ISS and Glass Lewis Policy Updates

Holly J. Gregory and John P. Kelsh are partners and Claire H. Holland is special counsel at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Gregory, Mr. Kelsh, Ms. Holland, Thomas Kim, Rebecca Grapsas, and Andrea Reed.

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, 2020 (ISS) or January 1, 2020 (Glass Lewis). [1] This post (1) summarizes the changes in proxy voting policies that apply to U.S. companies, (2) discusses the practical implications of the changes and (3) provides guidance about preparing for the 2020 proxy season in light of these developments and related deadlines.

The Appendix below includes a comprehensive list of 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 2020 relate to:

  • Problematic Governance and Capital Structures at Newly Public Companies—ISS updated its policies applicable to newly public companies to separate the policies relating to problematic governance structures and multi-class capital structures with unequal voting rights. Under the revised policies, ISS will generally recommend voting against or withholding votes from the entire board (except new nominees, who should be considered on a case-by-case basis) if, prior to or in connection with the company’s public offering, the company or its board:
    • Adopted the following bylaw or charter provisions which ISS considers materially adverse to shareholder rights: (1) supermajority vote requirements to amend the bylaws or charter, (2) a classified board structure or (3) other egregious provisions.
    • Implemented a multi-class capital structure where the classes have unequal voting rights without subjecting the multi-class capital structure to a “reasonable” time-based sunset provision. When assessing the reasonableness of a time-based sunset provision, ISS will consider (1) a company’s lifespan, (2) its post-IPO ownership structure and (3) the board’s disclosed rationale for the sunset period chosen. ISS will not consider as reasonable any sunset period exceeding seven years from the date of the IPO.
  • Shareholder Proposals Seeking an Independent Board Chair—ISS identified six factors that will increase the likelihood that it will recommend votes in favor of independent board chair shareholder proposals including, among others, poor board responsiveness to shareholder concerns and risk oversight failures.
  • Management Proposals on Share Repurchase Programs—
    • Under the revised policy, in addition to recommending votes for management proposals to institute open-market repurchase plans in which all shareholders may participate on equal terms, ISS will generally recommend voting in favor of management proposals that give the board authority to conduct open-market repurchases, absent company-specific issues concerning (1) greenmail, (2) the use of buybacks to inappropriately manipulate incentive compensation metrics (e.g., to increase EPS), (3) threats to the company’s long-term viability or (4) other company-specific factors, as applicable.
    • ISS will also evaluate on a case-by-case basis management proposals to repurchase shares directly from specified shareholders, weighing the stated rationale against the likelihood for misuse of repurchase authority (e.g., to repurchase shares from insiders at a premium to market price).
  • Board Gender Diversity—Beginning in 2020, ISS will generally recommend voting against nominating committee chairs (and potentially other directors on a case-by-case basis) at Russell 3000 or S&P 1500 companies with no women on the board unless certain mitigating factors apply. ISS revised the policy to bring the policy in effect that was announced last year but delayed for a one-year transition period and clarified the mitigating factors that ISS will consider when applying the policy.
  • Exemptions for New Nominees—ISS clarified that only directors who have served for less than one year (rather than any director who is up for election by shareholders for the first time) may be exempt from certain ISS policies, including responsibility for problematic governance issues that were in place at the company before the director joined the board.
  • Shareholder Proposals on Gender Pay Equity—ISS revised its policy with respect to shareholder proposals on gender pay equity to expand it to proposals asking for greater disclosure or reports on a company’s pay data by race or ethnicity as well as gender.
  • Board Accountability—Restrictions on Shareholders’ Rights to Amend Bylaws—ISS revised its policy to generally recommend that shareholders vote against or withhold from governance committee members until the company gives shareholders an unfettered ability to amend the bylaws or submits to a shareholder vote a proposal providing for such unfettered right. The revised policy also added to the list of items that ISS considers undue restrictions on shareholders’ rights “subject matter restrictions” (i.e., prohibitions on shareholders’ being able to amend the particular bylaws that limit their ability to amend the bylaws).
  • Use of Economic Value Added (EVA) Metrics in Secondary Financial Performance Assessment (FPA) Screen—Beginning in 2020, ISS will use EVA metrics in the secondary FPA screen of its quantitative pay-for-performance model.
  • Evergreen Provisions in Equity Compensation Plans—ISS added the presence of an evergreen (automatic share replenishment) feature as an “overriding factor” that would trigger a negative vote recommendation on an equity compensation plan proposal.

Note that ISS’ 2019 Global Policy Survey included questions regarding director overboarding and director accountability for failure to assess and mitigate climate change risk, but ISS did not update its policies on these topics for 2020. [2]

The key updates to Glass Lewis’ proxy voting policies for 2020 relate to:

  • Shareholder Proposals on Gender Pay Equity—Under a new policy, Glass Lewis will evaluate on a case-by-case basis shareholder proposals asking companies to disclose their median gender pay ratios and generally recommend voting against such proposals where companies have provided adequate information regarding their diversity initiatives and details about how they guarantee men and women equal pay for equal work.
  • Audit Committee Performance—Under the revised policy, Glass Lewis will generally recommend voting against the audit committee chair when fees paid to the company’s external auditor are not disclosed.
  • Governance Committee Performance—Under the revised policy, Glass Lewis will generally recommend voting against the governance committee chair when:
    • Directors’ records for board and committee meeting attendance are not disclosed; or
    • The company discloses that a director attended less than 75% of board and committee meetings but it is not possible to determine which specific director’s attendance was lacking.
  • Compensation Committee Performance—Under the revised policy, Glass Lewis will generally recommend voting against all members of the compensation committee when the board adopts a frequency for future say-on-pay votes other than the frequency approved by a plurality of shareholders.
  • Exclusive Forum Provisions—Currently, Glass Lewis generally recommends votes against the governance committee chair when a board has adopted an exclusive forum provision without shareholder approval. Under the revised policy, Glass Lewis may make an exception to this policy if it can be reasonably determined that the exclusive forum provision has been narrowly tailored to the specific circumstances facing the company and/or a reasonable sunset period is included.
  • Exclusion of Shareholder Proposals—Glass Lewis adopted new voting guidelines in response to the SEC’s new approach to responding to no-action requests to exclude shareholder proposals by which the SEC Staff will either issue a written response, respond orally (but not in writing) or decline to state a Under the new policy, Glass Lewis will generally recommend voting against governance committee members if:
    • The SEC declined to state a view as to whether a shareholder proposal may be excluded and the company chose to exclude the proposal from its proxy statement; or
    • The SEC orally authorized a company to exclude a proposal (but not in writing) and the company does not include any disclosure in its proxy statement about the SEC’s no-action decision.
  • Shareholder Proposals on Supermajority Vote Requirements at Controlled Companies—Under a new policy, Glass Lewis may recommend voting against shareholder proposals seeking to eliminate supermajority voting requirements that are submitted at controlled companies because Glass Lewis believes such requirements may act to protect minority shareholders.
  • Contractual Payments and Arrangements—Glass Lewis identified certain executive employment terms that may drive a negative say-on-pay vote recommendation, including but not limited to: (1) excessively broad change-in-control triggers, (2) inappropriate severance entitlements, (3) inadequately explained or excessive sign-on arrangements, (4) guaranteed bonuses (particularly if multi-year) and (5) failure to address any concerning pay practices in amended employment agreements.
  • Double-Trigger Change-in-Control Arrangements—Under the revised policy, Glass Lewis may consider any employment agreement “change-in-control” provision that is not explicitly double-trigger to be a single-trigger or modified single-trigger arrangement.
  • Company Responsiveness Following a Low Say-on-Pay Vote—Under the revised policy, Glass Lewis may consider recommending that shareholders vote against a say-on-pay proposal if the company fails to adequately disclose its engagement activities and specific changes made in response to shareholder feedback following low (<80%) shareholder support for last year’s say-on-pay proposal.
  • Post-Fiscal Year End Compensation Decisions—When evaluating say-on-pay proposals, Glass Lewis clarified that it will review any significant post-fiscal year end changes and one-time awards, particularly where the changes touch upon issues that are material to Glass Lewis’ recommendations.
  • Applying Upward Discretion for Short-Term Incentive Awards—Glass Lewis clarified that, where a company applies upward discretion when determining awards under a short-term incentive plan (e.g., by lowering goals mid-year or increasing calculated payouts), Glass Lewis expects a robust discussion of why the decision was necessary/

A more comprehensive discussion of the ISS and Glass Lewis policy updates for 2020 follows.

Topics Key Policy Updates for 2020
Governance-Related Policy Updates
Problematic Governance and Capital Structures at Newly Public Companies ISS: ISS updated its policies applicable to newly public companies to separate the policies relating to (1) problematic governance structures and (2) multi-class capital structures with unequal voting rights. ISS narrowed the scope of the first policy to specified problematic governance practices to reflect its current approach. ISS also provided additional guidance as to how it evaluates sunset provisions for capital structures that it views as problematic. In the revised policies, ISS explicitly defines “newly public companies” to generally include companies that emerge from bankruptcy, spin-offs, direct listings and companies that complete a traditional IPO.

ISS will continue to vote against or withhold from directors individually, committee members or the entire board (except new nominees, who should be considered on a case-by-case basis) if, prior to or in connection with the company’s public offering, the company or its board adopted bylaw or charter provisions that are viewed as materially adverse to shareholder rights. Under the revised policy, ISS identified the following bylaw or charter provisions as materially adverse to shareholder rights: (1) supermajority vote requirements to amend the bylaws or charter, (2) a classified board structure or (3) other egregious provisions. ISS will consider a reasonable sunset provision as a mitigating factor. ISS will vote case-by-case on director nominees in subsequent years until the adverse provision is reversed or removed.

Under the revised policy, ISS will generally recommend voting against or withholding votes from the entire board (except new nominees, who should be considered on a case-by-case basis) if, prior to or in connection with the company’s public offering, the company or its board implemented a multi-class capital structure where the classes have unequal voting rights, unless the structure is subject to a reasonable time-based sunset provision. If a problematic capital structure is not reversed or removed, ISS will continue to vote against or withhold from incumbent directors in subsequent years. When assessing the reasonableness of a time-based sunset provision, ISS will consider (1) a company’s lifespan, (2) its post-IPO ownership structure and (3) the board’s disclosed rationale for the sunset period chosen. ISS will not consider as reasonable any sunset period exceeding seven years from the date of the IPO. In ISS’ 2019 Global Policy Survey, 55% of investor respondents agreed that a seven-year maximum on a time-based sunset is appropriate.

When proposing the policy update, ISS noted that it does not expect the revised policies to significantly lower the overall rate of adverse vote recommendations it issues against directors. However, under the revised policies, it may be possible for an IPO company to avoid negative vote recommendations from ISS on its directors if the company has a reasonable time-based sunset on its dual-class share structure and does not have a classified board or supermajority vote requirements.

Glass Lewis: No change.

Shareholder Proposals Seeking an Independent Board Chair ISS: Under current policy, ISS will generally recommend voting in favor of shareholder proposals requiring that independent directors fill board chair positions, taking into consideration (1) the scope and rationale of the proposal, (2) the company’s current board leadership structure, (3) the company’s governance structure and practices, (4) company performance and (5) other relevant factors.

While ISS noted that it will continue to take a holistic approach to evaluating independent board chair shareholder proposals, the policy update identifies six factors that ISS will give substantial weight. The presence of the following factors will generally result in a vote recommendation in favor of these proposals:

  • A majority non-independent board and/or the presence of non-independent directors on key board committees;
  • A weak or poorly defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role;
  • The presence of an executive or non-independent chair in addition to the CEO; a recent recombination of the role of CEO and chair; and/or departure from a structure with an independent chair;
  • Evidence that the board has failed to oversee and address material risks facing the company;
  • A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or
  • Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’ interests.

This policy update largely codifies current ISS practice when evaluating independent board chair shareholder proposals. The new policy also reflects feedback ISS obtained through its 2019 Global Policy Survey, in which investors strongly preferred incorporating factors relating to poor board responsiveness to shareholder concerns and risk oversight failures.

ISS deleted from the policy a statement that ISS may consider one-, three- and five-year TSR performance as a mitigating factor, although it will continue to take company performance into consideration. ISS also deleted from the policy statements that ISS may consider board tenure and its relationship to CEO tenure when considering a company’s governance structure. Finally, ISS noted that it plans to update the language explaining how it analyzes independent board chair shareholder proposals and move it from the policy itself to the relevant FAQ document.

Glass Lewis: No change.

Management Proposals on Share Repurchase Programs ISS: ISS will continue to generally support management proposals that grant the board authority to engage in open-market share repurchases. However, the policy update codifies ISS’ current approach by identifying abusive practices that could lead ISS to issue a rare vote recommendation against a share repurchase program management proposal. The revised policy is intended to “provide safeguards against (1) the use of targeted share buybacks as greenmail or to reward company insiders by purchasing their shares at a price higher than they could receive in an open-market sale, (2) the use of buybacks to boost EPS or other compensation metrics to increase payouts to executives or other insiders and (3) repurchases that threaten a company’s long-term viability (or a bank’s capitalization level).”

Under the revised policy, in addition to recommending votes for management proposals to institute open-market repurchase plans in which all shareholders may participate on equal terms, ISS will generally recommend voting in favor of management proposals that give the board authority to conduct open-market repurchases, absent company-specific issues concerning (1) greenmail, (2) the use of buybacks to inappropriately manipulate incentive compensation metrics (e.g., to increase EPS), (3) threats to the company’s long-term viability or (4) other company-specific factors, as applicable.

Also under the revised policy, ISS will evaluate on a case-by-case basis certain management proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the potential for misuse of repurchase authority (e.g., to repurchase shares from insiders at a premium to market price).

As revised, the policy will apply to U.S.-incorporated companies as well as foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, regardless of their country of incorporation.

Glass Lewis: No change.

Board Gender Diversity ISS: Last year ISS adopted a new policy to generally recommend voting against nominating committee chairs (and potentially other directors on a case-by-case basis) at Russell 3000 or S&P 1500 companies with no women on the board unless certain mitigating factors apply. The policy update reflects the fact that the one-year transition period has now passed and the policy will be in effect for 2020.

The revised policy also clarifies the mitigating factors ISS will consider when applying the policy, and provides more concrete timelines for companies committing to increase board gender diversity. ISS explains that such a firm commitment will only be a mitigating factor for 2020, and not beyond, and only if the company commits to appoint at least one woman to the board within a year. ISS also clarifies that having board gender diversity the previous year (but not the current year) will only be a mitigating factor if the company also commits to appoint at least one woman to the board within a year. Under ISS’ current policy, having at least one woman on the board at the previous annual meeting was sufficient in itself to prevent a withhold/against vote recommendation.

The revised policy lists the following mitigating factors (with new language in italics):

  • Until Feb. 1, 2021, a firm commitment, as stated in the proxy statement, to appoint at least one woman to the board within a year;
  • The presence of a woman on the board at the preceding annual meeting and a firm commitment to appoint at least one woman to the board within a year; or

·      Other relevant factors, as applicable.

Finally, ISS noted that it will consider a “firm commitment” a plan, with measurable goals, outlining the way in which the board will achieve gender diversity.

Glass Lewis: No change.

Exemptions for New Nominees ISS: When making a vote recommendation on a director nominee who has been on a board for less than one year, ISS considers on a case-by-case basis whether he or she should be held responsible for an action taken by the board before he or she joined.

Consistent with ISS’ current approach, the policy update clarifies that only new nominees who have been on the board for less than one year may be exempt from responsibility for problematic governance issues. It is intended to address the fact that individuals may be considered “new nominees” under the current definition even if they have served as directors for multiple years before being up for election by shareholders (e.g., prior to a company’s IPO or at a company with a classified board).

As revised, ISS defines a “new nominee” as “a director who is being presented for election by shareholders for the first time” and adds that it will make recommendations on new nominees who have served for less than one year on a case-by-case basis depending on the timing of their appointment and the problematic governance issue in question.

Finally, ISS will move the definition of “new nominee” from the Accountability section to the beginning of the Director Election section because it factors into other ISS policies in that section relating to Independence, Responsiveness and Composition.

With respect to director attendance, currently 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. ISS revised the policy to delete the reference to “new nominees” and replace it with “nominees who served only part of the fiscal year” because what is relevant is whether the person served as a director for the entire fiscal year under review, not whether the person had been elected by shareholders previously.

ISS provided the following example of the application of the revised attendance policy: A director who was appointed to the board of a calendar-year company in April 2018 and elected by shareholders at the May 2018 annual meeting would be exempt from ISS’ revised attendance policy at the May 2019 annual meeting because he or she only served for part of the 2018 fiscal year. Notably, if a director served on the board for more than one year prior to a company’s IPO, such director would no longer be exempt from the attendance policy, as revised.

Glass Lewis: No change.

Shareholder Proposals on Gender Pay Equity ISS: Under current policy, ISS evaluates gender pay gap shareholder proposals on a case-by-case basis considering (1) the company’s current policies and disclosures on diversity and inclusion and the use of fair compensation practices, (2) whether the company has been the subject of any recent controversy, litigation or regulatory actions related to gender pay gap issues and (3) whether the company’s reporting on gender pay gap policies or initiatives lags behind that of its peers. In recent years, some companies have received shareholder proposals requesting data about pay equity on the basis of gender, race and ethnicity. ISS’ revised policy would apply to shareholder proposals asking for greater disclosure or reports on a company’s pay data by race or ethnicity as well as gender.

Glass Lewis: Under current policy, Glass Lewis evaluates gender pay equity shareholder proposals on a case-by-case basis, taking into account specified factors. Glass Lewis will consider supporting proposals requesting enhanced gender pay equity disclosure where the company has not adequately addressed the issue and there is evidence suggesting that such inattention could pose a risk to the company’s operations and/or shareholders.

Glass Lewis has codified its approach to evaluating shareholder proposals requesting that companies disclose their median gender pay ratios. Under the new policy, Glass Lewis will review such proposals (as opposed to proposals asking that gender pay ratio information be adjusted based on factors such as job title, tenure and geography) on a case-by-case basis, and will generally recommend voting against them if a company has provided adequate information regarding its diversity initiatives and details about how it ensures equal pay for men and women for equal work.

Board Accountability—Restrictions on Shareholders’ Rights to Amend Bylaws ISS: ISS has observed an increase in management proposals asking shareholders to ratify or approve requirements in excess of Exchange Act Rule 14a-8 to submit binding bylaw amendments. In response, ISS revised its policy on board accountability and will generally recommend that shareholders vote against or withhold from governance committee members until the company gives shareholders an unfettered ability to amend the bylaws or submits to a shareholder vote a proposal providing for such unfettered right.

ISS also added to the list of items it will consider undue restrictions on shareholders’ rights “subject matter restrictions,” which ISS described as prohibitions on shareholders’ being able to amend the particular bylaws that limit their ability to amend the bylaws.

Glass Lewis: No change.

Audit Committee Performance ISS: No change.

Glass Lewis: Under the revised policy, when assessing the performance of audit committee members, Glass Lewis will generally recommend voting against the audit committee chair when fees paid to the company’s external auditor are not disclosed. Additionally, when evaluating an auditor ratification proposal, Glass Lewis expects companies to disclose the balance of fees paid to the auditor for audit-related and non-audit services or else shareholders will not be able to make an informed decision on the auditor’s independence.

Governance Committee Performance ISS: No change.

Glass Lewis: Glass Lewis believes that disclosure about director attendance at board and committee meetings is crucial in order to assess director performance. Accordingly, under a new policy, Glass Lewis will generally recommend voting against the governance committee chair when:

  • Directors’ records for board and committee meeting attendance are not disclosed; or
  • The company discloses that a director attended less than 75% of board and committee meetings but it is not possible to determine which specific director’s attendance was lacking.
Compensation Committee Performance ISS: No change.

Glass Lewis: The Dodd-Frank Act requires companies to ask shareholders at least once every six years whether say-on-pay votes should be held every one, two or three years. Even though these say-on-pay frequency votes are advisory, Glass Lewis believes all members of the compensation committee should be held accountable if the board disregards the clear will of shareholders by selecting a different frequency for future say-on-pay votes than that approved by shareholders. Accordingly, under a new policy, Glass Lewis will generally recommend voting against all members of the compensation committee when the board adopts a frequency for future say-on-pay votes other than the frequency approved by a plurality of shareholders.

Exclusive Forum Provisions ISS: No change.

Glass Lewis: Currently, Glass Lewis generally recommends votes against the governance committee chair when a board has adopted an exclusive forum provision without shareholder approval. Under the revised policy, Glass Lewis may make an exception to this policy if it can be reasonably determined that the exclusive forum provision has been narrowly tailored to the specific circumstances facing the company and/or a reasonable sunset provision is included.

Exclusion of Shareholder Proposals ISS: No change.

Glass Lewis: In September 2019, the SEC announced a new approach for responding to requests from companies to exclude shareholder proposals from their proxy statements under Exchange Act Rule 14a-8. Under the new approach, the SEC Staff may respond to no-action requests in three ways: by issuing a written response letter (e.g., where broadly applicable guidance is at issue), by providing an oral response or by declining to state a view. The SEC will post a chart on its website tracking whether the SEC Staff granted, denied or chose not to comment on each company’s no-action request.

Glass Lewis believes that a company should only omit a shareholder proposal from its proxy statement if the SEC explicitly concurred with its argument that the proposal should be excluded. Accordingly, under a new policy, Glass Lewis will generally recommend voting against governance committee members if the SEC declined to state a view as to whether a shareholder proposal may be excluded and the company chose to exclude the proposal from its proxy statement. Furthermore, Glass Lewis will generally recommend voting against governance committee members if the SEC orally authorized a company to exclude a proposal “and there is no written record provided by the SEC about such determination” and the company does not include any disclosure in its proxy statement about the SEC’s no-action decision.

It is unclear whether the tracking chart to be posted to the SEC’s website could qualify as a “written record provided by the SEC about [the no-action] determination” for purposes of the policy update.

Shareholder Proposals on Supermajority Vote Requirements at Controlled Companies ISS: No change.

Glass Lewis: Glass Lewis believes that supermajority voting requirements may act as protections for minority shareholders at controlled companies (i.e., where a majority of the voting power is held by an individual or group voting together) and, therefore, should be maintained. Accordingly, under a new policy, Glass Lewis may recommend voting against shareholder proposals seeking to eliminate supermajority voting requirements that are submitted at controlled companies.

Compensation-Related Policy Updates

ISS issued preliminary FAQs on U.S. compensation policies for 2020 on November 13, 2019 and will provide additional details about compensation-related policy updates in FAQs and a whitepaper to be published in mid-December 2019.

Use of EVA Metrics in Secondary FPA Screen ISS: In 2019, ISS included 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 for purposes of ISS’ pay-for-performance evaluation.

Beginning in 2020, ISS will use EVA metrics in the secondary Financial Performance Assessment (FPA) screen of its quantitative pay-for-performance model rather than the GAAP metrics ISS used in 2019. The four EVA metrics to be used in the screen are EVA Margin, EVA Spread, EVA Momentum vs. Sales and EVA Momentum vs. Capital. ISS will calculate the EVA metrics based on audited financial data reported in annual and quarterly public filings.

ISS noted that several measures in the current FPA screen (e.g., ROIC and EBITDA growth) have comparable measures under the EVA framework. The GAAP metrics will continue to be included in ISS’ research reports for informational purposes and may inform ISS’ overall evaluation of a company’s long-term pay and performance alignment, but will no longer be used in the quantitative pay-for-performance screen for 2020.

In December 2019, ISS will publish an Updated Pay-for-Performance Mechanics whitepaper which will provide further details on the introduction of EVA metrics into the secondary FPA screen. More information on the EVA methodology and metrics may be found on the ISS EVA Resource Center accessible here.

Glass Lewis: No change.

Evergreen Provisions in Equity Compensation Plans ISS: Under its U.S. Equity Plan Scorecard analysis, ISS will generally vote against an equity compensation plan proposal if specified “overriding factors” apply. ISS added the presence of an “evergreen” funding provision in the plan as a new overriding factor that would trigger a negative vote recommendation. An evergreen feature provides for automatic share funding additions, typically annually, over the life of the plan.

ISS disfavors evergreen provisions because they may “perpetuate plans with shareholder-unfriendly features” and avoid regular shareholder reapproval of plans, which is no longer required and has declined significantly post-tax reform.

Glass Lewis: No change.

Contractual Payments and Arrangements ISS: No change.

Glass Lewis: Glass Lewis clarified its approach to evaluating ongoing and new contractual payments and executive entitlements. Glass Lewis generally opposes contractual agreements that are excessively restrictive in favor of the executive or that could potentially incentivize behaviors that are not in a company’s best interest.

Glass Lewis clarified the list of executive employment terms that may drive a negative say-on-pay vote recommendation, including but not limited to:

  • Excessively broad change-in-control triggers;
  • Inappropriate severance entitlements;
  • Inadequately explained or excessive sign-on arrangements;
  • Guaranteed bonuses (especially as a multiyear occurrence); and
  • Failure to address any concerning practices in amended employment agreements.

Glass Lewis believes that renewing or amending employment agreements that provide for problematic pay practices represent a missed opportunity for a company to rectify shareholder unfriendly provisions and align its policies with current best practices. Problematic pay practices under the revised policy include but are not limited to: excessive change-in-control entitlements, modified single-trigger change-in-control entitlements, excise tax gross-ups and multi-year guaranteed awards.

Double-Trigger Change-in Control Arrangements ISS: No change.

Glass Lewis: Glass Lewis considers double-trigger change-in-control arrangements (e.g., requiring both a change in control and termination (or constructive termination)) to be best practice. Under the revised policy, Glass Lewis may consider any employment agreement “change in control” provision that is not explicitly double-trigger to be a single-trigger or modified single-trigger arrangement.

Further, Glass Lewis views excessively broad “change in control” definitions as potentially problematic because they may result in an executive receiving additional compensation without any meaningful change in status or duties.

Company Responsive-less Following Low Say-on-Pay Vote ISS: No change.

Glass Lewis: Under the revised policy, Glass Lewis may consider recommending that shareholders vote against the upcoming say-on-pay proposal if the company fails to adequately disclose its engagement activities and specific changes made in response to shareholder feedback following low shareholder support for last year’s say-on-pay proposal.

The policy update discusses what Glass Lewis considers a proper response following low (<80%) shareholder support for the most recent say-on-pay proposal. It expects differing degrees of responsiveness depending on the level of opposition in a single year and the persistence of opposition over time. Glass Lewis added as an example of an appropriate response the implementation of changes that directly respond to large shareholders’ concerns about the company’s compensation program, where reasonable.

Post-Fiscal Year End Compensation Decisions ISS: No change.

Glass Lewis: When evaluating say-on-pay proposals, Glass Lewis clarified that it will review any significant post-fiscal year end changes and one-time awards, particularly where the changes touch upon issues that are material to Glass Lewis’ recommendations. Problematic practices or payments may impact Glass Lewis’ vote recommendation on the say-on-pay proposal.

Applying Upward Discretion for Short-Term Incentive Awards ISS: No change.

Glass Lewis: Glass Lewis clarified its expectations regarding disclosure of mid-year adjustments made to short-term incentive plans. Under the revised policy, where a company has applied upward discretion when determining awards under a short-term incentive plan (e.g., lowering goals mid-year or increasing calculated payouts), Glass Lewis expects a robust discussion of why the decision was necessary.

Peer Group for Pay-for-Performance Model ISS: No change.

Glass Lewis: Glass Lewis provided additional insight about its framework for determining how well companies link executive compensation to performance. Glass Lewis is more likely to issue negative vote recommendations against say-on-pay proposals and potentially compensation committee members at companies that demonstrate a weaker link between pay and performance but certain qualitative factors (e.g., overall incentive structure, significant forthcoming changes to the compensation program or reasonable long-term payout levels) may partially mitigate Glass Lewis’ concerns.

The policy update also deletes references to Equilar because Glass Lewis will replace Equilar with CGLytics as its provider of peer group and pay-for-performance data beginning in 2020. As revised, the policy explains that Glass Lewis generally measures compensation and performance against a peer group of companies that may overlap, in part, with a company’s self-disclosed peers.

Guidance in Preparing for the 2020 Proxy Season

Key Dates
Until December 6, 2019 Companies with annual meetings scheduled to be held between February 1 and September 15, 2020 may notify ISS of any changes to their self-selected peer companies for purposes of benchmarking 2019 CEO compensation
Mid-November 2019 Publication of all updated ISS proxy voting guidelines for 2020 on ISS website
Early- to Mid-December 2019 Publication on ISS website of:

  • Updated 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)
  • Updated Pay-for-Performance Mechanics whitepaper, which will detail the introduction of Economic Value Added metrics into the secondary Financial Performance Assessment screen of ISS’ pay-for-performance quantitative model for the U.S. market
Fourth Quarter 2019 Glass Lewis is expected to provide information about its peer review methodology and updates to its pay-for-performance model and analysis
January 1, 2020 Updated 2020 Glass Lewis policies take effect for meetings that occur on or after this date
January 2020 ISS will evaluate new shareholder proposals received by U.S. companies and make any necessary updates to its proxy voting guidelines for 2020
January 31, 2020 Deadline for S&P 500 companies holding meetings between March 1 and June 30, 2020 to elect to receive draft proxy voting reports by registering contact details with ISS
February 1, 2020 Updated 2020 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) 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 (1) is in the Russell 3000 or Russell MicroCap Index, (2) has an annual meeting scheduled to be held between February 1 and September 15, 2020 and (3) 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 2019 compensation decisions), notify ISS of updates to its self-selected peer companies for purposes of CEO compensation benchmarking by December 6, 2019. 
      • 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 [3] 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 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 2020 report.
      • ISS will conduct a separate peer submission process in mid-2020 for companies with annual meetings scheduled to be held after September 15, 2020.
    • As of January 1, 2020, Glass Lewis will use data from CGLytics rather than Equilar to generate peer groups used in formulating its vote recommendations. We expect Glass Lewis to provide further information about its peer review methodology and updates to its pay-for-performance model and analysis by the end of the
  • Verify data used by the proxy advisory firms in developing their
    • 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 vote 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 2019 IDR program, Glass Lewis will automatically notify it when the 2020 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 vote recommendation preview process by registering contact details with ISS using the Contact Information Form available here before ISS’ deadline, which is January 31, 2020 for meetings held between March 1 and June 30, 2020; 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.
    • In March 2019, Glass Lewis announced that it was piloting a new Report Feedback Statement (RFS) service to a limited number of U.S. companies and shareholder proponents for the 2019 proxy season. The pilot program allowed subscribers to the RFS service to submit statements noting their differences of opinion with Glass Lewis’ analysis of their proposals (as opposed to factual errors), which Glass Lewis then distributed to its clients along with its own response to the statement. For more information about the RFS service, see our Sidley Update available here and the Glass Lewis FAQs available here.
  • 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) 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 report, including Appendix, is available here.

Endnotes

1 ISS, Americas Proxy Voting Guidelines Updates for 2020 (Nov. 11, 2019), available here; ISS; Executive Summary of Global Proxy Voting Guidelines Updates and Process for 2020 ISS Benchmark Policy (Nov. 11, 2019), available here; ISS, U.S. Compensation Policies for 2020—Preliminary Frequently Asked Questions (Nov. 13, 2019), available here; Glass Lewis, 2020 Proxy Paper Guidelines: United States (Nov. 1, 2019), available here; and Glass Lewis, 2020 Proxy Paper Guidelines: Shareholder Initiatives (Nov. 1, 2019), available here.(go back)

2ISS, 2019 Global Policy Survey—Summary of Results (Sep. 11, 2019), available here.ISS, Americas Proxy Voting Guidelines Updates for 2020 (Nov. 11, 2019), available here; ISS; Executive Summary of Global Proxy Voting Guidelines Updates and Process for 2020 ISS Benchmark Policy (Nov. 11, 2019), available here; ISS, U.S. Compensation Policies for 2020—Preliminary Frequently Asked Questions (Nov. 13, 2019), available here; Glass Lewis, 2020 Proxy Paper Guidelines: United States (Nov. 1, 2019), available here; and Glass Lewis, 2020 Proxy Paper Guidelines: Shareholder Initiatives (Nov. 1, 2019), available here.(go back)

3 ISS, U.S. Peer Group Selection Methodology and Issuer Submission Process—Frequently Asked Questions (Jan. 7, 2019).(go back)

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