ISS and Glass Lewis Policy Updates

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

• 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