Glass Lewis’ Shareholder Initiative Guidelines

Courteney Keatinge is Director of Environmental, Social & Governance Research at Glass, Lewis & Co. This post is based on a Glass Lewis memorandum by Ms. Keatinge.

Shareholders are playing an increasingly important role at many companies by engaging in meetings and discussions with the board and management. When this engagement is unsuccessful, shareholders may submit their own proposals at the companies’ annual meetings. While shareholder resolutions are relatively common in some countries like the United States, Japan and Canada, in other markets shareholder proposals are rare. Additionally, securities regulations in nearly all countries define and limit the nature and type of allowable shareholder proposals including submission ownership thresholds. For example, in the United States, shareholders need only own 1% or $2,000 of a company’s shares to submit a proposal for inclusion on a company’s ballot. However, American issuers are able to exclude shareholder proposals for many defined reasons, such as when the proposal relates to a company’s ordinary business operations. In other countries such as Japan, however, shareholder proposals are not bound by such content restrictions. Additionally, whereas in the U.S. and Canada the vast majority of shareholder proposals are precatory (i.e. requesting an action), such proposals are binding in most other countries. Binding votes in the U.S. are most often presented in the form of a bylaw amendment, thereby incorporating the proponent’s “ask” in the company’s governing documents.

Glass Lewis believes binding proposals should be subject to heightened scrutiny since they do not allow the board latitude in implementation to ensure consistency with existing corporate governance provisions. Nonetheless, Glass Lewis will recommend supporting well-crafted, binding shareholder proposals that increase shareholder value or protect and enhance important shareholder rights.

We recognize that shareholder initiatives are not just limited to shareholder proposals. For example, in some markets, shareholders may submit countermotions (e.g., Germany) and/or may solicit votes against management proposals, most commonly the ratification of board acts.

While the types and nature of shareholder initiatives vary significantly across markets, Glass Lewis approaches such initiatives in the same manner, regardless of a company’s domicile. Glass Lewis generally believes decisions regarding day-to-day management and policy decisions, including those related to social, environmental or political issues, are best left to management and the board as they in almost all cases have more and better information about company strategy and risk exposure. However, when there is a clear link between the subject of a shareholder proposal and value enhancement or risk mitigation, Glass Lewis will recommend in favor of such proposal where the company has inadequately addressed the issue. We strongly believe that shareholders should not attempt to micromanage a company, its businesses or its executives through the shareholder initiative process. Rather, we believe shareholders should use their influence to push for governance structures that protect shareholders and promote director accountability. Shareholders should then vote into place a trustworthy and qualified board of directors, who can make informed decisions that are in the best interests of the business and its owners. These directors can then be held accountable for management and policy decisions through board elections.

Glass Lewis evaluates all shareholder proposals on a case-by-case basis. However, we generally recommend shareholders support proposals on certain issues such as those calling for the elimination or prior shareholder approval of antitakeover devices such as poison pills and classified boards. Additionally, we generally recommend shareholders support proposals that are likely to increase or protect shareholder value, those that promote the furtherance of shareholder rights, those that promote director accountability and those that seek to improve compensation practices, especially those promoting a closer link between compensation and performance as well as those that promote more and better disclosure of relevant risk factors where such disclosure is lacking or inadequate.

Summary of Changes for the 2019 Shareholder Initiatives Policy Guidelines

Glass Lewis evaluates these guidelines on an ongoing basis and formally updates them on an annual basis. This year we’ve made noteworthy revisions in the following areas, which are summarized below but discussed in greater detail in the relevant section of the complete publication, available here:

Conflicting and Excluded Proposals

We have codified our policy regarding conflicting special meeting shareholder resolutions:

  • In instances where companies place on the ballot both a management and shareholder proposal requesting different thresholds for the right to call a special meeting, Glass Lewis will generally recommend voting for the lower threshold (in most instances, the shareholder proposal) and recommend voting against the higher threshold.
  • In instances where there are conflicting management and shareholder special meeting proposals and the company does not currently maintain a special meeting right, Glass Lewis may consider recommending that shareholders vote in favor of the shareholder proposal and recommending that shareholders abstain from voting on management’s proposal.
  • In instances where companies have excluded a special meeting shareholder proposal in favor of a management proposal ratifying an existing special meeting right, Glass Lewis will typically recommend against the ratification proposal as well as members of the nominating and governance committee.

Glass Lewis will also be making note of instances where the SEC has allowed companies to exclude shareholder proposals, which may result in recommendations against members of the governance committee. In recent years, we have seen the dynamic nature of the considerations given by the SEC when determining whether companies may exclude certain shareholder proposals. We understand that not all shareholder proposals serve the long-term interests of shareholders and value and respect the limitations placed on shareholder proponents when submitting proposals to a vote of shareholders, as certain shareholder proposals can unduly burden companies. However, in the event that we believe that the exclusion of a shareholder proposal was detrimental to shareholders, we may, in very limited circumstances, recommend against the members of the governance committee.

Diversity Reporting

We have revised our policy concerning shareholder proposals that request additional reporting on a company’s diversity initiatives. Glass Lewis will generally support shareholder proposals requesting that companies provide disclosure concerning the diversity of their workforce, as well as those asking for details concerning how companies are promoting diversity within their workforce. When making these recommendations, Glass Lewis will consider: (i) the industry in which the company operates and the nature of its operations; (ii) the company’s current level of disclosure on issues related to workforce diversity; (iii) the level of such disclosure at the company’s peers; and (iv) any lawsuits or accusations of discrimination within the company.

Environmental and Social Risk Oversight

We have codified our approach to reviewing how boards are overseeing environmental and social issues. For large cap companies and in instances where we identify material oversight issues, Glass Lewis will review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of environmental and/or social issues. Glass Lewis will also note instances where such oversight has not been clearly defined by companies in their governance documents.

Further, we have clarified that, in instances where it is clear that companies have not properly managed or mitigated environmental or social risks to the detriment of shareholder value, or when such mismanagement has threatened shareholder value, Glass Lewis may consider recommending that shareholders vote against members of the board who are responsible for oversight of environmental and social risks. In the absence of explicit board oversight of environmental and social issues, Glass Lewis may recommend that shareholders vote against members of the audit committee. In making these determinations, Glass Lewis will carefully review the situation, its effect on shareholder value, as well as any corrective action or other response made by the company.

Materiality Considerations

We have formalized our consideration of materiality when reviewing and making voting recommendations on shareholder proposals. We have amended our guidelines to reflect our belief that, while all companies face risks associated with environmental and social issues, these risks manifest themselves differently at each company as a result of a company’s operations, workforce, structure, and geography, among other things. Accordingly, Glass Lewis will place significant emphasis on the financial implications of a company adopting, or not adopting, any proposed shareholder resolution. We have also noted that, to assist in determining financial materiality, Glass Lewis will consider the standards developed by the Sustainability Accounting Standards Board (“SASB”).

Recoupment Provisions (“Clawbacks”)

We have revised our policy concerning proposals requesting that companies adopt enhanced recoupment provisions. In instances where companies have not adopted policies that provide sufficient protections for reputational and financial harm, we may consider supporting well-crafted resolutions seeking to expand a company’s recoupment policy.

Written Consent

We have revised our policy concerning shareholder proposals requesting that companies allow shareholders the right to action by written consent. In instances where a company has adopted a special meeting right of

15% or below and has adopted reasonable proxy access provisions, Glass Lewis will generally recommend that shareholders vote against shareholder proposals asking companies to adopt their bylaws to provide shareholders with the right to action by written consent.

The complete publication is available here.

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