ISS and Glass Lewis Policy Updates for the 2019 Proxy Season

Holly J. Gregory and John P. Kelsh are partners and Rebecca Grapsas is counsel at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Gregory, Mr. Kelsh, Ms. Grapsas, Claire H. HollandCorey Perry, Kai H.E. Liekefett and Thomas J. Kim.

Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass Lewis) have updated their proxy voting policies for shareholder meetings held on or after February 1, 2019 (ISS) or January 1, 2019 (Glass Lewis). [1] This post (i) summarizes the changes in proxy voting policies that apply to U.S. companies, (ii) discusses the practical implications of the changes and (iii) provides guidance about preparing for the 2019 proxy season in light of these developments and related deadlines.

The Appendix to the complete publication (available here) identifies the various circumstances in which ISS and Glass Lewis may recommend voting against one or more directors in an uncontested election.

The key changes to ISS’ proxy voting policies for 2019 relate to:

  • Board Gender Diversity—Beginning in 2020, ISS will generally recommend voting against nominating committee chairs (and potentially other directors) at companies with no female directors unless certain mitigating factors apply.
  • Economic Value Added Data for Pay-For-Performance Evaluation—In 2019, solely for informational purposes, ISS will include on a phased-in basis Economic Value Added (EVA) data in its proxy research reports as a supplement to GAAP/accounting performance measures to provide additional insight into company performance when evaluating pay-for-performance alignment. ISS will continue to explore the potential future use of EVA data as part of its pay-for-performance evaluation.
  • Management Ratification Proposals
    • Under a new policy, ISS will generally recommend voting against management proposals to ratify provisions of the company’s existing charter or bylaws, unless such provisions align with best practice.
    • ISS will also recommend voting against or withholding from individual directors, members of the governance committee or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering specified factors.
    • Under a revised policy, if a management proposal to ratify existing charter or bylaw provisions fails to receive majority support, ISS will conduct a board responsiveness analysis for the next annual meeting.
  • Chronic Poor Attendance by Directors—In cases of “chronic poor attendance” by a director (defined as three or more consecutive years of poor attendance without reasonable explanation), in addition to recommending votes against the director(s) with chronic poor attendance, ISS will generally recommend voting against or withholding from appropriate members of the nominating/governance committee or the full board.
  • Director Performance Evaluation—Under a revised policy, when evaluating director performance, ISS will assess a company’s 5-year total shareholder returns (TSR) as part of the initial screen for underperformance rather than during the second step of its evaluation.
  • Reverse Stock Splits—Under a revised policy, ISS will evaluate on a case-by-case basis certain management proposals to implement reverse stock splits, taking into consideration (i) disclosure of substantial doubt about the company’s ability to continue as a going concern without additional financing, (ii) the company’s rationale or (iii) other factors as applicable.
  • Shareholder Proposals on Environmental and Social (E&S) Issues—Under a revised policy, ISS expanded the factors it will consider when analyzing E&S shareholder proposals to include whether there are significant controversies, fines, penalties or litigation associated with the company’s E&S practices.
  • Excessive Non-Employee Director Compensation—ISS will delay until at least 2020 its previously-announced new policy of potentially issuing negative vote recommendations against members of the board committee responsible for setting or approving excessive non-employee director compensation in two or more consecutive years without a compelling rationale or other mitigating factors.

The key updates to Glass Lewis’ proxy voting policies for 2019 relate to:

  • Board Gender Diversity—Beginning in 2019, Glass Lewis will generally recommend voting against nominating committee chairs (and potentially other nominating committee members) at companies with no female directors unless the company is outside of the Russell 3000 index or the board has provided a sufficient rationale for not having any female directors. This rationale may include a timetable for addressing the lack of diversity on the board and any notable restrictions affecting board composition (e.g., director nomination agreements with significant investors).
  • Management Ratification Proposals—Under a new policy, where a company has excluded a special meeting shareholder proposal in favor of a management proposal ratifying an existing special meeting right that is materially different from the shareholder proposal, Glass Lewis will typically recommend voting against the management proposal and against the governance committee chair. In very limited circumstances, Glass Lewis may recommend voting against governance committee members if a company excludes any conflicting shareholder proposal (not limited to special meeting proposals) based on SEC no-action relief if Glass Lewis believes the exclusion was detrimental to shareholders.
  • Conflicting Special Meeting Proposals—Glass Lewis has codified its policy with respect to vote recommendations on special meeting proposals.
    • Where both management and shareholder proposals requesting different thresholds for the right to call a special meeting are on the ballot, Glass Lewis will generally recommend voting for the lower threshold (typically the shareholder proposal) and against the higher threshold.
    • Where conflicting management and shareholder proposals are on the ballot and the company does not currently maintain a special meeting right, Glass Lewis may consider recommending that shareholders vote for the shareholder proposal and abstain from voting on the management proposal.
  • Director Performance Evaluation—When making voting recommendations on directors based on company performance, in addition to the company’s stock price performance, Glass Lewis will consider the company’s overall corporate governance, pay-for-performance alignment and responsiveness to shareholders.
  • E&S Risk Oversight—Where mismanagement of environmental or social risks has threatened or decreased shareholder value, Glass Lewis may consider recommending that shareholders vote against directors responsible for oversight of E&S risks (or, if not specified, audit committee members), after reviewing the situation, its effect on shareholder value and any corrective action taken by the company.
  • Shareholder Proposals on E&S Issues—When evaluating E&S shareholder proposals, Glass Lewis will focus on the financial implications of a company adopting, or not adopting, the proposal, taking into account the standards developed by the Sustainability Accounting Standards Board (SASB) with respect to financial materiality.
  • Written Consent Shareholder Proposals—Under a revised policy, where companies have adopted a special meeting right of 15% or lower and reasonable proxy access provisions, Glass Lewis will generally recommend voting against shareholder proposals requesting that companies adopt a shareholder right to action by written consent.
  • Diversity Reporting Shareholder Proposals—Glass Lewis will generally recommend in favor of shareholder proposals requesting that companies provide enhanced disclosure on the diversity of their workforce and actions taken to promote diversity within their workforce.
  • Auditor Ratification—Glass Lewis expanded the factors it will consider when evaluating auditor ratification proposals to include (i) the auditor’s tenure, (ii) a pattern of inaccurate audits, and (iii) any ongoing litigation or significant controversies, which may call into question an auditor’s effectiveness. In limited cases, these factors may cause Glass Lewis to recommend voting against the proposal.
  • Virtual-Only Shareholder Meetings—Beginning in 2019, Glass Lewis will generally recommend voting against governance committee members where the board plans to hold a virtual-only shareholder meeting and the company does not provide disclosure assuring shareholders that they will have the same participation rights as at an in-person meeting.
  • Director and Officer Indemnification—Glass Lewis clarified that it believes it is appropriate for a company to provide indemnification and/or maintain liability insurance to cover its directors and officers so long as the terms of such agreements are reasonable.
  • Net Operating Loss (NOL) Protective Amendments—Where a company proposes adoption of a NOL poison pill and concurrently proposes adoption of protective bylaw amendments specifically restricting certain share transfers, if Glass Lewis supports the terms of a particular NOL poison pill, it will generally support the protective bylaw amendments in the absence of significant concerns with the specific terms of that proposal.
  • Quorum Requirements—Although Glass Lewis prefers a quorum requirement of a majority of outstanding shares entitled to vote, it will generally support management proposals seeking shareholder approval of a lower quorum requirement if the reduced quorum is at least one-third of shares entitled to vote, either in person or by proxy, considering specified factors.
  • Excise Tax Gross-Ups—Under a new policy, Glass Lewis will consider recommending against the say-on-pay proposal and compensation committee members when new excise tax gross-up provisions are adopted in executive employment agreements, particularly if the company had committed not to provide any such entitlements in the future.
  • Contractual Payments and Arrangements—Glass Lewis specified certain contractual terms relating to executive compensation that may contribute to a negative voting recommendation on a say-on-pay proposal, including, among others, excessive sign-on awards and multiyear guaranteed bonuses.
  • Materially Decreased Executive Compensation Disclosure for Smaller Reporting Companies—Glass Lewis may consider recommending against compensation committee members where materially decreased CD&A disclosure substantially impacts shareholders’ ability to make an informed assessment of the company’s executive pay practices.
  • Grants of Front-Loaded Awards—In a new discussion on the grants of front-loaded awards, Glass Lewis noted that it will evaluate such grants with particular scrutiny, taking into account the quantum and design of the awards and the company’s rationale for granting such awards.
  • Clawback Provisions—Where a company maintains a clawback policy that merely meets minimum legal requirements, Glass Lewis clarified that the lack of more robust recoupment tools may inform its overall view of the company’s compensation program. Further, if a board has adopted a comprehensive clawback policy that provides sufficient protections against financial and reputational harm, Glass Lewis will generally not support a shareholder proposal seeking amendment of that policy.

A more comprehensive discussion of the policy updates follows.

Governance-Related Policy Updates [2]

Board Gender Diversity

ISS: In 2019, boards with no female directors will receive a notation in their proxy research reports, but ISS will not issue negative vote recommendations against directors on the basis of a lack of gender diversity on the board. Beginning in 2020, where a board has no female directors, ISS will generally recommend voting against the nominating committee chair and potentially other directors responsible for director nominations (e.g., at companies with no formal nominating committee), on a case-by-case basis.

The new policy will apply to companies in either the Russell 3000 or S&P 1500 indices. ISS will also consider on a case-by-case basis any exceptional circumstances that may temporarily explain or excuse the lack of board gender diversity. Mitigating factors include:

  • A firm commitment in the proxy statement to appoint at least one female to the board in the near term (“near term” is not defined);
  • The presence of a female on the board at the preceding annual meeting; or
  • Other relevant factors as applicable.

In ISS’ 2018 Governance Principles Survey, only 3% of investor respondents replied that they do not consider the lack of female directors on a public company board to be problematic (down from 8% in 2017). [3] ISS noted that board gender diversity is linked to better financial performance and that the presence of at least one female director has become “the market norm.”

During the one-year grace period, boards should reevaluate their composition and consider adding qualified female directors. At a minimum, companies with no female directors should consider how best to disclose either a plan to increase gender diversity on the board or their rationale for not having any female directors.

Glass Lewis: As announced in November 2017, beginning in 2019, where a board has no female directors, Glass Lewis will generally recommend voting against the nominating committee chair. Depending on factors such as the company’s size, industry and governance profile, Glass Lewis may also recommend voting against other nominating committee members.

Glass Lewis will assess a company’s disclosure of diversity considerations and may refrain from issuing negative vote recommendations (i) if a company is outside of the Russell 3000 Index or (ii) when a board has provided a sufficient rationale for not having any female directors. This rationale may include, but is not limited to, a disclosed timetable for addressing the lack of diversity on the board and any notable restrictions affecting the board’s composition (e.g., director nomination agreements with significant investors).

In light of a new California law enacted in September 2018 requiring all corporations headquartered in California to have at least one female director by the end of 2019, in 2019, if a company headquartered in California does not have at least one female director, Glass Lewis will generally recommend voting against the nominating committee chair unless the company has disclosed a clear plan for addressing the issue by the end of 2019.

Management Proposals to Ratify Existing Charter or Bylaw Provisions

ISS: Under a new policy, ISS will generally recommend voting against management proposals to ratify provisions of the company’s existing charter or bylaws, unless such provisions align with best practice. Further, ISS will recommend voting against or withholding from individual directors, members of the governance committee or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:

  • The presence of a shareholder proposal addressing the same issue on the same ballot;
  • The board’s rationale for seeking ratification;
  • Disclosure of actions to be taken by the board should the ratification proposal fail;
  • Disclosure of shareholder engagement regarding the board’s ratification request;
  • The level of impairment to shareholders’ rights caused by the existing provision;
  • The history of management and shareholder proposals on the provision at the company’s past meetings;
  • Whether the current provision was adopted in response to the shareholder proposal;
  • The company’s ownership structure; and
  • Previous use of ratification proposals to exclude shareholder proposals.

These policy updates signify steps ISS is taking to discourage the practice of management seeking to ratify certain existing shareholder rights in order to block a shareholder proposal that seeks more favorable shareholder rights. ISS noted that in 2018 the SEC Staff permitted seven companies to exclude special meeting shareholder proposals where management put forth a “conflicting” proposal seeking ratification of the existing special meeting right provision.

Finally, under a revised policy, if a management proposal to ratify existing charter or bylaw provisions fails to receive majority support, ISS will conduct a board responsiveness analysis at the next annual meeting, considering specified factors.

Currently, the board responsiveness analysis is only triggered if the board fails to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year.

Glass Lewis: Under a new policy, where a company has excluded a special meeting shareholder proposal in favor of a management proposal ratifying an existing special meeting right that is materially different from the shareholder proposal, Glass Lewis will typically recommend voting against the management ratification proposal and against the governance committee chair.

Further, where the SEC has allowed a company to exclude a shareholder proposal and Glass Lewis believes that the exclusion was detrimental to shareholders, Glass Lewis may, in very limited circumstances, issue negative vote recommendations against governance committee members.

In the discussion of this new policy, Glass Lewis acknowledged that “certain shareholder proposals can unduly burden companies” but explained the need for the policy by referencing the “dynamic nature of the considerations given by the SEC when determining whether companies may exclude certain shareholder proposals.”

Conflicting Special Meeting Proposals

ISS: No change.

Glass Lewis: Glass Lewis will generally recommend voting for management or shareholders proposals seeking a special meeting right that falls within the 10-15% range. Where there are both management and shareholder proposals requesting different thresholds for the right to call a special meeting, Glass Lewis will generally recommend voting for the lower threshold (typically the shareholder proposal) and recommend voting against the higher threshold.

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 for the shareholder proposal and abstain from voting on management’s proposal.

Chronic Poor Attendance

ISS: In cases of “chronic poor attendance” by a director (defined as three or more consecutive years of poor attendance without reasonable explanation), in addition to recommending votes against the director(s) with chronic poor attendance, ISS will generally vote against or withhold from appropriate members of the nominating/governance committee or the full board.

Under current policy, ISS will generally issue negative vote recommendations against directors (except new nominees) who attend less than 75% of the aggregate of their board and committee meetings for the period in which they served unless an acceptable reason is disclosed. The new policy codifies the approach ISS has taken when reviewing instances of chronic poor attendance by directors on a case-by-case basis. ISS may also apply this approach where there is a long-term pattern of absenteeism, such as poor attendance the previous year and three out of the past four years.

Under the updated policy, if a director has chronic poor attendance without reasonable justification:

  • After three years, ISS will issue a negative vote recommendation against the nominating/governance committee chair;
  • After four years, ISS will issue negative vote recommendations against the full nominating/governance committee; and
  • After five years, ISS will issue negative vote recommendations against all nominees.

Glass Lewis: No change.

Director Performance Evaluation

SS: ISS’ policy on evaluating director performance is triggered when a board lacks mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Under the current policy, sustained poor performance is measured by 1 and 3 year total shareholder returns (TSR) in the bottom half of a Russell 3000 company’s 4-digit GICS industry group. If ISS detects sustained poor performance, it then considers the company’s 5-year TSR and operational metrics. Under a revised policy, when evaluating director performance, ISS will assess a company’s 5-year TSR as part of the initial screen for underperformance (along with the existing 1 and 3 year screens) rather than during the second step of the evaluation.

Glass Lewis: When making voting recommendations on directors based on company performance, Glass Lewis clarified that, in addition to the company’s stock price performance, it will consider the company’s overall corporate governance, pay-for-performance alignment and responsiveness to shareholders. Previously Glass Lewis’ recommendation was based solely on stock price performance in the bottom quartile of the company’s sector for the last three years.

Reverse Stock Splits

ISS: Currently, ISS will recommend in favor of management proposals to implement a reverse stock split when the number of authorized shares will be proportionately reduced. Under a revised policy, ISS clarified that it will also support such proposals if the effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy. Also under the revised policy, ISS will evaluate on a case-by-case basis certain management proposals to implement reverse stock splits (e.g., by companies that are not listed on a major stock exchange), taking into consideration (i) disclosure of substantial doubt about the company’s ability to continue as a going concern without additional financing, (ii) the company’s rationale or (iii) other factors as applicable.

Glass Lewis: No change.

E&S Risk Oversight

ISS: No change.

Glass Lewis: Glass Lewis believes that companies should have an appropriate board structure in place to monitor and manage material risks related to E&S issues. For large cap companies and where Glass Lewis identifies 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 companies have not clearly defined such oversight in their governance documents. In 2018, Glass Lewis began identifying in its proxy research reports the directors assigned with specific oversight of E&S issues at the committee level.

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 issuing negative vote recommendations against directors responsible for oversight of environmental and social risks. If the company’s governance documents do not specify which directors are responsible for overseeing environmental and social risk, Glass Lewis may issue negative vote recommendations against audit committee members. 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.

Shareholder Proposals on E&S Issues

ISS: Under a revised policy, ISS expanded the factors it will consider when analyzing environmental and social (E&S) shareholder proposals to include whether there are significant controversies, fines, penalties or litigation associated with the company’s environmental or social practices. This update codifies factors ISS already takes into consideration.

Glass Lewis: When evaluating E&S shareholder proposals, Glass Lewis will place significant emphasis on the financial implications of a company adopting, or not adopting, the proposal. Glass Lewis will consider the standards developed by the Sustainability Accounting Standards Board (SASB) when determining financial materiality.

Written Consent Shareholder Proposals

ISS: No change.

Glass Lewis: Glass Lewis has revised its policy concerning shareholder proposals requesting that companies allow shareholders the right to action by written consent. If a company has adopted a special meeting right of 15% or below and has adopted reasonable proxy access provisions (but does not specify what qualifies as “reasonable”), Glass Lewis will generally recommend voting against shareholder proposals asking companies to provide shareholders with the right to action by written consent. Glass Lewis believes that special meetings are preferable to action by written consent because they provide more protection for minority shareholders and better ensure that management is able to respond to shareholder concerns.

Shareholder Proposals on Diversity Reporting ISS: No change.

Glass Lewis: Glass Lewis believes that companies should provide shareholders with adequate information to be able to assess the management and mitigation of any risks relating to human capital. Accordingly, Glass Lewis will generally recommend in favor of shareholder proposals requesting that companies provide enhanced disclosure on the diversity of their workforce or details about actions taken to promote diversity within their workforce. When making these recommendations, Glass Lewis will consider:

  • The industry in which the company operates and the nature of its operations;
  • The company’s current level of disclosure on issues related to workforce diversity;
  • The level of such disclosure at the company’s peers; and
  • Any lawsuits or accusations of discrimination within the company.

Auditor Ratification Proposals

ISS: No change.

Glass Lewis: Glass Lewis expanded the factors it will consider when evaluating auditor ratification proposals to include (i) the auditor’s tenure, (ii) a pattern of inaccurate audits, and (iii) any ongoing litigation or significant controversies, which may call into question an auditor’s effectiveness. In limited cases, these factors may cause Glass Lewis to recommend voting against the proposal.

Glass Lewis also supplemented the discussion of auditor ratification in its guidelines to reflect updated disclosure standards relating to expanded auditor reports and communication of critical audit matters.

Virtual-Only Shareholder Meetings

ISS: No change.

Glass Lewis: As announced in November 2017, beginning in 2019, Glass Lewis will generally recommend voting against governance committee members where the board plans to hold a virtual-only shareholder meeting and the company does not provide disclosure that assures shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting.

Glass Lewis provided the following examples of “effective disclosure” about shareholder participation rights at a virtual-only shareholder meeting:

  • Addressing the ability of shareholders to ask questions during the meeting, including time guidelines for shareholder questions, rules around what types of questions are allowed, and rules for how questions and comments will be recognized and disclosed to meeting participants;
  • Procedures, if any, for posting appropriate questions received during the meeting, and the company’s answers, on the investor page of the company’s website as soon as practical after the meeting;
  • Addressing technical and logistical issues related to accessing the virtual meeting platform; and
  • Procedures for accessing technical support to assist in the event of any difficulties accessing the virtual meeting.

This policy is another data point for companies to consider when evaluating the pros and cons of moving to or continuing to hold virtual-only shareholder meetings. Companies that have determined to hold virtual-only shareholder meetings should review their meeting processes and consider including detailed disclosure about how shareholders will be able to participate in the meeting to try to avoid negative vote recommendations from Glass Lewis.

Director and Officer Indemnification

ISS: No change.

Glass Lewis: In a new discussion about director and officer indemnification, Glass Lewis explicitly stated its belief that it is appropriate for a company to provide indemnification and/or maintain liability insurance to cover its directors and officers so long as the terms of such agreements are reasonable.

NOL Protective Amendments

ISS: No change.

Glass Lewis: When proposing the adoption of a NOL poison pill (i.e., a rights plan adopted for the purpose of preserving NOLs), a company will often concurrently propose the adoption of bylaw amendments specifically restricting certain share transfers in order to protect the company’s deferred tax assets. Previously Glass Lewis would support adoption of the NOL poison pill and oppose the protective bylaw amendments. Glass Lewis revised its policy on NOL poison pills to clarify that, in such cases, if it supports the terms of a particular NOL poison pill, it will generally support the protective bylaw amendments in the absence of significant concerns with the specific terms of the proposal.

Quorum Requirements

ISS: No change.

Glass Lewis: In a new discussion about quorum requirements, Glass Lewis expressed its general belief that a majority of outstanding shares entitled to vote is an appropriate quorum requirement for the transaction of business at shareholder meetings. Glass Lewis added that it will generally support management proposals seeking shareholder approval of a lower quorum requirement if the reduced quorum is at least one-third of shares entitled to vote, either in person or by proxy. When evaluating such proposals, Glass Lewis will also consider the company’s specific facts and circumstances, such as size and shareholder base.

Compensation-Related Policy Updates

In addition to the updates summarized below, ISS (i) clarified its pay-for-performance model and how peer groups contribute to recommendations, (ii) described its expectations for enhanced disclosure when the board uses discretion in determining bonuses and (iii) explained in greater detail the rating scale it uses when assessing the structure and disclosure of compensation programs.

ISS issued preliminary FAQs on U.S. compensation policies for 2019 on November 21, 2018 and will provide additional details about compensation-related policy updates in FAQs to be published in December 2018. In the preliminary FAQs, ISS announced changes to its Equity Plan Scorecard methodology for 2019. First, ISS is introducing a new “overriding” factor that will be triggered if a company’s equity compensation program is estimated to dilute shareholders’ holdings by more than 20% (S&P 500 companies) or 25% (Russell 3000 companies). Second, ISS is updating the change in control (CIC) vesting factor to provide points based on the quality of disclosure of CIC vesting provisions rather than the actual vesting treatment. Full points will be earned if the equity plan specifically discloses the CIC vesting treatment for both performance- and time-based awards. No points will be earned if the plan is silent—or provides for merely discretionary vesting—for either type of award.

Use of EVA Data in Financial Performance Assessment Screen

ISS: In 2019, ISS will include on a phased-in basis EVA data in its proxy research reports as a supplement to GAAP/accounting performance measures to provide additional insight into company performance for purposes of ISS’ pay-for-performance evaluation. There will be no methodology change for 2019; the EVA data will be featured solely for information purposes.

ISS will continue to explore the potential future use of EVA data as part of the financial performance assessment screen of its quantitative pay-for-performance evaluation.

Glass Lewis: No change.

Excise Tax Gross-Ups

ISS: No change.

Glass Lewis: Glass Lewis is strongly opposed to excise tax gross-ups and believes that the inclusion of excise tax gross-up provisions in new or amended agreements is unacceptable. Under a new policy, Glass Lewis will consider recommending against the say-on-pay proposal and compensation committee members when new excise tax gross-up provisions are adopted in executive employment agreements, particularly if the company had committed not to provide any such entitlements in the future.

Contractual Payments and Arrangements

ISS: No change.

Glass Lewis: Glass Lewis specified certain contractual terms relating to executive compensation that may contribute to a negative voting recommendation on a say-on-pay proposal, including:

  • Excessive sign-on awards;
  • Multiyear guaranteed bonuses; and
  • Executive employment terms such as key man clauses, board continuity conditions, excessively broad change in control triggers and poor wording of employment agreements.

When evaluating severance and sign-on arrangements, Glass Lewis will consider general U.S. market practices and the size and design of entitlements. Glass Lewis noted the following:

  • It believes companies should abide by predetermined severance payouts in most circumstances;
  • It believes the basis and total value of severance should be reasonable and not exceed the upper limit of general market practice (most commonly Glass Lewis sees multiples of salary and/or bonus of three or less);
  • It considers the inclusion of long-term incentives in the cash severance calculations to be inappropriate; and
  • It will consider severance sums actually paid to departing executives and, in special cases, their appropriateness under the circumstances.

Materially Decreased Executive Compensation Disclosure for Smaller Reporting Companies

ISS: No change.

Glass Lewis: When analyzing the performance of compensation committee members, Glass Lewis will consider the impact of materially decreased proxy statement disclosure regarding executive compensation policies and procedures and may consider recommending against compensation committee members where a reduction in disclosure substantially impacts shareholders’ ability to make an informed assessment of the company’s executive pay practices.

The impetus for the new policy is that the SEC amended the definition of “smaller reporting company” (SRC) effective in September 2018. The new definition enables a company to qualify as an SRC if (i) it has less than $250 million of public float (increased from $75 million), or (ii) it has (a) no public float or a public float that is less than $700 million and (b) less than $100 million in annual revenues.

The amended definition significantly expands the number of companies that are eligible to qualify as an SRC and take advantage of the related scaled disclosure requirements. For SRCs, the summary compensation table is only required to disclose two (rather than three) years of information covering the principal executive officer and two additional executive officers (rather than the principal executive officer, principal financial officer and three additional executive officers). Further, SRCs are not required to provide a CD&A or tables detailing grants of plan-based awards, vesting or exercise of equity awards or a quantification of termination payments.

Grants of Front-Loaded Awards

ISS: No change.

Glass Lewis: In a new discussion about grants of front-loaded awards (i.e., large grants that are intended to serve as compensation for multiple years), Glass Lewis noted that it will evaluate grants of front-loaded awards with particular scrutiny, taking into account the quantum and design of the awards and the company’s rationale for granting such awards.

Glass Lewis believes that provisions around change of control or separations of service must ensure that executives do not receive excessive payouts that do not reflect shareholder experience or company performance.

Glass Lewis expects any front-loaded awards to include a firm commitment not to grant additional awards for a defined period. If a company violates its commitment not to grant further awards, Glass Lewis may recommend voting against the pay program unless the company provides a compelling rationale.

In analyzing the grant of front-loaded awards to executives, Glass Lewis will consider the quantum of the award on an annualized basis (as opposed to the lump sum) and as compared to past practice and peer data, among other benchmarks.

Clawback Provisions

ISS: No change.

Glass Lewis: Glass Lewis broadened its policy on clawback provisions now that its focus has shifted from (i) whether a company maintains a clawback policy that satisfies minimum legal requirements to (ii) the specific terms of clawback policies.

Even though the SEC has not finalized the Dodd-Frank clawback rules which are more stringent than the Sarbanes-Oxley clawback rules, Glass Lewis revised its policy to make clear that it expects boards to adopt detailed bonus recoupment policies that go beyond the Sarbanes-Oxley requirements to prevent executives from retaining performance-based awards that were not truly earned. Glass Lewis believes that clawbacks should be triggered, at a minimum, in the event of a reinstatement of financial results or similar revision of performance indicators upon which bonuses were based. Where a company maintains only a bare-minimum clawback policy, Glass Lewis clarified that the lack of more robust recoupment tools may inform its overall view of the company’s compensation program.

Further, Glass Lewis made clear that if a board has adopted a comprehensive clawback policy, it will generally not support a shareholder proposal seeking amendment of that policy. However, Glass Lewis may consider supporting a shareholder proposal seeking to expand a company’s clawback policy if Glass Lewis believes the company has not adopted a clawback policy that provides sufficient protections against financial and reputational harm for the company.

Excessive Non-Employee Director Compensation

ISS: In 2019, ISS will not issue negative vote recommendations against members of the board committee responsible for setting or approving excessive non-employee director compensation in two or more consecutive years without a compelling rationale or other mitigating factors. ISS will delay implementation of this policy until at least 2020 because it is still developing its methodology for identifying non-employee director pay outliers for purposes of the policy. ISS will provide details on the revised methodology in the compensation-related FAQs to be published in December 2018.

Glass Lewis: No change.

Guidance in Preparing for the 2019 Proxy Season

Key Dates

Until December 7, 2018 Companies with annual meetings scheduled to be held between February 1 and September 15, 2019 may notify ISS of any changes to their self-selected peer companies for purposes of benchmarking 2018 CEO compensation
December 7, 2018 Publication of full set of ISS proxy voting guidelines for 2019
December 31, 2018 [4] Publication of:

• ISS FAQs on U.S. proxy voting policies and procedures

• ISS FAQs on U.S. executive compensation policies and equity compensation plans (including the setting of annual burn rate thresholds and pay-for-performance quantitative concern thresholds)

December 31, 2018 Companies in the Russell 3000 Index may submit updates to their peer groups on file with Equilar, which Glass Lewis uses to generate peer groups used in formulating its voting recommendations
January 1, 2019 Updated 2019 Glass Lewis policies take effect for meetings that occur on or after this date
January 2019 ISS will evaluate new shareholder proposals received by U.S. companies and make any necessary updates to its proxy voting guidelines for 2019
January 31, 2019 Deadline for S&P 500 companies holding meetings between March 1 and June 30, 2019 to elect to receive draft proxy voting reports by registering contact details with ISS
February 1, 2019 Updated 2019 ISS policies take effect for meetings that occur on or after this date

Companies may wish to review and become familiar with the various circumstances in which ISS and Glass Lewis may recommend a negative vote in uncontested director elections (set forth in the Appendix of the complete publication, available here) or on other proposals that may be included in their proxy statements. Companies may also wish to contact their analysts at ISS shortly after filing the proxy statement to discuss any issues that could potentially trigger a negative vote recommendation. Companies may engage with Glass Lewis outside of the proxy solicitation period and outside of proxy season.

In addition to the steps discussed above, we recommend that companies:

  • Provide updates, if any, to self-selected compensation peer groups.
    • If the company (i) is in the Russell 3000 or Russell MicroCap Index, (ii) has an annual meeting scheduled to be held between February 1 and September 15, 2019 and (iii) made changes to its peer group used to set compensation for the fiscal year that will be disclosed in the next proxy statement (i.e., for 2018 compensation decisions), notify ISS of updates to its self-selected peer companies for purposes of CEO compensation benchmarking by December 7, 2018.
      • A company’s self-selected compensation peer companies are a key input to ISS’ peer selection process. However, ISS makes clear in its Peer Group Selection Methodology FAQs [5] that there are instances in which a company’s self-selected peer may not appear in the ISS peer group, such as when it does not meet the applicable size constraints or inclusion would lead to an overrepresentation of a particular industry within the ISS peer group.
    • Companies should take advantage of the opportunity to indicate any changes to their self-selected compensation peer groups since the fiscal year covered by ISS’ last report. Companies can submit peer company updates using the Governance Analytics platform, information about which is available here. If a company does not provide an updated peer group to ISS, the previously collected peer group will be used to determine ISS’ peers for the company’s 2019 report.
      • ISS will conduct a separate peer submission process in mid-2019 for companies with annual meetings scheduled to be held after September 15, 2019.
    • For its pay-for-performance analysis, Glass Lewis uses the top 15 peers from a peer group generated by Equilar based on a company’s self-disclosed peer group and the strength of connection between peer companies (i.e., one-way vs. reciprocal connections). Equilar updates its market-based peers twice yearly—in January and June. Companies in the Russell 3000 Index that plan on filing an updated peer group in their 2019 proxy statements may submit updates to their peer groups on file with Equilar by December 31, 2018 using the form available here.
      • Verify data used by the proxy advisory firms in developing their reports.
    • Glass Lewis allows companies to review an Issuer Data Report (IDR) comprising the key data points it uses in developing its report on the company’s annual meeting. IDRs do not contain Glass Lewis’ analysis or voting recommendations. IDRs are distributed by email to participating companies approximately 3-4 weeks prior to the annual meeting (although sometimes as close as 16 days prior), and companies generally have 48 hours (or 24 hours, in limited circumstances) to review the IDR and suggest corrections, with supporting public documentation; the review time may be over a weekend. Glass Lewis will only issue IDRs for companies that have released all proxy materials no less than 30 days before the annual meeting date. If a company was a participant in the 2018 IDR program, Glass Lewis will automatically notify it when the 2019 sign-up period begins. For more information, see the Glass Lewis Issuer Data Report website, which includes a link for companies to request an email notification that is typically sent 1-7 business days in advance of when an IDR is available for review.
      • Carefully review draft “preview” and/or final proxy voting reports relating to the company—with input from outside counsel and compensation consultants, as appropriate—and notify the relevant proxy advisory firm of any errors as soon as possible.
    • S&P 500 companies that have registered with ISS to receive draft reports have a very narrow timeframe in which to correct any data errors or to otherwise engage with ISS on any issues; companies that are not in the S&P 500 generally do not receive access to draft reports.
      • S&P 500 companies may participate in the voting recommendation preview process by registering contact details with ISS using the Contact Information Form available here before ISS’ deadline, which is January 31, 2019 for meetings held between March 1 and June 30, 2019; for meetings outside of this timeframe contact information must be provided at least 35 days prior to the meeting. Companies that received and responded to a draft in the previous year need not register again, but may update their list of contacts if needed.
      • Draft reports (which do not include a company’s QualityScores) are typically sent approximately 2-4 weeks prior to the annual meeting, and will likely be closer to 2 weeks during the height of proxy season.
      • All comments and corrections are due in writing by the deadline specified in the cover letter accompanying the draft report, generally within 1-2 business days.
    • Companies may report a data discrepancy in a Glass Lewis report through the “Report an Error or Omission” page on Glass Lewis’ website; because Glass Lewis bases its analysis entirely on publicly available information, a company must precisely identify where within the company’s public disclosure Glass Lewis can find and verify the correct information with which to revise its report.
      • Review the composition of the board and the company’s corporate governance and compensation practices for potential vulnerabilities under ISS and Glass Lewis policy updates (for example, in relation to board gender diversity or virtual-only shareholder meetings) and decide what action, if any, to take in light of this assessment.
      • Develop outreach tactics to engage with key institutional investors on governance-related matters, especially if the company had a majority-supported shareholder proposal at its last annual meeting that has not been implemented, and/or relatively low support for “say-on-pay” (less than 70% of votes cast for ISS and below 80% for Glass Lewis).
      • Review corporate governance and compensation disclosure included in last year’s proxy statement, and make improvements where appropriate.

The complete publication, including Appendix, is available here.

Endnotes

1ISS, 2019 Americas Proxy Voting Guidelines Updates (Nov. 19, 2018), available here; ISS; Executive Summary of 2019 Global Proxy Voting Guidelines Updates and Process (Nov. 19, 2018), available here; ISS, U.S. Compensation Policies for 2019—Preliminary Frequently Asked Questions (Nov. 21, 2018), available here; Glass Lewis, 2019 Proxy Paper Guidelines: United States (Oct. 24, 2018), available here; and Glass Lewis, 2019 Proxy Paper Guidelines: Shareholder Initiatives (Oct. 24, 2018), available here.(go back)

2Glass Lewis also added new policies for 2019 applicable to OTC-listed companies and business development companies that are beyond the scope of this post.(go back)

3ISS, 2018 Governance Principles Survey, Summary of Results (Sep. 18, 2018),  available here.(go back)

4In the Executive Summary of 2019 Global Proxy Voting Guidelines Updates and Process, ISS indicates that updated FAQs will be published on ISS’ website on December 31, 2018 but in the U.S. Compensation Policies for 2019—Preliminary Frequently Asked Questions, ISS indicates that the compensation-related FAQs will be published in mid-December 2018.(go back)

5ISS, U.S. Peer Group Selection Methodology and Issuer Submission Process—Frequently Asked Questions (Nov. 9, 2017), available here.(go back)

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