All About Your Company's Qualityscore Rating

In October, 2019, Institutional Shareholder Services (ISS) — the largest and most influential proxy advisory firm — updated, expanded and issued the methodology guide for its corporate governance rating system. The scoring system—ESG Governance QualityScore — is designed to help institutional investors review a company’s quality factors and assess risk.

Your company should review its QualityScore rating as soon as possible and ensure it’s based on accurate data, due to the significant impact governance issues can have on investor decisions.

Measuring Risk

QualityScore, which replaced ISS’s QuickScore in 2018, is a data-driven scoring solution designed to identify governance risk within portfolio companies. It covers approximately 5,800 publicly traded companies in 30 markets, including the largest U.S. companies (by market capitalization), as well as several other global regions.

In computing a company’s QualityScore, ISS examines correlations between governance factors and key financial metrics, giving greater weight to the factors with the highest correlation. Moving from the previous QuickScore to QualityScore framework, ISS refined its regional focus to include more factors that are applicable across all markets, including global markets.

More than 230 factors are analyzed, with the specific factors under analysis varying by region. Each factor is assigned a weight, based on an understanding of the impact of governance practices, ISS voting policy, and prevailing governance standards within each region. Subject companies are evaluated based on whether they meet, exceed or fall short of market best practices for each relevant factor. The actual number of factors analyzed varies by region, but each falls under one of the following four categories:

1. Board structure
2. Compensation/remuneration
3. Shareholder rights
4. Audit practices

Keep in mind that ISS does not disclose the relative weight given to each governance factor. Also, it is not entirely clear how ISS analysts evaluate whether a company meets, exceeds or falls short of a particular best practice. Therefore, it may not be apparent how a particular factor affects your company’s final score. For example, a board’s proportion of independent directors is thought to have a big impact on company performance. Will a company with one nonindependent director receive a substantially better score than a company with two?

Everything’s Relative

Companies receive scores, on a scale from 1 (lowest risk) to 10 (highest risk) for each of the four corporate governance categories. They also receive an overall score. 

In computing these scores, ISS takes a company’s raw scores and converts them into a 1-to-10 score based on its ranking relative to other U.S. companies. Because QualityScores are relative, a company that has adopted many or most governance best practices may still find itself with a score that’s average or below average.

How to Check Your Score

You can find your company’s score by visiting issgovernance.com. The page also provides instructions for obtaining a log-in ID for ISS’s complimentary Data Verification. This tool enables you to review, verify and provide feedback on data used to determine your company’s QualityScore.

Review your QualityScore carefully for inaccuracies in any of the underlying data and submit corrections to ISS. Be sure to investigate any potentially serious governance issues that QualityScore has marked with a red flag. These red flags indicate factors that have had a significantly negative effect on your company’s score. As the 2020 proxy season approaches, your QualityScore report also can help you identify corporate governance practices with room for improvement.

QualityScore Rating Factors

Each of the several dozen factors Institutional Shareholder Services considers when determining a company’s Governance QualityScore falls into one of the following categories and subcategories:

1. Board structure: board composition, composition of committees, board practices, board policies, related party transactions, board controversies and diversity.
2. Compensation/Remuneration: pay for performance, nonperformance-based pay, use of equity, equity risk mitigation, nonexecutive pay, communications and disclosure, termination, and compensation controversies.
3. Shareholder rights and takeover defenses: one-share / one-vote, takeover defenses, meeting and voting issues, and other shareholder rights issues.
4. Audit and risk oversight: external auditor, audit and accounting controversies and other audit issues.

Keep Things in Perspective

It’s important to know your company’s QualityScore, especially since investors are likely to use this tool in comparing different companies’ governance practices. But be careful not to overreact. While a poor score in a particular area may prompt you to re-evaluate your company’s practices, you should continue to make governance decisions based on the best interests of your company. If you have questions regarding your company’s score, contact us today!

Updated as of February 19, 2020.

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