On November 2, ISS sent a letter to companies in the S&P 500 Index stating it will no longer provide draft reports for review prior to publication. The policy is effective January 1, 2021.
ISS took a hostile and inflammatory tone with S&P 500 companies and the decision was clearly punitive in light of ISS’s angry reaction to the recent SEC rule on proxy advisory firm accountability. ISS appears unwilling to accept any increase in accountability, even though the final proxy advisory firm rule was not unduly burdensome to ISS compared to the proposed rule. "It is supremely ironic that ISS is reversing prior transparency commitments, even as it is preparing to implement new transparency requirements in 2022," said Ani Huang, President and CEO of our Center On Executive Compensation.
ISS blames issuers for using the draft report process to “lobby” investors regarding ISS policy approaches rather than finding errors, and notes that its own fact-checking process is now so sophisticated that errors seldom occur (despite evidence to the contrary). The letter further states that investors have supposedly “made it clear” that they oppose draft reviews, do not want issuers to be the first to see the research, and would rather see the reports earlier and have more time to engage directly with companies.
Outlook: The SEC’s proxy advisory reform rule will become effective January 1. A Republican Senate majority would prevent it from being unwound through legislation. A Democratic majority at the SEC could eventually revise or reverse the new rules. Unless and until that happens, after January 1, 2022, the rule clearly requires ISS to give issuers a chance to respond to their report in writing and then provide written responses (or a link to an SEC supplemental filing) to investors before they vote. Given this requirement, the decision to cancel draft reports seems particularly hard to understand. ISS contends that its existing alert process provides sufficient time for investors to see corrections (and presumably a company response) and change their proxy vote. This statement seems particularly geared toward addressing the new SEC requirements. Time will tell.