NYC Pension Funds Launch Broad Proxy Access Initiative, Filing Proposals at 75 Public Companies; ISS and Glass Lewis Release 2015 Voting Policies; ISS Codifies Approach on Bylaw Amendments and Adopts Previously Proposed Changes on Independent Chair Proposals and Equity Plans
Public companies should be aware of a range of announcements made by shareholders and proxy advisors in the past few days:
The NYC Pension Funds announced yesterday a broad initiative to advance the cause of proxy access, filing shareholder proposals with 75 public companies seeking to give a shareholder or group who has held 3% of the stock for three years the right to include director nominees in the company’s proxy statement.
Similar proposals have received high levels of support during 2014, with support levels ranging from 44% to 69% of votes cast. Some companies that have received and are considering opposing such a shareholder proposal may consider instead putting forward a management proposal with terms that the company finds acceptable in light of its circumstances.
Institutional Shareholder Services, the proxy advisory firm, has issued final updates to its proxy voting guidelines, which will be effective for meetings on or after February 1, 2015. The updates include not only the previously proposed changes to ISS’s policy on independent chair proposals and a new equity plan scorecard, but also a number of updates not included in the October proposal:
Adopting a formal policy to vote against directors if the board unilaterally amends the company’s bylaws or charter “in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders” (which ISS indicates is a codification of its current approach under its “Governance Failures” policy);
Generally voting against bylaws that mandate fee-shifting if they apply when the plaintiff is partially successful, and voting case-by-case on other litigation-related bylaw amendments (such as exclusive venue and mandatory arbitration) based in part on the company demonstrating past harm from litigation;
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Refining the political contributions policy to indicate separately the factors ISS considers regarding types of oversight mechanisms and disclosure practices; and
Updating the current policy on greenhouse gas emissions to provide greater clarity on the factors ISS considers in evaluating shareholder proposals, including company disclosure.
Glass Lewis & Co., the proxy advisory firm, published its proxy season guidelines for the 2015 proxy season. The updates include:
Voting against governance committee members or the governance committee chair if the board unilaterally limits important shareholder rights, including through adoption of fee- shifting or mandatory arbitration bylaws;
Refining its policy to vote against governance committee members if a majority-approved shareholder proposal is not implemented, to reflect that Glass Lewis will consider the quality of any action taken by the board in response, including any unreasonable restrictions; and
Refining its policies on (1) the $120,000 materiality threshold for relationships with director- affiliated companies, (2) treatment of one-off awards in the say-on-pay analysis and
(3) employee stock purchase plans.
NYC PENSION FUNDS PROXY ACCESS INITIATIVE
On Thursday, the New York City Comptroller, on behalf of the $160 billion New York City Pension Funds, announced a broad initiative to give shareholders the right to nominate directors at U.S. companies using the corporate ballot. By submitting proxy access shareholder proposals to 75 companies at once, the
NYC Pension Funds are taking a major step to roll out proxy access across the market.1 The proposals,
known collectively as the Boardroom Accountability Project, request that companies give shareholders who meet a threshold of owning 3% of the company for three years the right to include their candidates in the company’s proxy statement. These proposals are in a form that has achieved significant support during 2014 – of the nine similar proposals that came to a vote in 2014, five of them passed, and the rest
nearly passed. Overall levels of shareholder support ranged from 44% to 69%, and averaged 54%.2
Companies may want to think about steps to prepare for and respond to such proposals, including maintaining a dialogue with key shareholders. In addition, companies may wish to consider the terms of a proxy access provision that might be acceptable to the company, or other governance enhancements that may prevent the company from becoming a proxy access target. Although there seems to be little benefit to the unilateral adoption of a proxy access provision on a preemptive basis, there may be a benefit for a company to be prepared to put its own proxy access proposal up for a shareholder vote, particularly because doing so should permit the exclusion of a conflicting shareholder proposal.
The Comptroller’s announcement, the list of companies, the form of proposal and other materials are available at http://comptroller.nyc.gov/boardroom-accountability/.
For a further discussion of proxy access proposals in 2014, see our firm’s publication, dated June 25, 2014, entitled “2014 Proxy Season Review.”
ISS 2015 PROXY VOTING GUIDELINES
For U.S. issuers, ISS’s 2015 proxy voting guidelines3 reflect the two changes that were included in the proposed updates issued in October – that is, broadening the factors considered with regard to independent chair proposals and introducing a “nuanced” scorecard for assessing equity plan proposals – and three additional sets of changes.4 We discuss all of the 2015 changes below.
Independent Chair Shareholder Proposals
As it had proposed, ISS adopted new guidelines modifying its independent chair shareholder proposal policy. Under the 2015 guidelines, ISS will employ a “holistic review” of the company and board when deciding to vote for shareholder proposals for an independent chair, taking into consideration:
the scope of the proposal;
the company’s current board leadership structure;
the company’s governance structure and practices;
company performance; and
any other relevant factors that may be applicable.
The new framework will result in more uncertainty with respect to independent chair proposals. Under the prior policy, companies could be relatively confident that ISS would not support a shareholder proposal to separate the CEO and chair roles, so long as the company met all the factors in the ISS policy, including a lead independent director with specified duties and powers. Under the new “holistic” test, even companies that had crafted the duties of their lead independent director with a view toward ISS’s policies can no longer be certain how ISS will recommend on these proposals. As discussed in our firm’s 2014 Proxy Season Review, ISS’s recommendation on these proposals appears to have a significant impact on
the voting results, though ultimately relatively few of these proposals tend to receive majority support.5
ISS notes that, in backtesting, the new methodology resulted in a higher level of support for such shareholder proposals.
Unilateral Bylaw/Charter Amendments
ISS’s new guidelines provide that it is adopting a stand-alone policy that codifies its current practice of withholding votes if the board unilaterally amends its bylaws or charter in a manner that materially limits shareholder rights. Although unilateral bylaw and charter amendments were previously evaluated by ISS
The 2015 U.S. Proxy Voting Guidelines are available at http://www.issgovernance.com/policy- gateway/2015-policy-information/. The proposed policy updates were described in our memorandum, dated October 16, 2012, entitled “ISS Proposes 2015 Policy Updates,” and are available at http://www.issgovernance.com/policy- gateway/2015-benchmark-policy-consultation/.
Our 2014 Proxy Season Review, dated June 25, 2014, is available at http://www.sullcrom.com/2014- proxy-season-review.
under its “Governance Failures” policy, ISS stated that it adopted a stand-alone policy in light of increased instances of unilateral amendments that adversely impact shareholder rights. The stated rationale for this policy change is that it is in line with investor sentiment indicating that a board should not adopt amendments that materially and negatively impact investors’ rights without shareholder approval. Under the new policy, ISS will consider the following factors in its vote for directors, committee members, or the entire board if the board’s unilateral amendment “materially diminishes shareholders’ rights” or “could adversely impact shareholders”:
the board’s rationale for the amendment;
the company’s disclosure of any engagement with shareholders on the amendment;
the degree to which shareholders’ rights will be impaired;
previous unilateral amendments;
the company’s ownership structure;
the company’s existing governance provisions;
the timing of the amendment (i.e., if it was made prior to or in connection with an IPO or a significant business development); and
any other factors that ISS deems appropriate.
ISS has also given guidance that situations where the board has unilaterally extended the life of a poison pill or increased the percentage of shares required to call a special meeting will result in ISS generally recommending to withhold or vote against directors that participated in the unilateral action.
The policy update does not specifically address how exclusive forum provisions would be treated, but historically ISS has not generally viewed the adoption of these provisions as a basis for withhold recommendations against directors.6 In contrast, ISS has recommended withhold votes for directors at companies that, for example, unilaterally increase the special meeting threshold, classify the board, increase share authorization or eliminate written consent rights.
Shareholders’ Litigation Rights
ISS has updated its policy framework for evaluating litigation-related bylaw proposals, which currently focuses solely on exclusive forum provisions, to encompass fee-shifting and mandatory arbitration bylaws. Following a May 2014 Delaware Supreme Court decision relating to a nonstock corporation, a small number of companies have adopted bylaws that would require an unsuccessful shareholder suing
the company to pay the company’s litigation expenses.7 Under the 2015 guidelines, ISS will generally
For a detailed discussion of exclusive forum provisions, see our firm’s publication, dated May 28, 2014, entitled “Exclusive Forum Bylaws Gain Momentum.” As discussed further below under “Glass Lewis Proxy Voting Guidelines,” Glass Lewis’s policies are more specific as to their views on particular types of litigation-related amendments in this regard.
For a detailed discussion of this case, see our firm’s publication, dated May 19, 2014, entitled “ATP Tour, Inc. v. Deutscher Tennis Bund.”
vote against management proposals to adopt fee-shifting bylaws (or for shareholder proposals to remove such bylaws) if the bylaws apply to plaintiffs that are only partially successful. For other bylaws that impact shareholders’ litigation rights, ISS will vote on a case-by-case basis, taking into account factors such as:
the company’s stated rationale;
disclosure of past harm from shareholder lawsuits in which plaintiffs were unsuccessful or where shareholders were not successful outside the jurisdiction of incorporation;
the breadth of the bylaw’s application; and
other governance features such as shareholders’ ability to repeal the provision, and whether the company has majority voting and annual elections for all directors.
Equity Plan Scorecard
In the 2015 guidelines, ISS also adopted the proposed changes relating to equity plan proposals. As a substitute for ISS’s current approach in determining when an equity incentive plan proposal warrants an “against” recommendation, ISS will implement an “Equity Plan Scorecard.” This Scorecard will consider a range of factors under three main categories—plan cost, plan features and grant practices, as follows:
Plan Cost: Shareholder Value Transfer relative to industry/market capitalization peers under a dual-cost measurement approach
Plan Features: minimum vesting periods, discretionary vesting authority, share recycling and single trigger change-in-control
Grant Practices: three-year burn rate relative to peers, vesting requirements in last three years of CEO equity grants, equity clawback policy, plan duration, share-holding requirements and performance grant ratio of CEO’s most recent equity awards
The factors will be benchmarked and weighted based on company size and status, with companies keyed to one of the following: the S&P 500, Russell 3000 (excluding S&P 500), Non-Russell 3000 or Recent IPO/Bankruptcy Emergent companies. For companies in the S&P 500 or Russell 3000, plan cost will be weighted 45%, grant practices 35% and plan features 20%. Additional information about the policy and weightings will be included in ISS’s Compensation FAQ to be published in December.
Although ISS will largely base their recommendations on a combination of factors relating to plan cost, plan features and grant practices, some equity plan features, such as awards vesting in connection with a liberal change-of-control definition, the authority to reprice options without shareholder approval, problematic pay practices or a pay-for-performance disconnect, and any other plan features that negatively impact shareholder interests, will automatically trigger “against” recommendations.
Importantly, a company’s burn rate would be considered as part of the Scorecard evaluation and would be measured against the company’s respective group. As a result, this would eliminate the potential for burn rate commitments to mitigate historic grant levels.
The updated policy will expand the factors considered in evaluating a company’s equity plan and reflects ISS’s view that, with the strong market recovery, investors may be more critical of equity transfers to management, particularly in the absence of shareholder-friendly plan features and grant practices.
Environmental and Social Issues
In the 2015 guidelines, ISS refined two policies relating to environmental and social issues. ISS will continue to generally vote for proposals requiring greater disclosure of a company’s political contributions and trade association spending policies and activities, but revised its policy to indicate separately the factors ISS considers with regard to the company’s oversight mechanisms and to factor in the company’s disclosure of its trade association support.
ISS also updated its policy to provide greater clarity on the factors that ISS considers in its analysis of greenhouse gas-related proposals and reflect investor feedback on greenhouse gas emissions, including focusing on the company’s disclosure of year-over-year emissions data. Under its new policy, ISS will no longer consider whether the shareholder proposal is overly prescriptive nor the feasibility of the company reducing its greenhouse gas emissions.
GLASS LEWIS PROXY VOTING GUIDELINES
Glass Lewis recently published its 2015 proxy voting policy, which includes a summary of changes from 2014.8
Similar to ISS, Glass Lewis’s changes illustrate an increased focus on unilateral board actions impacting important shareholder rights. Specifically, Glass Lewis has adopted a policy whereby it may recommend that shareholders vote against the chair of the governance committee or the entire committee in cases where a board has unilaterally reduced or removed important shareholder rights, such as:
eliminating the ability of shareholders to call a special meeting or act by written consent;
increasing vote requirements for charter or bylaw amendments;
increasing ownership threshold requirements for calling a special meeting;
limiting the ability of shareholders to pursue full legal recourse (such as fee-shifting or mandatory arbitration bylaws);9
adopting a classified board structure; and
eliminating shareholders’ ability to remove a director without cause.
The 2015 Proxy Season Guidelines are available at
Glass Lewis’s policies already provide for a recommendation against the governance committee chair if the board has unilaterally adopted an exclusive forum bylaw provision.
Glass Lewis also refined its policy of voting against governance committee members if a majority- approved shareholder proposal is not implemented, to reflect that Glass Lewis will consider the quality of any action taken by the board in response, including any unreasonable restrictions.
Glass Lewis will also increase its scrutiny of provisions adopted in a company’s charter or bylaws prior to its IPO and will consider recommending against some or all members of the board who served at the time of adoption. Consistent with its approach towards boards that adopt certain unilateral shareholder litigation bylaws, Glass Lewis will also recommend against the governance chair in the case of an exclusive forum provision and against the entire governance committee in the case of fee-shifting bylaws, in each case even if these were in place at the time of IPO.
Other changes to Glass Lewis’s guidelines include:
Clarifying that transactions with directors may be deemed immaterial where the amount received by a professional services firm that employs the director represents less than 1% of the firm’s annual revenues (even if over $120,000) and the board provides a compelling rationale as to why the director’s independence is not affected.
Providing clarification on its qualitative and quantitative approach to say-on-pay analysis, and guidance on its approach to analyzing a one-off award for say-on-pay purposes—specifically, noting that it recognizes that additional incentives may be appropriate in certain circumstances but clarifying that companies should:
provide a thorough description of the awards,
include a cogent and convincing explanation for the need for the award, and
describe if and how the regular compensation arrangement will be affected.
Providing guidance on its approach to analyzing employee stock purchase plans, specifically noting that it will generally support these plans unless they contain “evergreen” provisions that automatically increase the number of shares available under the plan.