Click here for PDF

The 2020 proxy season is almost upon us.  This QuickStudy recaps some important policy updates from Institutional Shareholder Services (“ISS”) and Glass Lewis & Co. (“Glass Lewis”) and new disclosure requirements to keep in mind as proxy preparations begin in earnest this winter.

ISS and Glass Lewis 2020 Voting Policy Updates

Both ISS and Glass Lewis have updated their proxy voting guidelines for the 2020 proxy season.1  The key policy updates relate to:

  • problematic governance and capital structures for newly public companies (ISS)
  • shareholder proposals for independent board chairs (ISS)
  • shareholder proposals on gender pay equity (ISS and Glass Lewis) and supermajority voting (Glass Lewis)
  • management proposals on share repurchase programs (ISS)
  • exclusion of shareholder proposals (Glass Lewis)
  • board gender diversity (ISS)
  • board committee matters (Glass Lewis)
  • compensation related matters (ISS and Glass Lewis)

The following table summarizes and compares certain of the key updates to ISS’s and Glass ‎Lewis’s voting guidelines for 2020.‎

Topic ISS Glass Lewis
Problematic Governance/Capital Structure 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 bylaw or charter provisions that allow for (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 such structure to a “reasonable” time-based sunset provision. No sunset longer than seven years will be considered reasonable.
No change
Independent Board Chair Under prior guidance, ISS generally will recommend a vote for shareholder proposals requiring that the board chair position be filled by an independent director, taking into consideration (1) the scope of the proposal, (2) the company’s board leadership structure, (3) the company’s governance structure and practices, (4) company performance and (5) other relevant factors. The new guidelines add the “rationale” for the proposal as part of the first factor that ISS will take into consideration. The new guidelines specify the following factors that will increase the likelihood of a “for” recommendation by ISS with respect to a shareholder proposal requiring that the board chair be filled by an independent director:

  • majority non-independent board and/or the presence of non-independent directors on key committees
  • week or poorly defined independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role
  • 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 cover and address material risks facing the company;
  • material governance failure, or
  • Evidence that the board failed to intervene when management’s interests are contrary to shareholders’ interests.
No change
Gender Pay Equity Prior policy provides that ISS will recommend on a case-by-case basis shareholder proposals for reports on pay data by gender, and in evaluating such reports will consider whether the company has been involved in controversy, litigation or regulatory action related to a gender pay gap. The policy has been expanded to include pay data by race or ethnicity in addition to gender. No change
Supermajority Voting No change Glass Lewis may recommend voting against shareholder proposals seeking to eliminate supermajority voting requirements that are submitted at controlled companies, as the supermajority voting requirements may serve to protect minority holders.
Management Proposals on Share Repurchase Programs ISS generally recommends voting favorably for management proposals to institute open-market repurchase plans in which all shareholders may participate on equal terms, it will recommend voting against practices it considers abusive, including (1) the use of share buybacks as greenmail or to reward company insiders by purchasing their shares at a price higher than they could receive in an open markets sale, (2) the use of buybacks to boost earnings per share or other compensation metrics to increase payouts to company insiders, and (3) repurchases that threatened a company’s long-term viability. No change
Restrictions on Shareholders’ Rights ISS generally will recommend that shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval. Subject matter restrictions (i.e., prohibitions on shareholders’ ability to amend the particular bylaws that govern their ability to amend the bylaws) are now also considered undue restrictions on shareholders’’ rights and would therefore receive an adverse voting recommendation.ISS has added a provision to the effect that prior shareholder approval of a management proposal to insert requirements more stringent than those contained in Rule 14a-8 will not be regarded as a mitigating factor unless a proposal for an unfettered right (i.e., not containing restrictions beyond those contained in Rule 14a-8) to submit proposals has been submitted to and rejected by shareholders No change
Exclusion of Shareholder Proposals No change In response to the SEC’s September 2019 new policy 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 view, 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.
Board Gender Diversity Last year, ISS adopted a new policy to generally recommend voting against nominating committee chairs (and potentially other directors) at Russell 3000 or S&P 1500 companies with no women on the board absent certain mitigating factors. The policy update reflects that the one-year transition period has passed and the policy is now in effect for 2020.The revised policy lists the following as mitigating factors: (1) until February 1, 2021, a firm commitment, as stated in the proxy statement, to appoint at least one woman to the board within a year, (2) 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 (3) other relevant factors, as applicable No change
Board Committee Performance No change Audit CommitteeGlass Lewis will generally recommend voting against the audit committee chair when fees paid to the company’s external auditor are not disclosed.

Governance Committee

Glass Lewis will generally recommend voting against the governance committee chair if (1) directors’ records for board and committee meeting attendance are not disclosed, or (ii) when it is indicated that a director attended fewer than 75% of board and relevant committee meetings, but the disclosure is sufficiently vague that it is not possible to determine which director has failed to attend.

Glass Lewis may make an exception to its policy of recommending a vote against the governance committee chair when a board has adopted an exclusive forum provision without shareholder approval. Under the revised policy, the exception may be made 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 is included

Compensation Committee

Glass Lewis will generally recommend voting against the compensation committee members if the board adopts a frequency for the say-on-pay advisory vote that is different from the frequency approved by a plurality of the shareholders.

Board Attendance ISS will recommend a vote against directors who attend fewer than 75% of board and relevant committee meetings without the prior exception for incumbent nominees who had not previously been elected by shareholders. The exemption now is only for nominees who served for only part of the preceding year. No change
Equity Compensation Plans ISS added the presence of an automatic share replenishment feature (an “evergreen”) to the list of egregious factors that will trigger a negative vote recommendation on an equity compensation plan proposal. No change
Say-On-Pay No change Contractual Payments and Arrangements

Glass Lewis clarified its list of unfavorable contractual provisions that would make it more likely that Glass Lewis would recommend against the say-on-pay proposal to include:

  • excessively broad change in control triggers
  • inappropriate severance entitlements
  • inadequately explained or excessive sign-on arrangements
  • guaranteed bonuses (especially as a multiyear occurrence)
  • failure to address any concerning practices in amended employment agreements (e.g., excessive change-in-control entitlements, modified single-trigger change-in-control entitlements, excise tax gross-ups and multiyear single-trigger arrangements).

Company Responsiveness

Glass Lewis may recommend 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 shareholder support for the prior year’s say-on-pay proposal.

Peer Group for Pay-for-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. Certain qualitative factors may partially mitigate Glass Lewis’ concerns including overall incentive structure, significant forthcoming changes to the compensation program or reasonable long-term payout levels.

Applying Upward Discretion for Short-Term Incentive Plans No change Glass Lewis clarified that it will review any significant post-fiscal year end changes and one time awards when evaluating say-on-pay proposals. Glass Lewis also clarified its expectations regarding disclosure of mid-year adjustments of short term incentive plans, particularly where a company has applied upward discretion when determining awards under a short-term incentive plan.
Use of EVA Metrics in Secondary FPA Screen ISS will use Economic Value Added (EVA) data in the secondary Financial Performance Assessment (FPA) screen of its quantitative pay-for-performance model rather than the GAAP metrics ISS used in 2019. In 2019, ISS included EVA data in its proxy research reports as a supplement to GAAP performance measures. No change
Exemptions for New Nominees ISS clarified that only directors who have served for less than one year (as opposed to any director who is up for reelection 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. The new guidelines provide greater flexibility to ISS in the case of directors on staggered boards who may serve more than one year prior to their upcoming election. No change

 

1. ‎ See the ISS updates here and the Glass Lewis updates here and here.‎