Recently, proxy advisors Institutional Shareholder Services Inc. (ISS) and Glass Lewis released their final voting policies for the 2016 proxy season. Below is a summary of the major updates of both proxy advisory firms below. The ISS updates are effective on or after February 1, 2016 and the Lewis Glass updates are effective on or after January 1, 2016.
Starting with the 2017 proxy season, ISS will recommend against directors who sit on more than five public company boards (as opposed to the current six-board cap) and during the 2016 proxy season, ISS will simply note in its report if a director serves on more than five public company boards. The one-year grace period will allow both companies and directors to plan accordingly. For CEOs of public companies, ISS has retained its existing policy of recommending against directors sitting on the board of more than two public companies (excluding their own).
Beginning with the 2017 proxy season, Glass Lewis will recommend voting against a director (i) who sits on more than a total of five public company boards (as opposed to the current six-board cap) and (ii) an executive officer of a public company who sits on more than two public company boards (including their own) and will note in its report such directors for the 2016 season.
Unilateral Board Adoption of Bylaw or Charter Amendments
In 2014, ISS instituted a policy of recommending against directors if the board amends the company’s bylaws or charter without shareholder approval in a manner that “materially diminishes shareholders’ rights” and will continue to consider these unilateral amendments in subsequent years’ recommendations until the actions are reversed or submitted to a shareholder vote. In the latest update, ISS has noted that investors may have different expectations for public issuers, as opposed to IPO companies, and has implemented a separate methodology for evaluating IPO companies. The factors to be considered in the IPO context include the provision’s impact on the ability to change the governance structure in the future (e.g., limitations on shareholder’s rights, or supermajority voting requirements, to amend the charter and bylaws) and whether there is a classified board as well as mitigating factors such as a public commitment to put the provision to a shareholder vote within three years of the IPO. ISS indicated that unless the adverse provision is reversed or submitted to a shareholder vote, it will vote on a case-by-case basis on director nominees in subsequent years.
Conflicting Management and Shareholder Proposals
Rule 14a-8 under the Securities Exchange Act of 1934 allows shareholders meeting certain stock ownership requirements to submit proposals for inclusion in a company’s proxy materials. There are certain exclusions, including Rule 14a-8(i)(9), which allow an issuer to exclude a shareholder proposal which “directly conflicts” with a management proposal. After considerable controversy as to the meaning of this exclusion, in October 2015, the SEC staff clarified that they will find a conflict exists only “if a reasonable shareholder could not logically vote in favor of both proposals.” This increases the burden on companies to prove to the SEC staff that a conflict exists so some companies may choose to place management proposals alongside similar shareholder proposals in the coming year.
Glass Lewis’ new policy establishes a framework of factors it will consider when evaluating competing management and shareholder proposals, including the following:
- the nature of the underlying issue;
- the benefit to shareholders from implementation of the proposal;
- the materiality of the differences between the terms of the shareholder proposal and management proposal;
- the appropriateness of the provisions in the context of a company’s shareholder base, corporate structure and other relevant circumstances; and
- a company’s overall governance profile and, specifically, its responsiveness to shareholders as evidenced by a company’s response to previous shareholder proposals and its adoption of progressive shareholder rights provisions.
Exclusive Forum provisions
Glass Lewis’ existing policy recommends voting against the chairman of a nominating and governance committee that has adopted an exclusive forum provision, which is a provision in a company’s charter or bylaws that limits a shareholder’s choice of legal venue to a certain jurisdiction. They have upheld this policy, but refined their approach to distinguish between an established company and an IPO company. Where such provision is included in an IPO company’s governing documents, Glass Lewis will consider the provision, on balance, in conjunction with other provisions that may unduly limit shareholder rights such as supermajority voting requirements, a classified board or a fee-shifting bylaw, when making their recommendation.
Compensation Disclosures by Externally Managed Issuers
Currently under ISS policy, insufficient disclosure regarding compensation arrangements for executives by externally-managed issuers (EMI) is not considered a “problematic pay practice.” However, investors responding to the 2015-2016 ISS policy survey supported a change to this policy. Going forward, when the EMI provides a say-on-pay proposal, insufficient disclosure, which precludes a “reasonable assessment” of the EMI’s compensation practices for executives, will be the basis for an adverse recommendation from ISS on the say-on-pay proposal.
Nominating and Committee Performance
Glass Lewis has revised its policy for the 2016 proxy season to make it clear that it could consider issuing a recommendation against the chair of a nominating committee where the board’s failure to ensure the board has directors with relevant experience, either through periodic assessment or board refreshment, has contributed to the company’s poor performance. The policy does not provide guidance or factors which could lead to such a conclusion.
Proxy Access Nominees
ISS clarified the factors it will consider in evaluating proxy access nominations, which is substantially similar to the framework used for contested elections generally but may include different factors. They also announced plans to release a FAQ in December that will provide information on which proxy access provisions ISS finds offensive.
Shareholder Proposals on Equity Holding Periods for Executives
ISS has clarified its policy with respect to shareholder proposals requiring senior executives retain portions of their shares acquired through compensation plans. Under the revised policy, ISS will recommend case-by-case on such shareholder proposals, taking into account:
- the percentage/ratio of net shares required to be retained;
- the time period required to retain the shares;
- whether the company has equity retention, holding periods, or stock ownership requirements and the robustness of such requirements;
- whether the company has any other compensation policies aimed at mitigating executive risk taking;
- executives’ actual stock ownership and the degree it meets or exceeds the thresholds in the proposal; and
- problematic pay practices, current and past, which may demonstrate a short-term versus long- term focus.
The changes are intended to clarify the factors used in ISS’ analysis and eliminate the need for a separate policy tied to specific retention ratios (i.e., 75 percent of net shares).
ISS also amended its voting policies on issues related to animal welfare, pharmaceutical pricing or access to medicine policies and climate change policies.
Glass Lewis also updated its policies to (1) clarify when it may consider recommending against directors for lapses in environmental and social risk management and (2) a detailed discussion of its position on one-time and transitional awards to highlight some of the specific factors they will consider.