ISS Informs S&P 500 Companies That It Won’t Provide Draft Reports Prior to Publication

Published: November 2020

 

This regulatory update summarizes the broader context of ISS’ announcement, the firm’s rationale and the potential impact to proxy voting recommendations and voting outcomes.


Proxy advisory firm Institutional Shareholder Services (ISS) recently notified S&P 500 companies that it will no longer provide drafts of its reports to them before sending the reports to institutional investor clients for annual shareholder meetings after January 2, 2021.

What’s Not Changing

If there are factual errors in the report, these companies still have the following tools and processes to deal with:

  • Companies may continue to access free copies of the final report when available.
  • Companies may continue to use ISS’ data verification portal to submit information or corrections.
  • If an error is discovered or new information is disclosed, ISS will issue an update alert if it believes one is warranted.
  • Institutional investor votes can be changed in response to such an alert.

Broader Context

In July, the SEC amended its proxy rules, effective in 2022, to provide that proxy advisors are subject to solicitation regulation unless they adopt policies to provide all companies (not just S&P 500) access to ISS research reports before or at the same time they are given to the proxy advisor’s investor clients. 
To land within the safe harbor for this exemption, if the company files its proxy statement 40 days before its meeting, ISS would make its voting recommendations available to the company no later than when they are sent to investors. ISS must also notify investors if a company has filed a response to the voting advice or stated its intent to do so.

(Additionally, ISS is required to disclose material conflicts of interest arising from providing consulting services to companies or from consulting with investors before publishing voting advice).

The SEC considered mandating that proxy advisors allow companies to review the proxy voting advice before sending it to their investor clients. However, many investors opposed that provision, saying it could potentially decrease the objectivity of the advice, and it was ultimately dropped from the final rules. The new rules encouraged proxy firms to provide advance copies of their voting recommendations to issuers, as ISS has historically done for S&P 500 companies.

In August, ISS reactivated its lawsuit against the SEC, challenging its authority to regulate proxy advisors and issue these rule amendments.

ISS’ Stated Rationale and Other Considerations

ISS cited multiple reasons to stop providing drafts to S&P 500 companies:
  • Investor client feedback: Institutional shareholders told ISS directly and sent comment letters on the SEC rulemaking, saying that they oppose company reviews of draft reports and want to see the reports first before companies can comment or lobby to ISS.
  • Data accuracy: ISS says it began providing draft reports in order to increase data accuracy, but claims it has invested in quality control and such reviews are unnecessary. (Errors continue to occur and to affect analyses).
  • Timing: ISS says that not providing draft reports for review will enable it to release its reports to clients earlier. (Companies were given only 24-48 hours for review).
  • Company responses to draft reports: ISS says that companies frequently use the review opportunity to lobby ISS about its recommendations and policies, which was not ISS’ intent.

It might also be that providing review of draft reports to all companies was not feasible, due to limitations on resources and cost.

Looking Ahead

With ISS no longer providing draft reports, S&P 500 companies should obtain their reports upon publication and review them for accuracy and faithful policy application. They should also be prepared, if necessary, to respond to both factual errors or unanticipated negative recommendations.

Given that this is the Aon governance team’s longstanding approach with both S&P 500 and non-S&P 500 companies, we are well-positioned to help clients of all sizes respond immediately, whatever the report contains. 

Organizations can sign up to receive a complimentary report from ISS Research through the ISSS Helpdesk portal, which offers the opportunity to receive an availability notification at the same time as their shareholders.

For additional advice, please reach out to any member of our Governance team or write to rewards-solutions@aon.com.


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