Tag: Glass Lewis

The Changing Dynamics of Governance and Engagement

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. The following post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the full article, including footnotes, is available here. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

As anticipated, the 2015 proxy season has been the “Season of Shareholder Engagement” for U.S. public companies. Activist attacks, high-profile battles for board seats, and shifting alliances of major investors and proxy advisors have created an environment in which shareholder engagement is near the top of every well-advised board’s to-do list. There is no shortage of advice as to how, when, and why directors should pursue this agenda item, and there is no doubt that they are highly motivated to do so. Director engagement is a powerful tool if used judiciously by companies in service of their strategic goals. As companies and their advisors study the lessons of the recent proxy season and look ahead, it is worth examining recent shifts in corporate governance dynamics. With an awareness of the general trends, and by taking specific actions as appropriate, boards can prepare and adapt effectively to position themselves as well as possible to achieve their strategic objectives.


Proxy Advisors Clarify Proxy Access and Bylaw Amendments Voting Policies

The following post comes to us from Ariel J. Deckelbaum, partner and deputy chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum.

On the heels of SEC Chair White’s direction to the Division of Corporation Finance to review its position on proxy proposal conflicts under Exchange Act Rule 14a-8(i)(9), both Institutional Shareholder Services (“ISS”) and Glass Lewis have issued clarifying policies on proxy access, entering the fray of what is becoming the hottest debate this proxy season. The publication of ISS’s updated policy in particular means that market forces may have outpaced the SEC’s review process. In order to avoid risking a withhold or no-vote recommendation from ISS against their directors, many companies will be faced with the choice of (i) including any shareholder-submitted proxy access proposal in their proxy materials (either alone or alongside a management proposal) (ii) excluding the shareholder submitted proposal on the basis of a court ruling or no-action relief from the Division of Corporation Finance on a basis other than Rule 14a-8(i)(9) (conflict with management proposal) or (iii) obtaining withdrawal of the proposal by the shareholder proponent.


Proxy Access, SEC Uncertainty and Related Issues in 2015

The following post comes to us from Bill Libit, Chief Operating Partner concentrating in corporate and securities and municipal finance at Chapman and Cutler LLP, and is based on a Chapman publication by Mr. Libit and Todd Freier; the complete publication, including footnotes, is available here.

The rise of shareholder activism in the realm of corporate governance has increasingly focused on board performance and the right of shareholders to replace those directors who are perceived to underperform. One proposed approach to facilitate the replacement of underperforming directors is to give shareholders direct access to the company’s proxy materials, including permitting the inclusion of a shareholder-proposed director nominee (or slate of nominees) and a statement in support thereof in the company’s proxy statement (which such approach is more commonly referred to as “proxy access”). Although current U.S. securities regulations do not grant shareholders access to company proxy materials, proxy access may be available to shareholders by way of a company’s organizational documents (e.g., articles of incorporation, bylaws or corporate governance guidelines), as permitted by state corporate law.

While proxy access did not garner significant attention over the past two proxy seasons, it is one of the most notable early developments of the 2015 proxy season. It has been reported that shareholders have submitted an estimated 100 proxy access proposals to U.S. companies, a considerable number of which will be voted upon by shareholders over the next several months. Proxy access will very likely be one of the most contentious corporate governance issues this proxy season.


ISS and Glass Lewis Update Proxy Voting Guidelines for 2015

The following post comes to us from Yafit Cohn, Associate at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

Institutional Shareholder Services Inc. (“ISS”) and Glass Lewis have both released updates to their respective proxy voting guidelines. [1] ISS’s revised policies will take effect for annual meetings occurring on or after February 1, 2015. Glass Lewis’s new policies will take effect for meetings occurring after January 1, 2015, while its clarifications of existing policies are effective immediately.


ISS and Glass Lewis Voting Guidelines for 2015 Proxy Season

The following post comes to us from Edmond T. FitzGerald, partner and head of the Executive Compensation Group at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum by Kyoko T. Lin and Ning Chiu.

ISS and Glass Lewis, two influential proxy advisory firms, have both released updates to their policies that govern recommendations for how shareholders should cast their votes on significant ballot items for the 2015 proxy season, including governance, compensation and environmental and social matters.

ISS policy updates are effective for annual meetings after February 1, 2015. We understand that the new Glass Lewis policies are effective for annual meetings after January 1, 2015, but clarifications to existing policies are effective immediately.


Important Proxy Advisor Developments

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. The following post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the full article, including footnotes, is available here.

As 2014 winds down and 2015 approaches, proxy advisory firms—and the investment managers who hire them—are finding themselves under increased scrutiny. Staff guidance issued by the Securities and Exchange Commission at the end of June and a working paper published in August by SEC Commissioner Daniel M. Gallagher both indicate that oversight of proxy advisory services will be a significant focus for the SEC during next year’s proxy season. Under the rubric of corporate governance, annual proxy solicitations have become referenda on an ever-widening assortment of corporate, social, and political issues, and, as a result, the influence and power of proxy advisors—and their relative lack of accountability—have become increasingly problematic. The SEC’s recent actions and statements suggest that the tide may be turning. Proxy advisory firms appear to be entering a new era of increasing accountability and potentially decreasing influence, possibly with further, more significant, SEC action to come.


SEC Guidance May Lessen Investment Adviser Demand for Proxy Advisory Services

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on a Sidley update.

Recently issued SEC staff guidance addresses concerns that have been raised about proxy advisory firms by emphasizing that the investment adviser that retains and pays a proxy advisory firm is uniquely positioned to monitor the proxy advisory firm and is required to actively oversee the firm if it wants to benefit from the firm’s services to discharge its fiduciary duty. As a result of the greater oversight exercised by all of their investment adviser clients, the proxy advisory firms will presumably respond by enhancing their policies, processes and procedures, as well as the transparency of these policies, processes and procedures. In turn, the corporate community may indirectly benefit to some degree.


Proxy Advisory Firms and Corporate Governance Practices: One Size Does Not Fit All

The following post comes to us from Bill Libit, partner concentrating in corporate and securities and municipal finance at Chapman and Cutler LLP, and is based on a Chapman publication by Mr. Libit and Todd Freier.

The 2014 proxy season, like previous seasons, has provided shareholders of public US companies with an opportunity to vote on a number of corporate governance proposals and director elections. Throughout this proxy season, proxy advisory firms have provided shareholder vote recommendations “for” or “against” those proposals and “for” or to “withhold” votes for directors. Certain proxy advisory firms, such as Institutional Shareholders Services Inc. (“ISS”) and Glass, Lewis & Co., LLC (“Glass Lewis”), have also published updated corporate governance ratings reports on public companies, including evaluations of a company’s corporate governance risk profile.


Compensation Season 2014: Shareholder Engagement

The following post comes to us from Michael J. Segal, partner in the Executive Compensation and Benefits Department of Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Segal, Jeannemarie O’Brien, Adam J. Shapiro, Jeremy L. Goldstein, and David E. Kahan.

For many public companies, the new year marks the beginning of compensation season. As in years past, we have set forth below some of our thoughts on what to expect from the current compensation environment. Unlike previous years, the upcoming proxy season is not marked by new legislative or regulatory developments. And, as described in our memorandum of November 26, 2013, discussed previously on this Forum, here, the Institutional Shareholder Services (ISS) voting policies regarding compensation matters have remained largely unchanged. The most significant development this proxy season is the continuation of a single trend: increasing levels of shareholder engagement.


Boards Should Minimize the Role of Proxy Advisors

James Woolery is Deputy Chairman of Cadwalader, Wickersham & Taft LLP, Co-Chair of its Corporate Department and head of its Business Development Group. The following post is based on a Cadwalader publication by Louis J. Bevilacqua, Co-Chair of the firm’s Corporate Department and the head of its Mergers & Acquisitions and Securities Group.

The boards of public companies are increasingly being assessed by a hoard of short-term focused “activist” investors and an increasingly third-party-advised stockholder base that relies heavily on proxy advisory firms to make important voting decisions for them. It is estimated that over 75 percent of all shares of public companies are held in a managed fund or institutional account.

Institutional Shareholder Services (ISS) and Glass Lewis control 97 percent of the market for proxy advice; and the two dominant proxy advisors reportedly affect 38 percent of votes cast at U.S. public company shareholder meetings. Their dominance in the proxy marketplace not only affects numerous votes but, more importantly, how companies manage and deal with their shareholders. Both firms wield enormous influence without having “skin in the game.” Perhaps even more concerning, given the influence they have on public companies, the proxy advisors (i) are understaffed and therefore establish generic voting recommendations and (ii) profit from engaging in activities involving material conflicts of interest, including marketing their advisory services to many of the same companies for which they provide proxy recommendations. In addition, Glass Lewis is owned by an activist fund with an agenda.


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