The Corporate Governance World in 2019

(from ISS Analytics Governance Insights. Jan 22, 2019)

United States

Board and Governance

Board Gender Diversity: Pressure from investors has led to a decline in the number of all-male boards to an all-time low, and that trend is expected to continue in 2019. Shareholder interest in greater board diversity is not unrelated to broader societal concerns about sexual harassment and gender parity in the workplace, but also reflects the belief that diverse boards perform better and are less prone to groupthink.

Risk Oversight: Boards are increasingly being called upon to manage and oversee a wide variety of risks – not only those related to the business strategy and economic trends, but those related to cybersecurity, executive misbehavior, and a broad range of environmental and social issues. These risks are increasingly viewed through an economic lens, due to the potential for regulatory fines and penalties, private litigation, customer boycotts, and new regulations, which could materially affect a company’s business model. Investors will expect boards and committees to be regularly refreshed so that relevant skills can be added.

Executive Compensation

Pay for performance: As in prior years, investors will continue to hone in on incentive program weaknesses. We expect usual pay-for-performance considerations to continue to play a major part in say-on-pay voting decisions. These include a focus on metric selection, rigor of performance targets, clarity of disclosure and transparency, and use of discretion. Investors have also recently begun to more closely analyze non-GAAP adjustments to incentive results, and companies may face greater pressures to explain such adjustments in more detail when they have a significant impact on results. We may also see more proposals seeking approval of so-called “mega awards” that provide extremely large payout opportunities upon the achievement of moonshot goals.

162(m) changes: The elimination of the performance-based pay tax deducibility exemption under Section 162(m) has not so far not led many companies to make wholesale shifts to fixed or discretionary pay. However, the removal of the requirement to seek periodic shareholder approval of performance metrics has effectively removed the incentive for companies to seek re-approval of equity plans outside of the listing exchange requirements. We saw a precipitous decline in the number of equity plan proposals in 2018, and we expect to continue to see few proposals going forward.

Shareholder Resolutions

Climate Change Risk: In the wake of growing investor concerns, and two major climate reports warning of climate change risks and urging immediate action, expect the high number of climate change-related proposals filed to continue in 2019. More of these proposals will be asking companies to adopt and report on science-based Greenhouse Gas (GHG) emissions reduction goals – ones that are aligned with the Paris Agreement’s goal to keep global warming under 2 degrees Celsius.

Operational Risks Stemming from ESG Issues: Expect shareholders to continue to press companies on how they are managing operational risks stemming from high profile environmental and social issues. As was the case in 2018, expect shareholders to ask drug companies what measures they are taking to manage risks related to the opioid crisis. And at technology companies, proponents will want to know what measures the companies are taking to prevent false, illegal, or disturbing content from being spread on their platforms.

Activism and M&A

Contested Director Elections: Following a relatively low number of proxy contests going all the way to a vote in 2018, the number of contested elections in the U.S. could rise again in 2019. The size of target companies should continue to increase as experienced activists look for bigger fish and the barriers to entry for activism continue to fall away, encouraging new funds to try their hand at nominating competing slates. Whether the recent market downturn forces American hedge funds to retreat from foreign markets or heightens interest in overseas targets remains to be seen.

Vote No Campaigns (VNCs) could remain a popular tactic among activists in the new year following three high-profile campaigns in 2018 – which included Knauf's successful use of a VNC to force USG Corporation to agree to a sale.

Contested M&A: The unstable market environment could place a premium on balance sheet strength, possibly prompting investors of would-be acquirers to take a harder look at proposed mergers. Public opposition to certain deals could intensify under these conditions – and lead to increased reliance on material adverse change (MAC) clauses.


Board Diversity and Qualifications: While investors await the implementation of legal majority voting and board diversity disclosure under Bill C-25 which was passed into law in April 2018 for companies incorporated under the Canada Business Corporations Act (CBCA), the issue of board gender diversity continues to resonate with an increasing number of institutional shareholders who have adopted voting policies in this regard. Many Canadian institutional investors have adopted the goal of reaching 30 percent female representation on each board by 2022, therefore withhold votes at lagging boards are likely to continue to increase in 2019.

Furthermore, investors are likely to continue to scrutinize director qualifications, particularly in rapidly changing industries as new technologies open the door to new challenges and risks. Diversity beyond gender may become an expectation for boards lacking certain expertise in these new risks, as age, education, global experience and other forms of diversity come under the investor lens in the next few years.

Environmental and Social Issues: Canadian regulators continue to review disclosure of material environmental and social (E&S) risks by companies. In 2018, the Canadian Coalition for Good Governance published The Directors' E&S Guidebook, containing recommendations to aid directors in identifying and disclosing E&S risks. Canadian institutions are increasingly prioritizing consideration of E&S factors, particularly related to climate change risk, and are pressing for improved disclosure by public companies.

Executive Compensation: Fueled by increases in share-based compensation, CEO pay continued its upward trajectory in Canada with median CEO compensation up 14 percent in 2018. One trend observed during 2018 proxy season is an increase in the use of stock options as long term incentives. As market volatility continues and performance-contingent awards do not result in target payouts, this trend is likely to continue through 2019.

Another observation in 2018 was the continued use of one-time payments or awards. Boards are using discretion to pay special bonuses and make special one-time, out-of-plan equity or option grants. Disclosure is improving somewhat with regard to rationale for these payments, but the practice itself does not appear to be less frequent.

Latin America

Remuneration: 2019 will mark the first proxy season of full disclosure of remuneration in Brazil after the overturn of an eight-year legal injunction which had allowed companies to not disclose key remuneration figures of their executive pay. The expectation is that companies will be able to move past the pure disclosure compliance and provide not only full transparency of remuneration figures but also better articulate how the proposed compensation is aligned with the companies sustainability and long-term strategic goals.

State-controlled companies: The inauguration of a new government in Brazil will put governance mechanisms implemented by mixed economy companies to a test, as a result of the Responsibility Law of State Controlled Companies, Law 13,303, signed in 2016 as a government response to the wide-spread corruption investigations involving state-controlled companies. There is pressure to remove an essential safeguard mandated by the law prohibiting the appointment of political appointees and/or their relatives to the administration of such companies. An amendment to the law had already been approved by the Chamber of Deputies (the lower house of the Brazilian Congress) to remove the provision considered a key to insulate the administration of such companies from political interests. The amendment still needs to be approved by the Senate. Shareholders will likely pay close attention to the appointment and the election of state-controlled companies’ administrators to ensure that the governance mechanisms put in place remain effective.

United Kingdom

Seller's Market for NED Services: 2019 is expected to be the watershed year, as board recruitment activity is expected to hit its significant stride. The Financial Reporting Council (FRC) published a revised version of the U.K. Corporate Governance Code in July 2018. The new Code will apply to reporting periods starting from January 1, 2019, meaning that all companies must transition to the new Code by 2020. Many Code provisions will prompt significant board changes, as they pertain to board composition issues, including tenure limits on chairs, higher independence standards for small-cap companies, workforce representatives to the board, and overboarding concerns. Coupled with newly-established targets for gender and ethnic diversity, we expect these measures to bring forward a brand new class of U.K. directors in 2019.

Investors step on the gas on climate change: A consortium of shareholders coordinated by the group Follow This has over the last three years filed shareholder resolutions at Royal Dutch Shell plc to set and publish targets for Greenhouse Gas (GHG) Emissions. At the latest general meeting the resolution required Shell to publish company-wide greenhouse gas (GHG) emission reduction targets:

The Company's management did not recommend support, and the resolution was not approved. However, in December 2018, the CEO of Shell made a public commitment that the Company will set carbon emissions targets next year and link these to executive pay. This is a significant change in tone from July 2018 when the CEO had expressed concerns over setting hard targets and the potential risk of litigation over a failure to meet these targets.

This development puts pressure on other oil majors. Follow those who have already announced their intention to file similar shareholder resolutions at BP, Chevron, and ExxonMobil. This may be the start of a global trend where other companies in the sector will come under increasing pressure from institutional investors to start setting hard coded targets rather than aspirational targets of reducing carbon emissions by 2050.

Continental Europe

European Shareholder Rights Directive driving governance change in Europe: Because the implementation deadline for the second version of the Shareholder Rights Directive is in June 2019, European Member States will present new regulations that change the transparency requirements for investors, proxy advisors, and companies. In 2019, we expect more concrete legal requirements in terms of shareholder engagement, remuneration reporting, and related-party transaction reporting. At this point, some member states have draft legislation ready (e.g. Italy, Netherlands), and Greece is an early adopter having implemented the directive, which will be effective from Jan. 1, 2019, adding say-on-pay proposals to Greek agendas.


Purpose of companies and PACTE bill: While not definitively voted, the bill could substantially modify the governance framework by broadening the purpose of companies that should not be only managed in the common interest of shareholders but also according to their social interest considering social and environmental issues. Companies can also go further and add a raison d'être to their bylaws that would have to be submitted at a shareholder meeting. The PACTE bill could also impact employee representation on boards, governance of employee shareholders' funds, pay ratios, and the implementation of the revised shareholders' rights directive.

New Corporate Governance Code and severance packages: The Afep-Medef Code was updated in June 2018. The revised Code toughens the use of non-compete agreements that can no longer be implemented at the departure of the executive if not stipulated originally and be paid once the officer claims his pension rights, or over the age of 65. Some companies may have to modify their current severance packages and submit them to shareholders in 2019.


Revised Code: On Nov. 6, 2018, the German Corporate Governance Code Commission has published the draft of a revised Code that is set to become legally binding after the next voting season in Summer 2019. The Commission has specifically made new recommendations on supervisory board independence requirements and management board remuneration. While the proposed catalogue of independence criteria is broadly in line with international best practices (such as ISS' director independence criteria), the proposed rules regarding executive pay could fundamentally redesign managerial pay systems.

The Code requires an overall pay level to be set, after which the board decides how this total amount, which will include pension benefits, will be split over the different components. Variable bonuses shall be linked to long-term, but annually-measurable strategic goals rather than short-term financial targets. In addition, long-term incentive plans should be stock-based with shares that vest for four years. The new draft code also suggests the introduction of clawbacks to bonuses, following Volkswagen's diesel scandal prior to which VW's executives earned millions in bonuses before the misconduct was revealed.

Say-on-Pay: In consequence of the proposed new Corporate Governance Code that still might be amended after the public consultation period as well as the implementation of the second EU Shareholder Rights Directive that will require companies to submit the remuneration report to shareholders annually and the executive pay system at least every four years, say-on-pay resolutions will most probably not be as predominant in Germany's 2019 shareholder meetings as in previous years, where several companies had faced significant shareholder opposition. Expect most companies to refrain from proposing say-on-pay in 2019, as the will become mandatory by 2020.


Engagement with Activists: Activist investors remain involved in several large-cap companies in Switzerland. However, it remains to be seen whether their involvement will lead to any proxy fights during the upcoming season. Swiss companies have been progressively addressing at least part of the investors' concerns and, in the case of ABB, an activist representative was also added to the board. This appears aligned with less confrontational communications between investors and companies in Europe compared to the U.S., including regarding other topics, such as climate change, which may be due to both structural and cultural differences on the two continents.

Banking Sector: Both Credit Suisse and UBS will face their shareholders following sanctions and fines connected to money laundering in 2018. Where shareholder value was affected as a result, this may exacerbate increasing shareholder skepticism concerning the banks' bonus systems over the past years.


Revamp of Corporate Law delayed but still in the pipeline: The Belgian Parliament was due to approve a complete revamp of Belgian Corporate Law, but due to the current government crisis, the vote has been delayed. No major changes were made to the proposed law in the meantime, with double voting rights for 'loyal' shareholders being still the most contested element. We expect the bill to be approved in 2019 and to become effective in 2020. Interestingly, the initial bill included a transitional period, until June 30, 2020, with reduced majority requirements (simple majority) in the shareholders meeting to amend the articles of association and implement double voting rights. Under normal circumstances, an amendment to the articles requires a three-quarter majority. In the latest version of the bill the transitionary provision was removed, thus requiring at least three-quarters to implement the double voting rights, providing some support to minority shareholders.


Long-awaited 250-day time out period presented: On Dec. 11, 2018, the Dutch government presented a consultation on the new law implementing a 250-day time out period for boards 'under attack'. Dutch Parliament will likely vote on the bill in 2019. If a board decides to invoke this so-called response time, fundamental shareholder rights, such as appointment and dismissal of directors, are suspended.

The measure was introduced following some high-profile cases of unsolicited attempts to acquire Dutch companies (e.g. Akzo Nobel and Unilever). The response time can be invoked in cases of unsolicited or hostile bids, or in case of requests to add shareholder proposals whenever the board deems the approach to be in conflict with the company's interests. The government opened a consultation on the proposal, which is open for feedback and comments until Feb. 7, 2019.


New Governance Code: Several changes to the Norwegian Governance Code are aimed at simplifying and clarifying existing recommendations, and are due to changes in legislation, experience from the practice of the code, and international developments.Some of the main changes include the deletion of the recommendation and comments on the composition of corporate assemblies, a clarification that the company should not grant options to board members, and a clarification that companies that do not have a nomination committee should set out their nomination process.


New Governance Code: The Cyprus Stock Exchange has recently updated the local Corporate Governance Code introducing further guidance on independence at the board and audit committee level. The Code also encourages board diversity, including gender diversity. In 2019, we expect slight changes in board composition at Cypriot companies and further focus on independence at the audit committee.

Asia Pacific


Reform Continues: With the revisions of the Stewardship Code in 2017, which put emphasis on the role of asset owners, Japanese public pension funds began to play a more active role and Japan’s Government Pension Investment Fund continues to shift its investments to ESG-focused indices. The 2019 Corporate Law reform will likely include mandating earlier and electronic disclosure of proxy materials and improved compensation disclosure.

Compensation Discussion: The size of executive compensation at Japanese companies is generally modest. Out of over 30,000 listed company executives, less than 600 executives received over JPY 100 million ($900,000) in 2018. However, several companies proposed massive compensation increases in 2018 (e.g. Start Today’s JPY 134 billion equity awards and SoftBank’s JPY 10 billion compensation), and with Nissan’s former Chairman Ghosn’s compensation disclosure scandal, investors and regulators are likely to focus on compensation disclosure rules and practices.

Hong Kong

New delisting framework: A new delisting framework took effect on August 1, 2018, which aims to address prolonged trading suspensions by both Mainboard and GEM listed companies. The new rule will allow HKEx to delist companies that have suspended trading and are facing financial difficulties, are under investigations, or fail to publish financial results.


Amended listing rules and Corporate Governance Code: The regulatory amendments include rationalizing tests of independence for independent directors, lowering the threshold to determine a director’s independence, and subjecting long-tenured independent directors to a two-tier shareholders’ vote. The amendments will be effective on Jan. 1, 2019, except for the two-tier vote system for long-serving independent directors and the requirement for independent directors to comprise one-third of the board which will come into effect on Jan. 1, 2022.


Auditor ratification: The Companies Act 2013 was amended to remove the requirement for annual ratification of auditors to address certain to inconsistencies in the law.

Kotak Committee reforms: The Securities and Exchange Board of India (SEBI) adopted certain recommendations of the Kotak Committee for changes in regulations relating to board diversity, board and committee independence, related-party transactions, director remuneration, and executive compensation, among others.


New Governance Code: The new China Corporate Governance Code has come into effect since Sept. 30, 2018. The amendments to the Code focus primarily on establishing Party organizations, establishing ESG requirements, encouraging cash dividend distribution, establishing internal control and risk management systems, enhancing audit committee functions, promoting diversity of board members, restricting the powers of controlling shareholders, and encouraging institutional investors to participate in corporate governance. These changes are expected to bring continuous impact to listed companies in China.

Government Control: According to the new China Corporate Governance Code, all listed companies are required to establish an organization of the Party Committee, while state-owned enterprises (SOEs) are required to incorporate requirements on Party-building activities in their Articles of Associations. The central government will continue its grip on enterprises through measures like the inception of Party organizations, allegedly also in non-SOEs and foreign enterprises.

ESG development: The new Code established ESG requirements for listed companies and a basic framework for the disclosure of companies’ ESG information. Companies are required to integrate environmental protection requirements into their development strategies and corporate governance, and fulfill the social responsibilities in community welfare, disaster and poverty assistance, and public welfare.


Revamp of the Company Act: The largest revision of the Company Act in 17 years has been officially approved and will become effective in 2019, under which shareholder rights and transparency are expected to be significantly improved given the greater flexibility in dividend distribution, tightened restrictions on extraordinary motions, enhanced shareholder rights in convening shareholder meetings, and a simplified director nomination process.

Restrictions of key personnel appointments in financial institutions: New initiatives, to be effective July 1, 2019, regulate key personnel appointments in the financial sector by restricting responsible persons at banks and financial holding companies as well as their concerted parties from holding concurrent key positions at other financial firms. The ruling is expected to more effectively address the potential conflicts of interests when directors and supervisors at financial companies are actively involved in the management of competitors in the industry.

-- ISS Global Research Teams