Low Carbon Transition Rating
Corporate Governance Glossary
Key Issues and Indicators
Board/Management Quality and Integrity
Key Question: Does the board’s experience, track record and behavior demonstrate its ability to provide strategic leadership and oversight?
| Code | Indicator | Underlying Research |
|---|---|---|
CG.1.1 | Board Experience | Industry experience of nonexecutive directors and Chairman; linkage of experience to company strategy. |
CG.1.2 | Director Track Record | Association of directors with governance and performance failures; excessive board service. |
CG.1.3 | Board Capture | Linkages among directors; connections of outside directors to CEO/Chairman. |
CG.1.6 | Related Party Transactions | RPT approval and evaluation process; existence of material RPTs with board/insiders. |
CG.1.7 | Director Stock Ownership | Proportion of directors with stock ownership; comparison against relevant market practice. |
CG.1.8 | Executive/Board Misconduct | Controversies reflecting on integrity of executives or board members. |
CG.1.9 | Business Practices Controversies | Controversies reflecting on business ethics. |
CG.1.10 | Governance Controversies | Controversies reflecting on compliance and governance culture. |
CG.1.11 | Shareholder Engagement and Responsiveness | Response to votes opposing directors or board proposals, or management proposals more broadly; engagement policy; absence of shareholder engagement. |
Board Structure
Key question: Does the board's organization and structure provide sufficient oversight, representation and accountability to shareholders?
| Code | Indicator | Underlying research |
|---|---|---|
CG.2.1 | Board Leadership | Independence/separation of chairman and CEO roles; Chairman’s status as founder/family member or affiliate/former executive; succession planning. |
CG.2.2 | Board Tenure | Proportion of board with long tenure & representation on main board committees; retirement, term limits, and other refreshment policies. |
CG.2.3 | Board Independence | Level of board independence, computed ratio and comparison to market practice; affiliations of outside directors with CEO/insiders. |
CG.2.4 | Nominating Committee Effectiveness | Nominating committee independence; role of insiders/Chair on committee; disclosure of nomination process. |
CG.2.5 | Director Disclosure | Level of disclosure of board biographies and directors’ remuneration (individual/ aggregate). |
CG.2.6 | Voting Structures | Majority/plurality voting standards; resignation policies; proxy access; cumulative voting. |
CG.2.7 | Directors not Elected by Shareholders | Presence and affiliations of designated directors; presence of directors not elected by shareholders. |
CG.2.8 | Risk Oversight | Presence of board-level risk oversight function; disclosure of industry-specific risks under their responsibility; level of disclosure of the work of risk oversight function. |
CG.2.9 | Board Diversity | Gender diversity on board; quality of diversity policy. |
Ownership and Shareholder Rights
Key question: Does the constitution of the company and its ownership structures respect the right of outside shareholders relative to the board, management, and major holders?
| Code | Indicator | Underlying research |
|---|---|---|
CG.3.1 | Director Appointment and Removal
| Board classification and elections; ability of shareholders to remove directors; ability of board to change its size. |
CG.3.2 | Proportionality – One Share/One Vote
| Dual-class shares; voting limitations/caps based on duration and size; golden shares; other proportionality violations. |
CG.3.3 | Ownership Structure | Presence of controlling/significant block-holders; is control achieved through disproportionate voting rights. |
CG.3.4 | Capital Issuance Risks | Excessive issuance authorities; excessive buyback authorities; abusive or potentially abusive capital issuances. |
CG.3.5 | Shareholder Action |
Rights to call special meeting/act by written consent. |
CG.3.6 | Poison Pill & Takeover Defences |
Shareholder rights plans, including evaluation of shareholder-friendly provisions; quality of the market’s takeover regime. |
CG.3.7 | Super-majority Provisions | Supermajority provisions for charter/bylaw amendment and/or M&A transactions; in context of presence of controlling shareholder. |
Remuneration
Key Question: Do the company’s remuneration policies and practices provide appropriate incentives for management to build value?
| Code | Indicator | Underlying research |
|---|---|---|
CG.4.1 | Remuneration Disclosure | Quality and granularity of disclosure of CEO and other executive pay. |
CG.4.2 | Remuneration Committee Effectiveness
| Independence of remuneration committee; presence of executives/ insiders on committee. |
CG.4.3 | Say on Pay | Ability of shareholders to approve or advise on remuneration policy, report, and equity compensation. |
CG.4.4 | Pay Controversies | Controversies related to pay, including negative votes. |
CG.4.5 | STI Performance Metrics | Quality of performance metrics for the annual bonus; degree of discretion. |
CG.4.6 | LTI Performance Metrics | Quality of performance metrics for the long-term/equity incentives. |
CG.4.7 | Pay Magnitude | CEO pay relative to regional and sector norms; dilution concerns related to equity awards. |
CG.4.8 | Pay for Performance | Alignment of pay with long-term financial performance; qualitative assessment of remuneration program features. |
CG.4.9 | Pay for Failure | Excessive golden parachutes, and sign-on awards without performance conditions that presage excessive payouts. |
CG.4.10 | CEO Termination Scenarios | Vesting provisions for equity pay under various CEO termination scenarios. |
CG.4.11 | Internal Pay Equity | CEO pay relative to other employees. |
CG.4.12 | Claw-back Policy | Presence of recoupment policy; requirements for malfeasance. |
Audit and Financial Reporting
Key Question: Are the company’s financial reports reliable and subject to appropriate oversight?
| Code | Indicator | Underlying research |
|---|---|---|
CG.5.1 | Audit Committee Structure | Audit committee independence relative to market standards; presence of insiders on committee. |
CG.5.2 | Audit Committee Effectiveness | Audit committee meetings; financial and industry expertise of committee members. |
CG.5.3 | Audit Fees | Level of non-audit fees relative to audit fees. |
CG.5.4 | Audit Rotation Policy | Presence of rotation and retendering policies; relative to market practice. |
CG.5.5 | Auditor Change | Change in auditor; reasons for change. |
CG.5.6 | Reporting Irregularities | Material restatements, adverse auditor opinions, going concern issues. |
Stakeholder Governance
Key Question: Does the company’s management of extra financial risks and broader stakeholder relationships raise concerns regarding its governance of long-term value creation?
| Code | Indicator | Underlying research |
|---|---|---|
CG.6.1 | ESG Governance | Level of oversight of ESG-specific issues - by the board, management, or other bodies. |
CG.6.2 | ESG Reporting Standards | Adoption of ESG reporting standards. |
CG.6.3 | Verification of ESG Reporting | External validation of the depth of ESG reporting and monitoring. |
CG.6.4 | Global Compact Signatory | Public commitment to principles of corporate responsibility as through the UN Global Compact. |
CG.6.5 | ESG Performance Targets | Incentives for ESG performance; board attention to ESG considerations. |
CG.6.6 | Political Involvement Policy | Policy regarding political involvement and contributions. |
CG.6.7 | Lobbying and Political Expenses | Level of lobbying and political expenses. |
CG.6.8 | Bribery & Corruption Policy | Policy on bribery and corruption. |
CG.6.10 | Environmental Policy | Environmental policy as a framework for oversight of material risks. |
CG.6.12 | Whistleblower Programs | Company-wide whistleblower programme; structures to oversee and process reports; risk oversight and mitigation initiatives. |
CG.6.13 | Tax Disclosure | Transparency regarding taxes paid; possible use of tax shelters. |
CG.6.14 | Discrimination Policy | Policy on discrimination; commitment to ensure equal opportunity. |
CG.6.15 | Scope of Social Supplier Standards | Policies or codes of conduct for expectations of working conditions at contractors and suppliers. |
CG.6.17 | GHG Reduction Program | Initiatives to manage and reduce GHG emissions. |
CG.6.18 | Green Procurement Policy | Degree of incorporating environmental aspects in procurement decisions. |