Last year, 58% of ISS' institutional investor clients providing policy input felt strongly that accountability for company performance should extend to directors. As a result of this feedback, ISS in 2006 adopted a new case-by-case director performance policy which considers issuing withholds on director nominees when performance lags.
The policy is based on a weighted average total shareholder return (TSR) measurement. The weightings are as follows: -20% weight on 1-year TSR, -30% weight on 3-year TSR, -50% weight on 5-year TSR. The TSR analysis serves as an initial screen. If a company does not meet the requirements of this initial screen, then ISS evaluates whether there is evidence of corrective action including: a company turnaround strategy, near-term performance improvement, changes in leadership and, proof that directors are responding.
Recently, Learning Tree and Fifth Third failed to meet the performance test. Ciena was identified initially for its lackluster performance over the past five years but, upon further engagement with the company, ISS made the determination that they had taken sufficient steps to correct their performance issues. All three companies triggered ISS' policy because they were poor performers within their specific GICS group, based on a weighted average TSR. However, at Learning Tree and Fifth Third, ISS recommended withhold votes, while at Ciena, ISS did not take action given their turnaround in recent performance.
Based on the outcomes at Fifth Third and Learning Tree, it appears that tying director accountability to long-term company performance will most likely take some time to play out in the proxy voting process. Yet, there is evidence of a growing movement to hold directors accountable for poor performance. According to a business article in the New York Times on Sunday, March 26, a new foundation has just formed called the Investors for Director Accountability, which hopes to influence institutional investors to hold directors accountable to shareholders.
ISS' new director performance policy is intended to send a signal to directors at some of the poorest performing companies to take steps to ensure shareholders realize positive long-term returns. We'd like to know whether or not you think accountability for creating shareholder value should extend to directors. To submit your thoughts, please email us at email@example.com