ISS has proposed two major changes for its 2019 policy update, with a comment period running through 5 p.m. eastern time on Thursday, November 1. The changes are based in part on the ISS policy survey in which 70 percent of the responses were from issuers and just 17% from investors, mostly larger institutional investors. The changes include the following:
EVA Metrics to Replace GAAP Financial Metrics in "Financial Performance Assessment". Despite relatively low support for the change from both investors and issuers in its recent policy survey, according to Meridian Compensation Partners, ISS has proposed to replace its GAAP-based Financial Performance Assessment with new Economic Value Added (EVA) metrics. ISS has received considerable criticism since implementing the Financial Performance Assessment in the 2018 proxy season as a secondary screen following the normal TSR-based tests; investors and issuers both noted that the use of standardized GAAP metrics for all companies was problematic. However, the decision to replace those metrics with EVA measures has raised equal levels of concern.
- ISS is proposing to replace ROA, ROE and ROIC with "EVA Spread" and "EVA Margin," while EBITDA and cash flow growth will be replaced by "EVA Momentum."
- ISS intends to provide issuers with EVA metric results, basic benchmarking and a "data dictionary" for free in advance of each company's annual meeting, but it seems likely that additional consulting services through ISS's recent acquisition, EVA Dimensions, will soon be offered.
Board Gender Diversity. After a 2019 grace period, ISS will begin voting against the chair of the nominating committee (or whomever is responsible for board nominations) for companies that have zero female directors. ISS will consider mitigating factors such as a firm public commitment to appoint a female director before the next annual meeting or the presence of a female director at the preceding annual meeting. ISS seeks feedback on other mitigating factors, an appropriate time frame to appoint a female director to an all-male board, and whether a one-year grace period is appropriate.
The Center will submit comments on behalf of Subscribers to ISS. Companies may also submit comments (which will be public unless otherwise requested) directly to firstname.lastname@example.org, and final policies will be released in mid-November.