Glass Lewis’ 2022 Policy Guidelines: Important Updates

Shaun Bisman is a Principal and Han Wen Zhang is an Analyst at Compensation Advisory Partners LLC. This post is based on their CAP memorandum.

Glass Lewis recently released its 2022 policy guidelines, with new amendments on compensation, board diversity, and environmental and social areas. The key changes for 2022 focus on diversity and SPAC governance. This post discusses key compensation and Environmental, Social and Governance (ESG) updates.

Executive Compensation-Related Updates

Linking Executive Pay to Environmental and Social Criteria

Glass Lewis does not maintain a policy on the inclusion of environmental and social (E&S) metrics in a company’s short- or long-term incentive program. However, if a company includes E&S metrics in its variable incentive program, Glass Lewis expects robust disclosure on the metrics selected, the rigor of performance targets, and the determination of corresponding payout opportunities. For qualitative E&S metrics, it expects the company to provide shareholders with a thorough understanding of how these metrics will be or were assessed.

Short- and Long-Term Incentives

In 2021, Glass Lewis codified additional factors that will be considered when evaluating a company’s short- and long-term incentive plan. These factors included clearly disclosed justifications to accompany any significant changes to a company’s incentive plan and inappropriate performance-based award allocation. For 2022, Glass Lewis reaffirms these expectations with the added clarification that adjustments to GAAP financial results will be considered in its assessment of the incentive’s effectiveness at tying executive pay to performance for both short- and long-term incentives.

Grants of Front-Loaded Awards

Glass Lewis will continue to approach front-loaded awards with scrutiny because the grants may preclude improvements or changes to reflect evolving business strategies. This year, Glass Lewis specified that it will continue to examine the quantum of the award on an annualized basis for the full vesting period of the awards. It will also consider the impact of the overall size of awards on dilution of shareholder wealth.

Diversity-Related Updates

Board Gender Diversity

Glass Lewis expanded its policy on board gender diversity. Glass Lewis’ current vote recommendation is based on the requirement of having at least one female board member and it will note as a concern boards with fewer than two female directors. As noted in last year’s update, beginning in 2022, it will generally recommend against the chair of the nominating committee when there are fewer than two gender diverse directors at Russell 3000 companies and the entire nominating committee when there are no gender diverse directors. Companies outside the Russell 3000 index or that have boards with six or fewer total directors will continue to be held to the 2021 policy of one gender diverse director at a minimum.

Beginning in 2023, Glass Lewis will transition from a fixed numerical approach to a percentage-based approach. It will generally recommend against the nominating chair when the board is not at least 30 percent gender diverse at Russell 3000 companies. Additionally, when making voting recommendations, Glass Lewis will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending against when boards have provided a sufficient rationale or plan to address the lack of diversity on the board.

Glass Lewis replaced references in its guidelines to female directors with “gender diverse directors”, defined as women and directors who identify with a gender other than male or female.

State Laws on Gender Diversity and Underrepresented Community Diversity

In 2021, Glass Lewis began making recommendations in accordance with board composition requirements set forth in applicable state laws in addition to its standard policy on board diversity. In 2022, Glass Lewis expanded its discussion into two sections covering (i) state laws on gender diversity and (ii) state laws on underrepresented community diversity.

On gender diversity, in addition to its standard policy on board diversity, Glass Lewis will recommend in accordance with applicable state laws mandating board composition requirements. It will generally refrain from recommending against directors when applicable state laws do not mandate board composition requirements, are non-binding, or solely impose disclosure or reporting requirements. On underrepresented community diversity, Glass Lewis recognizes that states have also begun to encourage board diversity beyond gender through legislation. It will generally recommend in line with applicable state laws mandating board composition requirements.

Stock Exchange Diversity Disclosure Requirements

A new section outlines Glass Lewis’ approach to a recent disclosure rule adopted by the Nasdaq stock exchange. Beginning the later of (i) August 8, 2022 or (ii) the date the company files its proxy statement for its 2022 annual meeting, companies listed on the Nasdaq stock exchange will be required to disclose certain board diversity statistics annually in a standardized format in the proxy statement or on the company’s website. Glass Lewis will recommend against the chair of the governance committee when the required disclosure has not been provided.

Disclosure of Director Diversity and Skills

Glass Lewis began assessing the quality of disclosure on the mix of diverse attributes and skills of directors in company proxy statements in 2021. New in 2022, it may recommend against the chair of the nominating and/or governance committee of S&P 500 companies with particularly poor disclosure. Beginning in 2023, it will generally recommend against the chair of the nominating and/or governance committee for companies in the S&P 500 index that have not provided any disclosure of individual or aggregate racial/ethnic minority demographic information.

Environmental, Social and Governance-Related Updates

Overall Approach to Environmental, Social and Governance (ESG)

Glass Lewis has expanded its discussion of ESG initiatives in a new section titled Glass Lewis’ Overall Approach to ESG. Here it provides additional details of considerations when evaluating these topics. To summarize, Glass Lewis evaluates all E&S issues through the lens of long-term shareholder value. It believes that companies should be considering material environmental and social factors in all aspects of their operations and that companies should provide shareholders with disclosures that allow them to understand how these factors are being considered and how attendant risks are being mitigated. Glass Lewis’ comprehensive review of its policies on ESG is additionally published in its Proxy Paper Guidelines for Environmental, Social & Governance Initiatives, available here.

Environmental and Social Risk Oversight

Glass Lewis currently notes as a concern when boards of S&P 500 companies do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. It has reaffirmed that in 2022 it will generally recommend voting against the governance chair of such companies if they fail to provide explicit disclosure concerning the board’s role in overseeing these issues. Additionally, in 2022 Glass Lewis will begin noting as a concern when boards of Russell 1000 companies do not provide clear disclosure concerning the board-level oversight afforded to E&S issues. It continues to believe that while it is important that these issues are overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, companies should determine the best structure for this oversight.

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