Abe Friedman is Managing Partner
at CamberView Partners. This post is based on a CamberView
publication by Mr. Friedman, David Martin, and Chris Wightman.
announced on November 8th that
proxy research reports published after February 1, 2017 will include a
standardized comparison of the company’s CEO pay with a relative
financial performance ranking versus peers as measured by multiple
financial metrics including return on equity, return on assets, return
on invested capital, revenue growth, EBITDA growth, and growth in cash
flow from operations.
The relative financial
metric results will be used solely in ISS’s qualitative
pay-for-performance analysis, at least for 2017. The quantitative
pay-for-performance screen will not change for 2017 and will continue
to be based on relative and absolute total shareholder return (TSR).
ISS noted that both
investors and issuers have been supportive of ISS using metrics beyond TSR
for pay-for-performance evaluations. In fact, 79% of investors and 68% of
issuers supported the use of the additional metrics in ISS’s 2017 global
benchmark policy survey.
ISS’s announcement included the following specific
information related to the changes:
New Financial Metrics.
reports published after February 1, 2017 will include a standardized
table comparing the company’s performance across six financial metrics
relative to its ISS-defined peer group. The metrics will be three-year
ROIC, ROA, ROE, revenue growth, EBITDA growth, and growth in cash flow
from operations, along with TSR. The weight of each metric will vary by
industry, but ISS has not yet disclosed the exact weightings.
Financial Performance Metric.
ISS will produce an overall relative financial performance metric to be
compared against relative granted pay, to produce a numeric result
indicating alignment between three-year financial performance and
Relative Degree of
The new financial performance evaluation test, along with
the long-implemented Relative Degree of Alignment test, will only apply
to companies with two full fiscal years of trading data. The RDA test
will continue to compare relative TSR to relative CEO compensation over
one- and three-year periods.
Peer Group Submission
The peer submission window for U.S. and Canadian
companies will run from November 28th to December 9th.
What should issuers do
Monitor New ISS
ISS noted that more information will be available in the
coming weeks, through FAQs and other documents, including presumably the
exact weighting of financial metrics for each industry. In the meantime,
issuers should consider calculating the ISS-selected metrics for
themselves and peers to gain a preliminary understanding of where they
will rank under the new test.
Enhance CD&A Disclosure
Regarding Various Metrics.
ISS announced the market-wide use of six financial metrics that will be
applied under their refined qualitative analysis. These six metrics are
not necessarily widely used or even appropriate measures for all
industries or companies. As such, issuers should now start refining CD&A
disclosure about what financial metrics are most important to their
business and how they are performing against these measures. Issuers
might also consider affirmatively disclosing why some of ISS’s metrics
might not be as important or reflective of industry or company
Peer Group Submission
Companies that made changes to the peer groups used for
benchmarking 2016 CEO pay should consider submitting their revised peer
groups to ISS through ICS’ Governance Analytics platform. Companies can
reach out to ISS to obtain login credentials if they do not already have
them. If your company did not make any changes to your peer group for
2016, there is no action to be taken. Additional instructions for
companies detailing the peer submission process during this window are
expected in the coming days.
Some remaining questions
What are the specific
weightings by industry?
How much will these
metrics impact ISS’s qualitative review analysis?
Will ISS consider
company-specific circumstances that make certain metrics and the
industry weightings inappropriate?
How will ISS account for
M&A? Will companies who have made significant acquisitions/divestments
automatically fare well/poorly on the revenue, EBITDA, and CFFO growth
Will companies with
structurally lower ROE/ROIC/ROA than peers be penalized even if
management has performed well in improving these metrics?
Will these metrics and
the composite score be added to ISS’s formulaic quantitative analysis in
the future without consideration of a company’s specific circumstances?
Harvard Law School Forum
on Corporate Governance and Financial Regulation
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