ISS publishes EMEA voting guidance changes – no major shifts in the UK on pay

ISS has just published its summary of changes its EMEA voting guidance policy for 2021 which can be accessed here https://www.issgovernance.com/file/policy/latest/updates/EMEA-Policy-Updates.pdf. The modifications to the UK and Ireland guidelines which are all effective for in respect of voting recommendations that ISS makes from 1 February 2021. They are important but contain few surprises. The changes for the UK relating to “overboarding”, gender diversity and remuneration are:

• ISS will consider recommending a vote against individual directors where there are “material failures of governance, stewardship, or risk oversight, including demonstrably poor risk oversight of environmental and social issues, including climate change” – in all EMEA markets.
• ISS’ approach to directors who may be “overboarded” will be more considered and lenient where directors serve on the boards of less complex companies e.g. externally managed investment companies.
• ISS clarifies its policy on gender diversity. It will generally recommend a vote against the chair of the nomination committee (or other directors on a case-by-case basis) in the case of FTSE 350 companies (excluding investment trusts) where the board does not comprise at least 33% representation by women, in line with the recommendation of the Hampton-Alexander Review
• ISS will generally recommend a vote against the chair of the nomination committee (or other directors on a case-by-case basis) where there is not at least one woman on the board on the boards of companies of the:
  • FTSE SmallCap;
  • Listed on the AIM with a market capitalisation of over GBP 500 million; or
  • ISEQ 20.
• There is scope for some transition. In 2021, a FTSE 350 which commits publicly to bring the composition of the board in line with the recommendations of the Hampton-Alexander Review by the following AGM can forestall an ISS negative vote recommendation. Similarly, where there was compliance with the relevant board diversity standard at the preceding AGM and a firm commitment, publicly available, to appoint at least one female director to the board to comply with the relevant standard within a year.
• On remuneration, ISS aligns its guidance with the UK Corporate Governance Code in respect of the alignment of executive directors’ pensions to those of employees generally and “an appropriate post-employment shareholding requirement in place”. These now form part of ISS’ list of policy features to which it will “pay particular attention” when considering its recommendation in respect of Directors’ Remuneration Policies. ISS states:    ”This update recognises pensions and post-cessation shareholding requirements as potential vote drivers, as these issues have come into prominence since the 2018 UK Corporate Governance Code came into force. There is no intent to significantly alter ISS' existing approach in terms of the application of the policy.”

ISS states that the full policy guidelines will be published at the end of November and will be followed by FAQs in December.

FIT’s view: it is helpful that ISS has made few changes to its voting guidance on remuneration. We think that 2021 will be challenging enough for Remuneration Committees as they seek to make sound pay decisions in the interests of investors and amidst the continuing and prolonged uncertainties of Covid-19 countermeasures. To date, there have been no further pronouncements on Covid-19 issues and, at least to date, it is worth noting that ISS has adopted a slightly more flexible approach to the detailed terms of post-cessation share ownership guidelines.  We await the other proxy advisory updates and will report on these and on their implications for our clients.

On 11 November, the Office of Tax Simplification published its report “Capital Gains Tax review – first report: Simplifying by design”. It was keen to point out that issues of tax rates and broader policy are political but noted that more closely aligning rates between CGT and income tax would raise substantial amounts but that there would counter-arguments in terms of tax gains arising largely through inflation.

So far as relevant to executive compensation, it is worth noting that while executives in listed companies largely pay income tax on all their earnings (including equity gains), those in PE-backed companies typically structure equity to secure lower CGT treatment.  The report specifically highlights the treatment of share-based remuneration as a ‘boundary pressure’ between the 2 taxes.

The report recommends that Government should consider more closely aligning rates between CGT and income tax and considering whether there should be more alignment of returns from personal labour (i.e. whether different treatment of equity gains should continue).

The detailed report particularly highlights ‘growth shares’ and other structures which it feels are designed to avoid CGT treatment.

While it is unclear how Government will respond, anyone seeking to secure CGT treatment should be aware that the tax treatment on a disposal, potentially many years into the future, may not secure the currently anticipated advantages over income tax treatment.  Such companies may wish to bear this in mind, particularly where such structures are complex and involve upfront tax leakage.  

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com.

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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