05 Oct. 2017 | Comments (0)
On Governance is a new series of guest blog posts from corporate governance thought leaders. The series, which is curated by the Governance Center research team, is meant to serve as a way to spark discussion on some of the most important corporate governance issues.
ISS’ report on its 2017-2018 Global Policy Survey came out last week, and some observers have been quick to highlight the results of the questions ISS asked about the new required pay ratio disclosures.
When asked “How does your organization intend to analyze data on pay ratios?”
- 6 percent of investors who responded to the survey checked the box that said, “Compare ratios across companies/industry sectors”
3 percent of investors checked “Assess year-on-year changes in the ratio at an individual company”
A surprisingly high 63 percent of investor respondents indicated they would do both
16 percent checked “My organization is not planning to use this information”
12 percent checked “Other”
At first blush, the natural conclusion is that the CEO-to-median employee pay ratio will be a very relevant piece of information for most investors. Those who advocated for this disclosure will no doubt feel vindicated, although many people (including myself) said this exercise would be costly and produce meaningless data. However, let’s analyze these survey results before jumping to conclusions.
As always, it’s hard to gauge how meaningful the ISS’ annual global policy survey results are because, for purposes of the survey, the proxy advisor counts each investor as one respondent without regard to size. So, a vote by State Street Global Advisors, with $2.5 trillion assets under management (AUM), counts the same as a vote by an investor with $2.5 billion AUM and an investor with $250 million AUM. Each of the Council of Institutional Investors’ 120 member funds, with combined assets of $3 trillion or so, has a vote with equal weight as The Vanguard Group, with $4 trillion AUM. Think of it like this: Investors, big and small, like to espouse the “one share, one vote” principle, but the results of the ISS survey are shown on a “one investor, one vote” basis. Obviously, these two approaches will result in very different pictures. (Imagine if votes in public company director elections were counted this way!)
It’s also important to look at who responded. That’s very difficult because ISS doesn’t reveal exactly which investors responded to the survey. To give us some idea, ISS discloses a table showing the percentage of investor respondents in each of seven ranges of assets owned or under management. So, for example, we know that 35 percent of the investor respondents each owned or managed assets in excess of $100 billion (the top bracket). But, we don’t know whether BlackRock, with $5.7 trillion, was one of them. We also know that 34 percent of investor respondents each owned or managed under $10 billion.
Now let’s look at how many investors responded. In total, 129 “investors” submitted answers to the survey, which number includes 10 organizations that “represent or provide services to institutional investors.” A few of the responses were from people within the same organization. We don’t know how many of the 129 investors are based in the United States, but we do know that of the 602 total survey respondents, which in addition to the 129 investors include corporate issuers, consultants/advisors to companies, corporate directors, and organizations that represent or provide services to issuers, at least 142 (23.6 percent) are based outside of the United States. The report doesn’t break down the number of non-US investor respondents, so the best we can do is extrapolate or make educated guesses.
So, now that we see some of the shortcomings of ISS’ annual global policy survey results (most of which have been pointed out in the past), it’s not clear whether a headline that reads “Investors Overwhelmingly Plan to Use Pay Ratio Data” is something we can take at face value and start spreading. Now that the results of the survey are public and the headlines about them have been posted, it won’t make much of a difference what commentators like me have to say about the methodology. We live in a world where headlines and tweets can move markets and alter relations between nations within a matter of seconds.
Taking the ISS global policy survey results at face value, here is my own interpretation. This next proxy season will be the first time the new required pay ratio data are published, so of course investors (all except maybe the quantitative analysts) are going to take a look at them, even only if out of curiosity. That doesn’t mean 72 percent of investors will find them useful for any kind of investment or voting purpose. We don’t know and they probably don’t yet know. Nobody will even know for a few months what the disclosures themselves will look like.
As it was six years ago with the first required Say on Pay votes, it will take a few trips around the block before people can start to tell us how they view the landscape. So, let’s see what the survey results look like after one, two, or three years of pay ratio disclosure have passed and then see who finds the data useful and for what purpose.
The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.