Council of Institutional Investors

Policies on Other Issues

Best Disclosure Practices for Institutional Investors
Credit Rating Agencies
Corporate Disclosure of Sustainability Performance
Effective and Efficient Proxy Voting
Financial Gatekeepers
Guiding Principles for Trading Practices, Commission Levels, Soft Dollars and Commission Recapture
Independence of Accounting and Auditing Standard Setters
Investor Expectations for Newly Public Companies
Statement on Company Disclosure
Statement on Index Provider Consultation Processes
Statement on Stock Sales by Insiders
Support of Defined Benefit Plans

Best Disclosure Practices for Institutional Investors
In order to foster an environment of transparency and accountability, institutional investors—including pension funds, hedge funds, private equity firms and sovereign wealth funds, among others—should make publicly available in a timely manner:

  • Proxy voting guidelines;
  • Proxy votes cast;
  • Investment guidelines;
  • Names of governing-body members; and
  • An annual report on holdings and performance.
Adopted May 1, 2009

Credit Rating Agencies
CII supports a credit ratings environment that:
  • incentivizes long-term accuracy
  • provides transparency in methodology
  • applies consistent methodology to similar securities
  • minimizes, manages and discloses conflicts of interest
  • has strong, appropriately funded oversight mechanisms
  • holds agencies accountable for fraud and weak processes]
  • fosters competition and innovation
  • involves diligence from both agencies and investors 
Credit rating agencies play an integral part in the safety and soundness of the financial system. They reduce informational asymmetry among investors, help mitigate duplicative research costs and have a key role in facilitating capital formation.  Yet all of these benefits hinge upon the long-term accuracy of ratings, which the above principles aim to promote. These principles, which build upon ideas expressed in broader CII policies, including the Statement on Financial Gatekeepers and the final report of the CII-CFA Investors’Working Group, will help underscore the value that CII members place on reliably accurate credit ratings.

The Credit Rating Agency Reform Act of 2006 paved the way for registration and improved oversight of credit rating agencies deemed Nationally Recognized Statistical Rating Organizations (NRSROs). While the ratings industry has made strides in addressing weaknesses revealed since the adoption of the act and the financial crisis of 2008, significant concerns persist. A Securities and Exchange Commission study released in September 2011  exposed cases in which NRSROs failed to follow their own methodology and allowed months to pass before disclosing changes to their methodology. The same report pointed to weaknesses in the oversight of conflicts of interest and compromises in internal supervisory controls, including limited involvement and high turnover among compliance officers. 
These findings drive home the importance of accountability, which strengthens credit rating agencies’ability to focus on objectives beyond increasing revenue and market share. Credit rating agencies have a responsibility to be diligent in the analysis upon which investors rely; investors in turn should be diligent in monitoring the quality of the analysis and in determining whether the level of quality makes references to ratings worthwhile in investment guidelines.
The predominant business model for credit ratings, in which the issuer pays for analysis, has come under intense scrutiny since 2008. Breakdowns in diligence due to fundamental principal-agent challenges, exacerbated by the practice of “ratings shopping”that chipped away at the quality of analysis, has prompted some observers to call for eliminating this model altogether.  A model in which the investor pays for ratings would promote alignment between the service provider and the end-user.  But the free-rider problem that likely would result—investors sharing ratings without paying for them—could make this model unsustainable.  Publicly-funded ratings, another alternative model, could potentially politicize the selection and compensation of rating agencies.  As no single model ensures robust analysis, policymakers should consider ways to help multiple models flourish in the marketplace.
Adopted April 3, 2012

Statement on Corporate Disclosure of Sustainability Performance
Investors increasingly seek decision-useful, comparable and reliable information about sustainability performance in corporate disclosures in order to better understand how nonfinancial metrics can impact business and profitability. CII believes that independent, private sector standard setters should have the central role in helping companies fill that need. Market participants, non-governmental organizations and governments can aid the success of these standard setters by supporting their independence and long-term viability, attributes of which include: stable and secure funding; deep technical expertise at both the staff and board levels; accountability to investors; open and rigorous due process for the development of new standards; and adequate protection from external interference.
CII encourages companies to disclose standardized metrics established by independent, private sector standard setters along with reporting mandated by applicable securities regulations to better ensure investors have the information they need to make informed investment and proxy voting decisions. CII believes those standards that focus on materiality, and take into account appropriate sector and industry considerations, are more likely to meet investors' needs for useful and comparable information about sustainability performance.  CII also believes that over time, companies should obtain external assurance of the sustainability performance information they provide.

Adopted September 22, 2020

Effective and Efficient Proxy Voting
The Council of Institutional Investors believes the public equity market and its stakeholders are best served by a proxy voting system characterized by:
  • Timeliness—Voting related communications should reach eligible voters in sufficient time to allow for careful review of the materials and to facilitate voter participation.
  • Accessibility—Mechanisms should be in place to ensure that shareowners receive proxy materials and can vote even if they do not use electronic voting and communications methods.
  • Accuracy—All votes properly cast should be correctly tallied.
  • Certainty—The proxy voting system should provide for end-to-end confirmation enabling both companies and shareowners to confirm that votes properly cast were included in the final tally as directed.
  • Cost-effectiveness—The costs of transmitting proxy materials and votes should be reasonable.
  • Best use of technology—Technology should be used to improve the proxy voting process, including through the adoption of private blockchains operated by trusted third parties that promote each of the above five objectives while safeguarding the identities, holdings and voting decisions of individual shareholders.
Updated October 24, 2018

Financial Gatekeepers
The Council of Institutional Investors believes financial gatekeepers should be transparent in their methodology and avoid or tightly manage conflicts of interest.  Robust oversight and genuine accountability to investors are also imperative.  Regulators should remain vigilant and work to close gaps in oversight.  Continued reforms are needed to ensure that the pillars of transparency, independence, oversight and accountability are solidly in place.
Auditors, financial analysts, credit rating agencies and other financial “gatekeepers” play a vital role in ensuring the integrity and stability of the capital markets.  They provide investors with timely, critical information they need, but often cannot verify, to make informed investment decisions.  With vast access to management and material non-public information, financial gatekeepers have an inordinate impact on public confidence in the markets.  They also exert great influence over the ability of corporations to raise capital and the investment options of many institutional investors.
In recent years, the global financial crisis and financial scandals on Wall Street and at operating companies from Enron to Tyco have cast a harsh light on flawed structures and practices of gatekeepers.  In many cases, poor disclosure, conflicts of interest, minimal oversight and lack of accountability helped mislead many market participants into making investment decisions that ultimately yielded huge losses.  The crisis of confidence in the markets that followed spurred regulators and lawmakers to scrutinize and rein in gatekeepers.
The Sarbanes-Oxley Act of 2002 and the “global settlement”with Wall Street firms in 2003 bolstered the transparency, independence, oversight and accountability of accounting firms and equity analysts, respectively.  For example, accounting firms now are barred from providing many consulting services to companies whose books they audit.  And banks are not allowed to include analysts in investment banking “roadshows”and must make analysts’historical ratings and price target forecasts publicly available.
Credit rating agencies largely escaped meaningful oversight until the passage of the Credit Rating Agency Reform Act of 2006.  While the act has improved disclosure and competition in the rating industry, more transparency, stronger regulation and genuine accountability are still needed.  Investigations by Congress and the Securities and Exchange Commission (SEC) have uncovered repeated instances where credit raters inflated ratings on structured financial products to win business from firms that issued the debt.  And rating agencies continue to face minimal accountability for the fairness or quality of their ratings.  CII welcomes further examination of financial gatekeepers by regulators, lawmakers, academics and others, to determine what changes, including new rules and stronger oversight, are needed.
Adopted April 13, 2010

Guiding Principles for Trading Practices, Commission Levels, Soft Dollars and Commission Recapture
The most important voice in discussions of soft dollars, commission levels and directed brokerage belongs to us, as institutional investors. Commissions are an asset of the plan, and as plan sponsors and trustees it is our right and responsibility to decide how they are managed. We have the power to assert our authority in these matters through our contractual arrangements with money managers and brokers. We also have the broader duty to communicate the interests and desires of the institutional investor community to regulators, to the public and to the industry regarding trading practices and commissions.
Like any other expense of the plan, trading costs need to be managed to minimize the cost and ensure that maximum value is received. But current brokerage industry practices of bundled pricing for services make it difficult to break out the exact costs of services (for trade execution, research or other things), may be antithetical to the fiduciary obligation of obtaining best execution, and hold too much potential for conflicts of interest and abuses. 
We support and urge full unbundling of pricing for investment management, brokerage and research services, so that institutional investors can purchase and budget for these services as they do any other expense of the plan.
Clarity and transparency of disclosure of all money management and brokerage arrangements is essential, and it is up to plan sponsors to require it. Simple reliance on brokers, money managers and consultants for volunteered information is insufficient to discharge the obligations of plan fiduciaries. Plan sponsors should require regular reports and affirmative representations that fiduciaries are pursuing best execution in their trading practices.
To the extent that any money manager or plan sponsor is engaged in using soft dollars or directing brokerage to obtain commission recapture, it is the duty of fiduciaries to ensure that all such practices are engaged in for the exclusive benefit of the plan and its members.

Adopted March 31, 1998

Independence of Accounting and Auditing Standard Setters
Audited financial statements including related disclosures are a critical source of information to institutional investors making investment decisions.  The efficiency of global markets—and the well-being of the investors who entrust their financial present and future to those markets—depends, in significant part, on the quality, comparability and reliability of the information provided by audited financial statements and disclosures.  The quality, comparability and reliability of that information, in turn, depends directly on the quality of the financial reporting standards that:  (1) enterprises use to recognize, measure and report their economic activities and events; and (2) auditors use in providing  assurance that the preparers’ recognition, measurement and disclosures are free of material misstatements or omissions.  The result should be timely, transparent and understandable financial reports.
The Council of Institutional Investors has consistently supported the view that the responsibility to promulgate accounting and auditing standards should reside with independent organizations. 
CII supports U.S. accounting and auditing standard setters cooperatively working with their international counterparts toward a common goal of high quality standards.  This means maintaining a high degree of on-going communication among domestic and international standard setters to produce standards that first and foremost result in high quality financial reports, and secondarily result in consistent financial reporting outcomes. CII continues to be open to a transition to a single global set of high quality standards designed to produce comparable, reliable, timely, transparent and understandable financial information that will meet the needs of institutional investors and other consumers of audited financial reports.  However, at this time CII does not support replacing U.S. accounting or auditing standards or standard setters with international standards or standard setters. Notwithstanding CII’s current opposition to replacing U.S. standards or standard setters, in light of the globalization of the financial markets and the fact that U.S investors invest trillions of dollars in securities of enterprises that report their financial results in some form of international standards, we generally support high quality international accounting and auditing standards.
In order to be high quality, accounting and auditing standards must be seen as meeting the needs of the investing public, and the standard setting process must be independent and free from undue influence. Attributes that underpin an effective accounting or auditing standard setter include:
  • Recognition of the Role of Reporting – A recognition that financial accounting and reporting and the quality of auditing thereof is a public good, necessary to investor confidence in individual enterprises and the global capital markets as a whole;
  • Sufficient Funding – Resources sufficient to support the standard setting process, including a secure, stable, source of funding that is not dependent on voluntary contributions of those subject to the standards (for international standard setters, such funding may depend on governmental and stakeholder cooperation from multiple jurisdictions, including the United States);
  • Independence and Technical Expertise – A full-time standard-setting board and staff that are independent from prior employers or similar conflicts and possess the technical expertise necessary to fulfill their important roles;
  • Accountability to Investors – A clear recognition that investors are the key customer of audited financial reports and, therefore, the primary role of audited financial reports should be to satisfy in a timely manner investors’ information needs (this includes having significant, prominent and adequately balanced representation from qualified investors on the standard setter’s staff, standard-setting board, oversight board and outside monitoring or advisory groups);
  • Due Process – A thorough public due process that includes solicitation of investor input on proposals and careful consideration of investor views before issuing proposals or final standards;
  • Adequate Protections – A structure and process that adequately protects the standard setter’s technical decisions and judgments (including the timing of the implementation of standards) from being overridden by government officials or bodies; and
  • Enforcement – A clear, rigorous and consistent mechanism for enforcement by regulators of the accounting and auditing standards.
Updated, March 1, 2017

Investor Expectations for Newly Public Companies
The Council of Institutional Investors (CII) has long maintained that companies wishing to tap the public markets should adopt an equity structure and governance provisions that protect public shareholders’ rights equally. A troubling number of companies enter the public markets with structures and practices that fundamentally compromise accountability to shareholders and entrench insiders, including:
  • multi-class equity structure with unequal voting rights
  • plurality vote requirement for uncontested director elections
  • non-independent board leadership, whether from the chair or lead director
  • classified board structure
  • super-majority vote requirement for bylaw amendments and other proposals
As newly public companies grow into mature, established firms, special protections for insiders and disparities between economic ownership and voting power become especially problematic. Upon going public, a company should have a “one share, one vote” structure, simple majority vote requirements, independent board leadership and a non-classified board. CII expects newly public companies without such provisions to commit to their adoption over a reasonably limited period through sunset mechanisms. 

Adopted March 23, 2016

Statement on Company Disclosure
In evaluating proposals to expand company disclosure, CII considers the following factors:
  • Materiality to investment and voting decisions
  • Depth, consistency and reliability of empirical evidence supporting the connection between the disclosure and long-term shareowner value
  • Anticipated benefit to investors, net of the cost of collection and reporting
  • Prospect of substantially improving transparency, comparability, reliability and accuracy
Adopted, March 10, 2020

Statement on Index Provider Consultation Processes:  
So as to maintain credible public due process that serves the interests of investors and the capital markets generally, the Council of Institutional Investors urges index providers to conduct robust public consultations when contemplating significant methodological changes to major indexes. Robust consultations are characterized by at least the following:   
  • Notice of the consultation should be broadly disseminated, such as through a press release, and the consultation period should be in line with the 30 to 90 day comment period provided for federal regulations.
  • Each response letter should be posted in a timely manner, such as within one week of receipt, excepting responses with reasonable requests for confidentiality. 
  • Confidential submissions should be discouraged, and exceptions to the public posting of comments should be narrowly interpreted.  
Background & Intent  
Index providers play a central role in modern capital markets, affecting investment decisions, public company strategies and corporate governance, all on a global scale. Their influence has only increased with the proliferation of passive investment strategies.   
The impact of significant changes to methodologies governing security eligibility for major indices can in some cases be more consequential than changes to listing standards for national stock exchanges. Yet unlike national exchanges, which are subject to transparency requirements as self-regulatory organizations (SROs) under Securities and Exchange Commission (SEC) oversight, index providers are largely unregulated.   
This renders the robustness of index providers’ consultations both critically important and vulnerable to procedural shortfalls that could detract from the benefits of soliciting public input. Currently, when an index provider contemplates significant methodological changes, procedures for how to notify the public, obtain input and be transparent with respect to that input are left to the index provider’s discretion.   
This statement identifies three indicators of well-executed public consultations for consideration by policy makers and index providers. In addition, other financial sector service providers conducting public consultations may benefit from evaluating how these indicators compare with their current practices.

Statement on Stock Sales by Insiders
Public confidence that securities markets are fair to all participants serves the interests of both companies and investors. When executives, officers and directors (“insiders”) sell company stock before important information reaches the public, that confidence erodes.

This erosion of confidence can happen without any violation of federal securities laws taking place. One such example is “selling into buybacks,” whereby insiders reduce their equity holdings shortly after the announcement of a company stock repurchase program. The actual amount and timing of buybacks—though eventually determined by insiders—becomes known to the public subsequent to the insiders’ sale of stock.  Another scenario that harms public confidence involves insiders aggressively promoting the company’s long-term prospects to public investors during the six months before and after a company’s initial public offering or direct listing, while simultaneously reducing their personal stake.
In the interest of optimizing long-term alignment with shareowners and reducing the risk of confidence-eroding stock sales, boards should consider requiring companies’ highest-level executives (at least the CEO and CFO) as well as non-employee directors to hold all company stock they receive until after their departure from the company.  For insiders for whom the board believes such an expectation is unworkable, CII recommends that boards adopt a policy requiring that insider stock sales take place either through a robust automatic trading plan governed by Rule 10b5-1 or through processes and controls, approved by an appropriate board committee, that mimic the rules and features of such a plan.
For Rule 10b5-1 plans to fulfill their legitimate purpose, they should be: publicly disclosed; adopted when the participant is not in possession of material, non-public information; inactive for at least three months following adoption; and ineligible for substantive modification. Participants should not be party to concurrently active 10b5-1 plans, and companies should avoid frequently cancelling and adopting new plans. Boards should periodically monitor plan transactions and adopt written policies covering plan practices, including how plans may be used in the context of guidelines or requirements on equity hedging, holding and ownership; and suspend trading under such plans upon internal awareness of an M&A transaction or tender offer involving the company.
Insiders should not reap rewards for announcing stock buyback programs, but their equity stake should benefit (or suffer) by the extent to which actual company repurchases prove to be wise (or imprudent) long-term capital allocation decisions. Announcing a share repurchase program has no impact on a company’s overall profitability. Nor does it define the number of shares that will ultimately be repurchased, which history shows is often substantially below the number of shares authorized under the announcement.
Aside from undermining the motivation for stock-based compensation, the phenomenon of insiders decreasing their equity holdings while a company actively repurchases shares sends an inconsistent message to investors. While valid circumstances may justify some amount of inconsistency, CII encourages boards to closely monitor for this concern, so that consistent signaling broadly predominates between the company’s repurchase activity and insiders’ trading activity. Both to improve market efficiency and reduce the likelihood of abuses, companies should disclose share repurchases at a frequency and level of detail on par with their disclosure of insider stock sales.

Background & Intent
When overhauling CII’s executive compensation policy in 2018 and 2019, the Policies Committee determined that that policy’s section on stock sales (Section 5.15b) warranted separate re-consideration and a standalone statement. The creation of this statement provides an opportunity to support closing loopholes in 10b5-1 plans, on which CII has a long advocacy record, raise particular circumstances in which insider stock sales are problematic, and support improvement with regard to transparency of company stock repurchases.
CII believes that companies should have discretion to make capital allocation decisions that they believe will best serve long-term company performance, subject to accountability to shareholders. At the same time, management’s ability to exercise clear-eyed judgment about the best use of capital can be compromised when, through a combination of circumstances, any particular allocation alternative offers the potential to deliver special benefits to insiders relative to other capital allocation alternatives.
A short-term market reaction to a buyback program announcement has no linkage to the intent of stock-based compensation, yet many companies have programs and policies enabling insiders to sell stock shortly after the announcement of a buyback program authorization. In order for stock-based compensation to reflect the impact of actual repurchases and the wisdom of that capital allocation decision, insiders need to hold stock long after such announcements.
In seeking to remove insiders’ ability to influence the timing of stock sales, the adoption of Rule 10b5-1 in 2000 created a path for insiders in possession of material, non-pubic information to sell stock through automatic trading plans, without fear of prosecution under federal insider trading rules. 10b5-1 plans need to be strengthened to eliminate the insider influence they intended to remove. Currently these plans are not transparent. Existing plans can be revised, or they can be terminated and replaced with newer plans with different terms. Participants can have multiple, overlapping plans, and initial participation does not require a meaningful waiting period, enabling opportunistically-timed selling.

Adopted March 10, 2020

Support of Defined Benefit Plans 
The Council of Institutional Investors (CII) supports defined benefit plans (DB plans) as a critical component of the nation’s retirement system and advocates for the retention of DB plans as the central element of retirement programs offered to workers.
Ensuring that workers have the ability to retire with dignity is one of the most complex issues facing public and private sector entities in the United States. The challenges in structuring retirement programs are considerable. One size does not fit all, and considerations such as an employer’s size and resources, the size and structure of employee pay packages, employee preferences and demographics influence what type of retirement benefits are most appropriate for an employer and its employees.
Today a broad variety of retirement programs are available for consideration by private and public sector entities. Different plan structures offer unique pros and cons for employees and employers.
Only one structure—the defined benefit plan—offers retirees a secure and guaranteed benefit upon retirement.
Background & Intent
CII is concerned that eliminating public and private DB plans, which according to the National Institute on Retirement Security (NIRS) currently cover about 70 million Americans (active and retired), could severely impact the ability of workers, particularly lower-income employees, to be financially secure at retirement. The end result could be even more pressure on already over-burdened federal, state and local government assistance programs.
DB plans have played an important role in stabilizing the U.S. financial markets. Due to their extended benefit horizons, pension funds are long-term investors, particularly in the U.S. markets. In contrast, the average mutual fund portfolio turnover ratio is 79%, according to research published in the Journal of Corporation Law.
As of 2020, the largest 1,000 U.S. retirement plan sponsors hold over $7 trillion in assets under defined benefit plans, according to data from Pensions & Investments. These resources, which flow into public equity, fixed income and alternative investments, promote not only plan participants’ retirement security, but also business development, innovation, infrastructure improvement and economic growth from which non-plan participants benefit.
DB plans are proven to be a particularly cost-effective method of managing retirement assets. Analysis by NIRS found that the cost to deliver the same level of retirement income was 46% lower for DB plans than for defined contribution plans.
CII believes the involvement of DB plans, particularly state and local government and union pension systems, in corporate governance issues has benefited investors at large in the U.S. capital markets and contributed to the vitality of the U.S. economy and U.S. corporations. Pension fund advocacy has resulted in regulatory and legislative reforms to strengthen rights for shareowners, improved corporate governance standards for U.S. companies and boards, increased accountability of corporate directors and executives and enhanced transparency of governance activities and financial accounting. Weakening the voice of defined benefit plans in matters of corporate governance would be detrimental to U.S. investors and companies and the U.S. financial markets.

Adopted March 11, 2021