Preparing for the 2023 Proxy Season

David M. Lynn, Scott Lesmes, and John Hensley are Partners at Morrison & Foerster LLP. This post is based on a Morrison & Foerster memorandum by Mr. Lynn, Mr. Lesmes, Mr. Hensley, and Leemor Banai.

Public companies need to consider recent developments when preparing for the 2023 proxy and annual reporting season. We summarize key regulatory developments, recent guidance, important disclosure considerations and updates to the voting guidelines of the proxy advisory firms.

Pay Versus Performance

In August 2022, the SEC adopted the pay versus performance disclosure requirements that the SEC was directed to promulgate by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act).[1] Companies (subject to certain exceptions discussed below) will need to comply with these disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after December 16, 2022.

New Item 402(v) of Regulation S-K requires that companies provide a new table disclosing specified executive compensation and financial performance measures for the company’s five most recently completed fiscal years. This table will include, for the principal executive officer (PEO) and, as an average, for the company’s other named executive officers (NEOs), the summary compensation table measure of total compensation and a measure of “executive compensation actually paid,” as specified by the rule. The financial performance measures to be presented in the table are:

  • Cumulative total shareholder return (“TSR”) for the company;
  • TSR for the company’s self-selected peer group;
  • The company’s net income; and
  • A financial performance measure chosen by the company and specific to the company that, in the company’s assessment, represents the most important financial performance measure the company uses to link compensation actually paid to the company’s NEOs to company performance for the most recently completed fiscal year.

In addition, Item 402(v) requires a clear description of the relationships between each of the financial performance measures included in the table and the executive compensation actually paid to its PEO and, on average, to its other NEOs over the company’s five most recently completed fiscal years. The company will be required to also include a description of the relationship between the company’s TSR and its peer group TSR.

Item 402(v) also requires disclosure of a list of three to seven financial performance measures that the company determines are its most important measures. Companies are permitted, but not required, to include non-financial measures in the list if they considered such measures to be among their three to seven “most important” measures.

Item 402(v) permits companies to voluntarily provide supplemental measures of compensation or financial performance (in the table or in other disclosure), and other supplemental disclosures, so long as any such measure or disclosure is clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure.

For purposes of Item 402(v), the definition of “executive compensation actually paid” for a fiscal year is, generally, total compensation as reported in the Summary Compensation Table for that year (i) less the change in the actuarial present value of pension benefits, (ii) less the grant-date fair value of any stock and option awards granted during that year, (iii) plus the pension service cost for the year and, in the case of any plan amendments (or initiations), the associated prior service cost (or less any associated credit), and (iv) plus the change in fair value of outstanding and unvested stock and option awards during that year (or as of the vesting date or the date the company determines the award will not vest, if within the year), as well as the fair value of new stock and option awards granted during that year as of the end of the year (or as of the vesting date or the date the company determines the award will not vest, if within the year). Adjustments (i) and (iii) with respect to pension plans do not apply to smaller reporting companies, because they are not otherwise required to disclose executive compensation related to pension plans.

Under Item 402(v) of Regulation S-K, a company will be required to disclose the cumulative TSR of the company, which is to be computed in accordance with the requirements set forth in Item 201(e) of Regulation S-K. Item 201(e) of Regulation S-K sets forth the specific disclosure requirements for the company’s stock performance graph, which is required to be included in the annual report to security holders provided for by Rules 14a-3 and 14c-3 under the Securities Exchange Act of 1934, as amended (the Exchange Act). Item 201(e) provides that cumulative TSR is calculated by dividing the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and the difference between the company’s share price at the end and the beginning of the measurement period, by the share price at the beginning of the measurement period.

The final rules require a company to disclose weighted peer group TSR (weighted according to the respective companies’ stock market capitalization at the beginning of each period for which a return is indicated), using either the same peer group used for purposes of Item 201(e) of Regulation S-K or a peer group used in the company’s Compensation Discussion and Analysis for purposes of disclosing a company’s compensation benchmarking practices. If the peer group is not a published industry or line‑of‑business index, the identity of the companies composing the group must be disclosed in a footnote. A company that has previously disclosed the composition of the companies in its peer group in prior filings with the SEC would be permitted to comply with this requirement by incorporation by reference to those filings. Consistent with the approach specified in Item 201(e) of Regulation S-K, if a company changes the peer group used in its pay versus performance disclosure from the one used in the previous fiscal year, it will be required to include tabular disclosure of peer group TSR for that new peer group (for all years in the table), but must explain, in a footnote, the reason for the change, and compare the company’s TSR to that of both the old and the new group.

The final rules require companies to separately tag each value disclosed in the table, block-text tag the footnote and relationship disclosure, and tag specific data points (such as quantitative amounts) within the footnote disclosures, all using Inline XBRL.

The new rules apply to all reporting companies, except foreign private issuers, registered investment companies, and EGCs. Smaller reporting companies are required to provide disclosure under Item 402(v) of Regulation S-K, but the disclosure is scaled for those companies, consistent with the existing scaled executive compensation disclosure requirements applicable to smaller reporting companies. Specifically, smaller reporting companies would:

  • Only be required to present three, instead of five, fiscal years of disclosure under new Item 402(v) of Regulation S-K;
  • Not be required to disclose amounts related to pensions for purposes of disclosing executive compensation actually paid;
  • Not be required to present peer group TSR;
  • Be permitted to provide two years of data, instead of three, in the first applicable filing after the rules became effective; and
  • Be required to provide disclosure in the prescribed table in Inline XBRL format beginning in the third filing in which the smaller reporting company provides pay versus performance disclosure.

Companies (except for smaller reporting companies) will be required to provide the information for three years in the first proxy or information statement in which they provide the disclosure, adding another year of disclosure in each of the two subsequent annual proxy filings that require the Item 402(v) disclosure.

Smaller reporting companies initially will be required to provide the information for two years, adding an additional year of disclosure in the subsequent annual proxy or information statement that requires this disclosure. In addition, a smaller reporting company will only be required to tag the information using Inline XBRL data beginning in the third filing in which it provides pay versus performance disclosure, instead of the first filing.

Clawback Policies

In October 2022, the SEC adopted Rule 10D-1 under the Exchange Act, which directs U.S. national securities exchanges to adopt listing standards requiring listed companies, including foreign private issuers, EGCs and smaller reporting companies, to establish and enforce policies which must provide that, if the company is required to prepare an accounting restatement, including to correct an error that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period, the company must recover “reasonably promptly” from any current or former “executive officer” incentive-based compensation that was erroneously awarded during the three years preceding the date such a restatement was required. The recoverable amount is the amount of incentive-based compensation received in excess of the amount that otherwise would have been received had it been determined based on the restated financial measure and must be computed without regard to any taxes paid.[2]

The SEC notes in the adopting release that there are situations where, under current accounting standards, certain changes to a company’s financial statements do not represent error corrections, and therefore would not trigger application of the company’s clawback policy:

  • Retrospective application of a change in accounting principle;
  • Retrospective revision to reportable segment information due to a change in the structure of an issuer’s internal organization;
  • Retrospective reclassification due to a discontinued operation;
  • Retrospective application of a change in reporting entity, such as from a reorganization of entities under common control;
  • Retrospective adjustment to provisional amounts in connection with a prior business combination (IFRS filers only); and
  • Retrospective revision for stock splits, reverse stock splits, stock dividends or other changes in capital structure.

The listing standards must require that a company recover all erroneously awarded compensation, even if there was no misconduct or failure of oversight on the part of an individual executive officer, subject to limited impracticability exceptions available only in circumstances where:

  • Direct expenses paid to third parties to assist in enforcing the policy would exceed the amount to be recovered and the company has made a reasonable attempt to recover;
  • Recovery would violate home country law that existed at the time of adoption of the rule, and the company provides an opinion of counsel to that effect to the exchange; or
  • Recovery would likely cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the Internal Revenue Code.

Companies will be required to disclose their recovery policies as an element of the listing standards adopted pursuant to Rule 10D-1, and the SEC has adopted amendments that require disclosure about, and the filing of, a company’s recovery policy. Under these filing requirements, a company will be required to:

  • File its clawback policy as an exhibit to its annual report;
  • Include new checkboxes to the cover page of its annual report, with one checkbox indicating whether the financial statements included in the report reflect the correction of an error to previously issued financial statements, and one checkbox indicating whether any of the error corrections require a recovery analysis under the company’s clawback policy; and
  • Disclose in its proxy statement how the company applied the clawback policy if, at any time during the last completed fiscal year, either: (i) a financial restatement that triggered the clawback policy was completed; or (ii) there was an outstanding balance of excess incentive-based compensation from the application of the policy to a prior restatement.

In a situation when a company completes a financial restatement that triggered the company’s clawback policy, the company will be required to disclose the following details about the pending recovery of erroneously awarded compensation in its executive compensation disclosure required by Item 402 of Regulation S-K:

  • The date on which the company was required to prepare the restatement;
  • The aggregate dollar amount of excess incentive-based compensation attributable to the restatement (including an analysis of how the recoverable amount was calculated);
  • If the incentive-based compensation was determined based on a stock price or TSR‑related financial reporting measure, the estimates used to determine the excess incentive‑based compensation attributable to the restatement (and an explanation of the methodology used to calculate such estimates);
  • The aggregate dollar amount of such excess incentive-based compensation that remains outstanding at the end of its last completed fiscal year;
  • If the aggregate dollar amount of erroneously awarded compensation has not yet been determined, this fact must be disclosed, along with the reasons, and the company must include the previous information in the next filing required to include Item 402 compensation information;
  • If recovery would be impracticable, for each current and former named executive officer and for all other current and former executive officers as a group, the company must disclose the amount of recovery forgone and a brief description of the reason the company decided not to pursue recovery; and
  • For each current or former named executive officer, the amounts of incentive-based compensation that are subject to clawback that are still outstanding for more than 180 days since the date the company determined the recoverable amount.

The SEC’s final rules become effective on January 27, 2023. Each national securities exchange must file its proposed listing standards with the SEC no later than February 27, 2023, and those listing standards must become effective no later than November 28, 2023. Each issuer subject to the listing standards will be required to adopt a clawback policy no later than 60 days following the date on which the applicable standards become effective.

If a company fails to adopt a clawback policy, disclose the policy and its application, or enforce the policy’s recovery provision, it may be subject to delisting. Companies are urged to review their existing clawback policies to consider what changes, if any, may be required. Companies may want to wait to make substantive changes to their clawback policies until their respective national securities exchange proposes its own listing standards, because those listing standards may differ from the requirements specified in Rule 10D-1.

Shareholder Proposals

In July 2022, the SEC proposed amendments to three of the thirteen substantive bases for exclusion of a shareholder proposal under Rule 14a-8 of the Exchange Act.[3] The proposed amendments would introduce new tests to be used for determining whether:

  • a shareholder proposal has been substantially implemented under Rule 14a-8(i)(10);
  • a shareholder proposal substantially duplicates another proposal that will appear on a company’s proxy card under Rule 14a-8(i)(11); and
  • a shareholder proposal substantially duplicates a proposal that appeared in a previous proxy statement for purposes of determining if the proposal is eligible to be resubmitted under Rule 14a-8(i)(12).

The SEC proposes to amend Rule 14a-8(i)(10) to provide that a shareholder proposal may be excluded as substantially implemented “[i]f the company has already implemented the essential elements of the proposal.” The SEC indicates in the proposing release that an analysis focused on the “specific elements of a proposal would provide a reliable indication of whether the actions taken to implement a proposal are sufficiently responsive to the proposal such that it has been substantially implemented.” The SEC indicates that, in order to identify essential elements of a shareholder proposal, the “degree of specificity of the proposal and of its stated primary objectives would guide the analysis.” If Rule 14a-8 is amended as proposed, a shareholder proposal could be excluded as substantially implemented “only if the company has implemented all of its essential elements.” Under this analytical framework, a company would be permitted to exclude a proposal “it has not implemented precisely as requested if the differences between the proposal and the company’s actions are not essential to the proposal.” The SEC notes that, if a shareholder proposal contains more than one element, each essential element would need to be implemented to exclude the proposal. If a shareholder proposal contains only one essential element, that single essential element must be implemented to exclude the proposal.

The SEC proposes to amend Rule 14a-8(i)(11) to state that a proposal “substantially duplicates” another proposal if it “addresses the same subject matter and seeks the same objective by the same means.” In the proposing release, the SEC  addresses the example of two proposals, with one proposal requesting that the company publish in newspapers a detailed statement of each of its direct or indirect political contributions or attempts to influence legislation and another proposal requesting a report to shareholders on the company’s process for identifying and prioritizing legislative and regulatory public policy advocacy activities. Under Rule 14-8(i)(11) as it is proposed to be amended, the two proposals would not be deemed substantially duplicative because they seek different objectives by different means.

The SEC also proposes to revise Rule 14a-8(i)(12) to the same “substantially duplicates” standard as under Rule 14a-8(i)(11). The proposed amendments would provide that, for purposes of Rule 14a-8(i)(12), a proposal “substantially duplicates” another proposal if it “addresses the same subject matter and seeks the same objective by the same means.”

These proposed amendments to Rule 14a-8 would likely make it more difficult to exclude shareholder proposals from proxy statements using these three bases for exclusion.

Universal Proxy and Voting Disclosure Changes

The SEC adopted the universal proxy rules in November 2021, which apply to shareholder meetings held after August 31, 2022.[4] The universal proxy rules require the use of a universal proxy card for all proxy solicitations related to contested elections for directors that are not exempt under Rule 14a-2(b) of the Exchange Act. The universal proxy rules do not apply to elections held by registered investment companies and business development companies.

Under the universal proxy rules, each party in a contested election will be required to distribute its own universal proxy card that includes the names of all the director nominees for whom proxies are solicited, either by the company or by dissident shareholders. This allows shareholders voting by proxy to pick and choose among the different slates of candidates, similar to how voting for directors occurs in person at a contested shareholder meeting. The universal proxy card must clearly distinguish between each of the company’s and dissident’s nominees, as well as proxy access nominees, if applicable. However, if there are proxy access nominees but no dissident nominees, the universal proxy card requirement will not apply.

The proxy cards for a contested election that the company and dissidents are required to provide shareholders must:

  • List each nominee in alphabetical order by last name;
  • Distinguish between company nominees, dissident nominees, and proxy access nominees;
  • Present each nominee in the same font type, style, and size; and
  • Prominently disclose the maximum number of nominees for which voting authority can be granted.

The new rules further require director nominees to consent to be named in any proxy statement (not just the company’s proxy statement) relating to the shareholder meeting at which directors will be elected. In addition to any advance notice requirements set forth in the company’s charter documents, a dissident shareholder seeking to run an election contest must provide notice to the company no later than 60 calendar days prior to the anniversary of the company’s previous year’s annual meeting date. The dissident shareholder is required to file its definitive proxy statement with the SEC by the later of 25 calendar days prior to the meeting date or five calendar days after the company files its definitive proxy statement. The dissident will have to solicit the holders of shares representing at least 67% of the voting power for the election of directors in order to trigger the universal proxy card requirements. In the event a dissident provides notice of a contested election, the company must disclose in its proxy statement how it intends to treat proxies granted in favor of a dissident’s nominees if the dissident abandons its solicitation or if the dissident fails to comply with the universal proxy rules.

The SEC amended rules relating to voting options and standards that are applicable to all director elections, including elections occurring in the 2023 proxy season. Amended Rule 14a-4(b) requires all proxy cards for director elections to include an “against” option instead of a “withhold authority to vote” option, if applicable state law gives legal effect to a vote against a nominee. If applicable state law does not give legal effect to votes cast against a nominee, a company is not required to include an “against” option, but it must provide specified means to withhold authority to vote for each nominee. The amended rule further mandates companies to give shareholders an opportunity to “abstain” from voting, as opposed to withholding authority to vote, when a director election is governed by a majority voting standard. Lastly, companies are required to disclose the methods by which votes will be counted, including the treatment and effect of a “withhold” vote in the director election.

Filing “Glossy” Annual Reports on EDGAR

In June 2022, the SEC adopted amendments to the electronic filing requirements.[5] As a result of these amendments, companies will be required to file on EDGAR the “glossy” annual report that companies provide as part of their annual meeting proxy materials. The electronic submission of glossy annual reports to the SEC should capture the graphics, styles of presentation, and prominence of disclosures contained in the report. The as-filed version should not reformat, resize, or otherwise redesign the report for purposes of its submission on EDGAR. Companies must begin to comply with these amendments beginning on January 11, 2023. The current guidance from the staff of the SEC’s Division of Corporation Finance (Staff) that it will not object if a company posts an electronic version of its glossy annual report to its corporate website by the due date in lieu of mailing paper copies or submitting it on EDGAR will be rescinded as of January 11, 2023.

Say-on-Frequency Votes

Exchange Act Rule 14a-21(b) requires public companies to conduct an advisory vote every six years on the frequency of the advisory vote on executive compensation required by the Dodd-Frank Act, often referred to as the “say-on-pay vote.” The “say-on-frequency” vote was first required beginning on January 21, 2011, and many companies held a second say-on-frequency vote a second time six years later in 2017. Now that six years have passed, companies will be required to conduct a say-on-frequency vote again in 2023. Companies will need to ask their shareholders if the say-on-pay vote should occur every one, two, or three years, even if the company is already conducting its say-on-pay vote annually and intends to continue doing so.

Rule 14a-21(b) does not require that companies use a specific form of resolution for the say-on-frequency vote. The SEC Staff has indicated that the say-on-frequency vote need not be set forth as a resolution; however, the say-on-frequency vote must clearly state that shareholders can vote on the options of every one, two, or three years (or abstain from voting), rather than solely following management’s recommendation as to the frequency, if one is provided.

The company’s Item 5.07 Form 8-K for reporting voting results must be filed within four days following the annual meeting and disclose both the results of the say-on-frequency vote, including the number of abstentions, and the frequency with which the company intends to conduct the say-on-pay vote in light of the results of the say-on-frequency vote. A company may disclose the determination the frequency with which the company intends to conduct the say-on-pay vote in light of the results of the say-on-frequency vote in either the original Form 8-K that disclosed the preliminary and final results of the say-on-frequency vote or in an amendment to the original Form 8‑K. The Form 8-K amendment is due no later than 150 calendar days after the date of the end of the annual meeting in which the say-on-frequency vote occurred, but in no event later than 60 calendar days prior to the deadline for the submission of shareholder proposals as disclosed in the proxy materials for the meeting at which the say-on-frequency vote occurred.

Board Leadership Disclosure

In the summer of 2022, the Staff began sending comment letters suggesting companies improve the board leadership disclosure required in proxy statements pursuant to Item 407(h) of Regulation S-K. Item 407(h) requires disclosure concerning:

  • The leadership structure of the board, including whether the company has combined or separated the roles of chair and principal executive officer, and why the company believes that its leadership structure is appropriate for the company, as well as a discussion, in some circumstances, of whether and why a company has a lead independent director; and
  • The extent of the board’s role in the oversight of risk and how that relates to the board’s leadership structure.

The Staff’s comments address a concern that disclosures required under Item 407(h) may have become too standardized and are not tailored to how board leadership structure and risk oversight are unique to the company and its challenges. Examples of some of the comments are as follows:

  • Please expand upon the role that your lead independent director plays in the leadership of the board. For example, please enhance your disclosure to address whether or not your lead independent director may:
    • Represent the board in communications with shareholders and other stakeholders;
    • Require board consideration of, and/or override your CEO on, any risk matters; or
    • Provide input on design of the board itself.
  • Please expand your discussion of the reasons you believe that your leadership structure is appropriate, addressing your specific characteristics or circumstances. In your discussion, please also address the circumstances under which you would consider having the chair and CEO roles filled by a single individual, when shareholders would be notified of any such change, and whether you will seek prior input from shareholders. Please also disclose how the experience of your lead independent director is brought to bear in connection with your board’s role in risk oversight.
  • Please expand upon how your board administers its risk oversight function. For example, please disclose:
    • Why your board elected to retain direct oversight responsibility for strategic risks and other risk areas not delegated to a committee, including cybersecurity matters, rather than assign oversight to a board committee;
    • The timeframe over which you evaluate risks (e.g., short-term, intermediate-term or long-term) and how you apply different oversight standards based upon the immediacy of the risk assessed;
    • Whether you consult with outside advisors and experts to anticipate future threats and trends, and how often you reassess your risk environment;
    • How the board interacts with management to address existing risks and identify significant emerging risks;
    • Whether you have a chief compliance officer and to whom this position reports; and
    • How your risk oversight process aligns with your disclosure controls and procedures.

Companies should consider whether to expand their disclosure regarding board leadership structure and risk oversight in the 2023 proxy season to address some of the considerations highlighted in the Staff comment letters.

Updated Staff Guidance on Non-GAAP Financial Measures

The Staff remains focused on non-GAAP financial measures and compliance with the Staff’s related interpretive guidance. The SEC notably continues to concentrate on the following issues associated with non-GAAP financial measures in the course of the comment process:

  • Individually tailored accounting principles;
  • Adjustments for taxes;
  • Segment profitability disclosure;
  • Adjustments related to COVID-19 and the war in Ukraine;
  • Mixing liquidity and performance measures;
  • Using terms that are defined in a non-standard way (i.e., “EBIDTA” and “core earnings”);
  • Failing to give equal or greater prominence to GAAP measures;
  • Presenting a full non-GAAP income statement; and
  • Presenting non-GAAP financial measures that adjust for normal, recurring cash operating expenses.

In December 2022, the Staff released new and revised Non-GAAP Financial Measures Compliance and Disclosure Interpretations, which are summarized below.[6]

Adjustments Resulting in Misleading Non-GAAP Financial Measures

Certain adjustments, although not explicitly prohibited, result in non-GAAP financial measures that are misleading and may violate Rule 100(b) of Regulation G. Whether or not an adjustment results in a misleading non-GAAP financial measure depends on a company’s individual facts and circumstances. The Staff notes in revised Non-GAAP Financial Measures Compliance and Disclosure Interpretations Question 100.01 that, when evaluating what is a normal operating expense, the Staff considers the nature and effect of the non-GAAP adjustment and how it relates to the company’s operations, revenue generating activities, business strategy, industry, and regulatory environment. The Staff would view an operating expense that occurs repeatedly or occasionally, including at irregular intervals, as recurring.

Individually Tailored Accounting Principles

A non-GAAP financial measure can violate Rule 100(b) of Regulation G if the recognition and measurement principles used to calculate the measure are inconsistent with GAAP. By definition, a non-GAAP measure excludes or includes amounts from the most directly comparable GAAP measure. However, non-GAAP adjustments that have the effect of changing the recognition and measurement principles required to be applied in accordance with GAAP would be considered individually tailored and may cause the presentation of a non-GAAP measure to be misleading. In revised Non-GAAP Financial Measures Compliance and Disclosure Interpretation 100.04, the Staff provides an expanded list of examples that may be considered misleading due to the use of individually tailored accounting principles:

  • Changing the pattern of recognition, such as including an adjustment in a non-GAAP performance measure to accelerate revenue recognized ratably over time in accordance with GAAP as though revenue was earned when customers were billed;
  • Presenting a non-GAAP financial measure of revenue that deducts transaction costs as if the company acted as an agent in the transaction, when gross presentation as a principal is required by GAAP, or the inverse, presenting a measure of revenue on a gross basis when net presentation is required by GAAP; and
  • Changing the basis of accounting for revenue or expenses in a non-GAAP performance measure from an accrual basis in accordance with GAAP to a cash basis.

Labeling Non-GAAP Financial Measures

In new Non-GAAP Financial Measures Compliance and Disclosure Interpretations Question 100.05, the Staff notes that a non-GAAP financial measure can be misleading if it, and/or any adjustment made to the measure, is not appropriately labeled and clearly described. The Staff notes that non-GAAP financial measures are not always consistent across, or comparable with, non-GAAP financial measures disclosed by other companies. Without an appropriate label and clear description, a non-GAAP financial measure and/or any adjustment made to arrive at that measure could be misleading to investors.

Disclosure Surrounding a Non-GAAP Financial Measure

In new Non-GAAP Financial Measures Compliance and Disclosure Interpretations Question 100.06, the Staff notes that a non-GAAP measure can be misleading, and therefore violate Rule 100(b) of Regulation G, even if it is accompanied by disclosure about the nature and effect of each adjustment made to the most directly comparable GAAP measure. The Staff believes that a non-GAAP financial measure could mislead investors to such a degree that even extensive, detailed disclosure about the nature and effect of each adjustment would not prevent the non‑GAAP measure from being materially misleading.

Equal or Greater Prominence of Non-GAAP Financial Measures

Item 10(e)(1)(i)(A) of Regulation S-K requires that when a registrant presents a non-GAAP measure, it must present the most directly comparable GAAP measure with equal or greater prominence. This requirement applies to non-GAAP measures presented in documents filed with the SEC, as well as earnings releases furnished under Item 2.02 of Form 8-K. In revised Non‑GAAP Financial Measures Compliance and Disclosure Interpretations Question 102.10(a), the Staff notes that whether a non-GAAP financial measure is more prominent than the comparable GAAP financial measure generally depends on the facts and circumstances in which the disclosure is made. Examples of the presentation of non-GAAP financial measures as more prominent than the comparable GAAP measures are:

  • Presenting an income statement of non-GAAP financial measures;
  • Presenting a non-GAAP financial measure before the most directly comparable GAAP measure or omitting the comparable GAAP measure altogether, including in an earnings release headline or caption that includes a non-GAAP measure;
  • Presenting a ratio where a non-GAAP financial measure is the numerator and/or denominator without also presenting the ratio calculated using the most directly comparable GAAP measure(s) with equal or greater prominence;
  • Presenting a non-GAAP financial measure using a style of presentation (e.g., bold, larger font, etc.) that emphasizes the non-GAAP financial measure over the comparable GAAP measure;
  • Describing a non-GAAP financial measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure;
  • Presenting charts, tables, or graphs of a non-GAAP financial measures without presenting charts, tables, or graphs of the comparable GAAP measures with equal or greater prominence or omitting the comparable GAAP measures altogether; and
  • Providing discussion and analysis of a non-GAAP financial measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence.

Undue Prominence of Non-GAAP Measure

In revised Non-GAAP Financial Measures Compliance and Disclosure Interpretations Question 102.10(b), the Staff notes the following examples of disclosure of non-GAAP financial measure reconciliations that give undue prominence to a non-GAAP financial measure:

  • Starting the reconciliation with a non-GAAP financial measure;
  • Presenting a non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures (as discussed in Non-GAAP Financial Measures Compliance and Disclosure Interpretations Question 102.10(c)); and
  • When presenting a forward-looking non-GAAP measure, a company may exclude the quantitative reconciliation if it is relying on the exception provided by Item 10(e)(1)(i)(B) of Regulation S-K. A measure would be considered more prominent than the comparable GAAP measure if it is presented without disclosing reliance upon the exception, identifying the information that is unavailable, and its probable significance in a location of equal or greater prominence.

Presentation of a Non-GAAP Income Statement

In revised Non-GAAP Financial Measures Compliance and Disclosure Interpretations Question 102.10(c), the Staff indicates that a non-GAAP income statement is one that is comprised of non‑GAAP financial measures and includes all or most of the line items and subtotals found in a GAAP income statement.

Updates to the Proxy Voting Guidelines of ISS and Glass Lewis

ISS and Glass Lewis, the two leading proxy advisory firms, published updates to their voting policies that will be applicable for the upcoming proxy season, which touch on several key areas for consideration during the 2023 proxy season.


ISS expanded the scope of its existing board gender diversity policy to generally vote against or withhold from the nominating committee chair or other relevant directors at all U.S. companies with no women on the board. ISS will only make an exception when there was at least one woman on the board at the preceding annual meeting and the board makes a firm commitment to return to gender diversity within one year.

Glass Lewis is recommending to vote against nominating committee chairs of boards of directors for Russell 3000 companies where the board is not at least 30% gender-diverse. For companies outside the Russell 3000 index, Glass Lewis will continue applying its policy requiring one gender-diverse director, but will consider situations where the board provides a sufficient rationale or clearly articulated plan to remedy the lack of gender diversity. Glass Lewis will also generally recommend against nominating committee chairs of Russell 1000 companies with fewer than one underrepresented community director,[7] but will consider refraining from such recommendation if the company has provided adequate rationale or stated a plan to remedy the lack of diversity.

Diversity Disclosure

Glass Lewis reviews the quality of board diversity disclosure based on the following criteria:

  • The board’s current percentage of racial/ethnic diversity;
  • Whether the board defines diversity to explicitly include gender and/or race/ethnicity;
  • Whether the board has adopted the “Rooney Rule” requiring women and minorities to be included in the initial pool of director candidates; and
  • Board skills disclosures.

Glass Lewis generally recommends against the nominating committee chair and/or governance committee chair at any Russell 1000 company that (i) has not provided any disclosure in each of the above listed criteria, and/or (ii) has not provided any disclosure of individual or aggregate racial/ethnic minority board demographic information.

Board Oversight of Environmental and Social Issues

Glass Lewis will generally recommend against governance committee chairs of Russell 1000 companies that do not disclose the board’s role in overseeing environmental and social issues, including matters such as diversity, climate change, human capital management, relations among stakeholders and health, safety, and environment. Beginning in 2023, Glass Lewis intends to expand its tracking of board-level oversight of environmental and social issues to all Russell 3000 companies.

Board Oversight of Cyber Risks

Glass Lewis will begin to evaluate cyber-related disclosure where cyberattacks have caused significant harm to shareholders. The company may recommend against appropriate directors in situations where the disclosure or oversight is insufficient.

Climate Accountability

ISS revised its policies on climate board accountability to require companies in the Climate Action 100+ Focus Group [8] to take minimum steps to understand and mitigate climate-related risks. ISS utilizes two criteria to assess whether a significant GHG emitter has taken the required minimum steps:

  • A significant GHG emitter must provide detailed disclosure of climate-related risks, such as disclosures aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”), including disclosure of board governance measures, corporate strategy, risk management analyses, and metrics and targets;
  • ISS defines “appropriate GHG emissions reduction targets” to include medium-term GHG reduction targets or Net Zero by 2050 GHG reduction targets, in each case, for at least 95% of a company’s Scope 1 and 2 emissions; and
  • In cases where a “significant GHG emitter” fails to provide these disclosures and set appropriate emissions reduction targets, ISS will generally withhold from or recommend against responsible directors (such as the incumbent chair of the responsible committee) and/or other relevant voting items.

Additionally, Glass Lewis has indicated that companies whose GHG emissions represent a financially material risk must provide clear and comprehensive disclosure regarding these risks in line with the disclosures recommended by TCFD. Glass Lewis may recommend against appropriate directors of the disclosure is not sufficient.


Glass Lewis generally will recommend against any of the following:

  • A director who serves as an executive officer (other than executive chair) of any public company while serving on more than one external public company board;
  • A director who serves as an executive chair of any public company while serving on more than two external public company boards; and
  • Any other director who serves on more than five public company boards.

Racial Equity Audits

ISS will evaluate shareholder proposals requesting the company to conduct an independent racial equity audit using the following factors:

  • The company’s established framework for addressing racial inequity internally;
  • Whether the company has sufficient disclosures regarding workforce diversity and inclusion goals and metrics;
  • Whether the company has issued a public statement related to its racial justice efforts or committed to an internal review;
  • Whether the company has engaged with impacted communities, stakeholders, and civil rights experts;
  • The company’s recent track record on racial justice measures and outreach; and
  • Whether the company has been the subject of recent controversy related to racial inequity.

Political Expenditures and Lobbying

ISS will recommend, on a case-by-case basis, on shareholder proposals requesting greater transparency on the company’s alignment of its political contributions to its political commitments and/or climate lobbying to its climate goals. Factors for the analysis include:

  • The company’s policies, management, oversight, governance, and existing level of disclosure (including payments to trade associations);
  • Any lack of congruency between its political expenditures and its stated values; and
  • Any recent significant controversies.

Officer Indemnification and Exculpation

As of August 1, 2022, Delaware corporations can now adopt charter provisions that will permit officers to be exculpated from direct claims by stockholders for breaches of the fiduciary duty of care in certain situations.

ISS will evaluate proposals seeking to amend the charter to include exculpation provisions for officers on a case-by-case basis. ISS will assess whether proposed changes are reasonable, considering the stated rationale for the proposed change and the scope, as well as (if applicable) whether the proposal would expand coverage beyond just legal expenses for more serious violations of fiduciary obligations than mere carelessness. ISS will also consider whether the proposal being voted on would provide for mandatory indemnification where indemnification was previously at the discretion of the board of directors.

Glass Lewis will also evaluate officer exculpation proposals on a case-by-case basis. Glass Lewis may recommend against officer exculpation provisions eliminating monetary liability for breaches of the duty of care, absent a compelling rationale.

Unequal Voting Rights

ISS will withhold or recommend against directors at all companies that have unequal voting rights due to multi-class share structures, except for the following situations:

  • Newly public companies with a sunset provision of no more than seven years from the date of going public;
  • REIT limited partnerships and operating partnerships;
  • Situations of de minimis inequity; and
  • Situations where, in ISS’s view, the company has sufficient protections in place for minority shareholders.

Adverse Governance Structures of Newly Public Companies

ISS has clarified that, for the purposes of its adverse governance structures policy, a “newly public company” is a company that holds or held its first annual public shareholder meeting after February 1, 2015. ISS indicates that a seven-year sunset provision will be considered as a mitigating factor for problematic governance structures, such as classified boards or supermajority voting.

Unilateral Charter or Bylaw Amendments

ISS has amended its policy regarding unilateral charter or bylaw amendments to explicitly include the unilateral adoption by the board of fee-shifting provisions. If such an amendment is adopted, ISS will generally recommend against directors at subsequent shareholder meetings. ISS also applies this policy in the event of the unilateral adoption by the board of any other charter or bylaw provision deemed “egregious.”

Short-Term Poison Pills

ISS will now consider the appropriateness of the board’s action, the share ownership trigger threshold, and the company’s market capitalization (including the absolute level and any sudden changes) when evaluating short-term poison pills (those with a term of one year or less) that a company has adopted without shareholder approval. If ISS determines that a poison pill is inappropriate under its case-by-case approach, it will generally recommend against or withhold from all board nominees.

Long-Term Incentive Compensation

Glass Lewis revised the threshold for the minimum percentage of the long-term incentive grant that should be performance-based from 33% to 50%. Beginning in 2023, Glass Lewis will raise concerns with executive compensation programs in situations where less than half of an executive’s long-term incentive awards are subject to performance-based vesting conditions.


1See Release No. 34-95607, Pay Versus Performance (Aug. 25, 2022), available at back)

2See Release No. 33-11126, Listing Standards for Recovery of Erroneously Awarded Compensation (Oct. 26, 2022), available at back)

3See Release No. 34-95267, Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8 (July 13, 2022), available at back)

4See Release No. 34-93596, Universal Proxy (Nov. 17, 2021), available at

(go back)

5See Release No. 34-11070, Updating EDGAR Filing Requirements and Form 144 Filings (June 3, 2022), available at back)

6Non-GAAP Financial Measures Compliance and Disclosure Interpretations, available at back)

7An underrepresented community director is defined as an individual who self-identifies as Black, African American, North African, Middle Eastern, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaskan Native, or who self-identifies as gay, lesbian, bisexual, or transgender.(go back)

8The Climate Action 100+ Focus Group are those companies that ISS deems to be significant greenhouse gas (“GHG”) emitters. (go back)

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