This newsletter’s Table of Contents is as follows:
- Poll: Director Optimism Stalls in April
- ESG reporting is coming: Are You on the Train or on the Tracks?
- ISS Issues 2021 Governance QualityScore Methodology Updates
- In the science of CEO selection, past experience is not a reliable predictor of future success
1.Poll: Director Optimism Stalls in April
Those are the key findings from the April Director Confidence Index, a poll of public company board members conducted in partnership between Corporate Board Member and Diligent Institute. This forward-looking indicator was unchanged this month from March, at 7.5 out of 10. Worth noting:
- While 55 percent of directors surveyed forecast improving business conditions by April 2022, 23 percent expect conditions to deteriorate.
- In April, the proportion of directors forecasting an increase in profits and revenues in the year ahead grew 7 and 6 percent, respectively to 88 and 93 percent.
- CEOs’ outlook for future conditions increased 3 percent in April, to 7.3/10
2.ESG reporting is coming: Are You on the Train or on the Tracks?
According to a recent study, investors that collectively manage $17.1 trillion in US-domiciled assets have adopted sustainable investing strategies, which integrate ESG criteria within investment decisions.
Sustainable investing has increased nearly 43% since 2018, demonstrating that the incorporation of ESG considerations into investment decisions has gained significant traction.
Many companies now recognize that developing and implementing an ESG strategy is more the norm than an exception and are evaluating how best to demonstrate progress through robust measures and enhanced disclosures.
Source: Deloitte
3. ISS Issues 2021 Governance QualityScore Methodology Updates
ISS has announced the updated methodology guide the firm uses to determine a company’s Governance QualityScore (GQS), its proprietary rating system designed to help institutional investors assess companies for governance quality and risk. Seventeen new factors have been added, which ISS states is the largest GQS methodology release in recent years.
What GQS Measures
GQS is a decile-based score meant to indicate the corporate governance risk relative to other companies in a respective index or region. The GQS grading platform covers each company in the S&P 500 and Russell 3000 (as well as in several foreign indices).
Scores range from 1 to 10, with a score of 1 indicating the lowest level of governance risk (meaning the best governance quality).
ISS analyzes the corporate governance risk based on specified factors across four categories: Board Structure, Compensation/Remuneration, Shareholder Rights & Takeover Defenses and Audit & Risk Oversight. Depending on the region, up to 127 of more than 230 possible governance factors are evaluated for each company. The GQS methodology is meant to closely align with the ISS benchmark voting policies (we discuss the 2021 updates here) and reflect developments in regulatory and market practices.
A company’s GQS is included in the proxy research report ISS prepares in connection with a company’s annual shareholder meeting. Yahoo! Finance also has a publicly available profile page that includes the ISS GQS score for many companies, particularly large caps.
EDITOR’S NOTE: Access the scorecard using the links provided above and use it to assess the quality of your Board’s governance.
Source: Davis Polk
4. In the science of CEO selection, past experience is not a reliable predictor of future success
However, recent research into CEO performance and the CEO Life Cycle2 finds no premium for prior CEO experience. The median year-over-year performance difference between a CEO’s first and second role was a staggering 7% per annum. While nearly every experienced CEO (97%) outperformed the market in their first role, only a minority of CEOs (38%) managed to hit the same benchmark in subsequent roles.
CEOs with prior experience tend to get a faster start in the role. They have a reliable playbook, which typically prioritizes putting the company on a diet. Put differently, the benefits of prior experience are especially pronounced in the early stage of a CEO’s tenure when opportunities to take cost out and identify quick wins are more apparent.
Yet, no CEO job is the same. Just as playbooks empower, they also limit new ways of thinking if adhered to too rigidly.
Research finds that first-time CEOs’ longer-term orientation and more balanced focus between profitability and revenue growth is reflected in their performance — even in challenged companies, first-timers attempt to lead through a mix of growth and profitability.
