Glass Lewis and ISS Issue Final 2021 U.S. Voting Policies

Andrea K. Wahlquist and Sabastian V. Niles are partners, and Justin C. Nowell is an associate at Wachtell Lipton Rosen & Katz. This post is based on their Wachtell memorandum.

Glass Lewis recently released its 2021 U.S. Voting Policies, which heighten focus on board diversity and related disclosures, board tenure and refreshment, and environmental and social risk oversight. The new policies also address incentive compensation plans and shareholder proposals. The new policies generally become effective for shareholder meetings held on or after January 1, 2021. ISS also recently released its final U.S. Voting Policies, which track previously issued draft policies and become effective for shareholder meetings held on or after February 1, 2021.

Glass Lewis

Notable updates to Glass Lewis’ voting policy guidelines include:

Board Gender Diversity. Glass Lewis reaffirmed its commitment to board gender diversity and will now generally recommend voting against the nominating committee chair of a board that has fewer than two female directors, starting with shareholder meetings held after January 1, 2022. In the interim, Glass Lewis will apply its existing guideline of a minimum of one female board member for meetings held in 2021 and will flag companies if their boards have fewer than two female directors. Although Glass Lewis’ voting policy guidelines did not adopt a board diversity policy that goes beyond gender or disclosure (see below), it would not be surprising to see a voting policy that addresses ethnic and/or racial diversity on boards in the future. This is particularly true given ISS’ adoption of such an approach and enhanced scrutiny from investors on boards lacking racial and ethnic diversity.

Disclosure of Director Diversity and Skills. Beginning in 2021, Glass Lewis’ reports on S&P 500 companies will assess company disclosure in its proxy statement relating to board diversity, skills and director nomination process, including: (1) a board’s current percentage of racial/ethnic diversity; (2) whether a board’s definition of diversity explicitly includes gender and/or race/ethnicity; (3) whether a board has adopted a policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees, otherwise known as the “Rooney Rule”; and (4) board skills disclosure.

Board Refreshment. Beginning in 2021, Glass Lewis will note instances where the average tenure of non-executive directors is 10 years or more, and no new independent directors have joined the board in the past five years. Glass Lewis would include cautionary language in its research reports but would not recommend negative voting action (i.e., “Withhold” or “Against” votes) solely for insufficient board refreshment.

Environmental and Social Risk Oversight. Glass Lewis stresses the importance of ensuring the sustainability of companies’ operations, as insufficient oversight of material environmental and social issues can present risks that can harm stakeholder interests. Beginning in 2021, Glass Lewis will note as a concern for S&P 500 companies any lack of clear disclosure in their proxy statements and governing documents (e.g., committee charters) regarding board-level oversight and accountability with respect to environmental and social issues. After 2021, Glass Lewis will begin recommending votes against the governance committee chair of companies that fail to provide explicit disclosure concerning the board’s role in overseeing these issues. This change reflects a compromise that affords shareholders meaningful disclosure while providing companies the flexibility to determine the best structure of oversight for themselves.

Short- and Long-Term Incentives. Glass Lewis notes that companies should provide clear disclosure as to the rationale for any pandemic-related changes to short-term incentive plans (e.g., increasing payouts, lowering performance goals or pro-rating performance periods). Absent extraordinary circumstances, significantly reducing the percentage of long-term incentives that are performance-based may cause Glass Lewis to recommend against a company’s say-on-pay proposal. Companies that may have modified their short-term and/or long-term incentive plans in light of the pandemic would be well-advised to include robust disclosure regarding the changes that were made, as well as the rationale for, and impact of, each change, as compared to the original plans.

Shareholder Proposals. Glass Lewis has also released its 2021 ESG Initiatives, which revise its recommendations on certain proposals involving: (1) diversity (i.e., EEO-1) reporting; (2) management-proposed ESG resolutions; and (3) climate change. In general, Glass Lewis will take a case-by-case approach, making recommendations based on a variety of factors (e.g., how existing disclosure compares to peers and material impact on shareholders), and will typically vote in favor of proposals that require enhanced disclosure.

ISS

As addressed in our prior memos (here and here), ISS’ updated policies focus on board diversity, as well as environmental and social risk oversight, and include updated approaches regarding forum selection clauses addressing state law or federal securities law claims. These final proxy voting policies largely track ISS’ previously issued draft policies, which reflect ISS’ willingness to be flexible when companies explain with specificity and context the scope and rationale for their decisions. It is also worth noting that these policies do not reverse any of its prior guidance as to how it expects to evaluate pandemic-related adjustments to compensation programs.

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As we have noted over this year, the pandemic has accelerated the focus on ESG related issues impacting all aspects of the business of public companies. It will be important for companies to remain nimble in these areas and proactively address (and, where appropriate, discuss in external disclosures and reporting) foreseeable ESG-related risks, and actions to be taken in respect of these risks, in order to avoid adverse recommendations from Glass Lewis and ISS.

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