Client update 1
November 12, 2014
ISS AND GLASS LEWIS
PROXY VOTING UPDATES
Institutional Shareholder Services (ISS) and Glass Lewis both released updates to
their proxy voting policies last week. Notably, both ISS and Glass Lewis have
adopted updates that reflect increased scrutiny of unilateral bylaw amendments
that they deem to negatively impact shareholders rights, board leadership
structure and compensation-related proposals.
To prepare for the 2015 proxy season, companies should be considering whether
the policy updates will impact proxy advisory voting recommendations on key
issues, including shareholder proposals, equity plans and corporate governance
issues. Thoughtful disclosure, focused shareholder engagement and other
strategies are key tools for companies that have sound governance and
compensation practices that are not endorsed by the proxy advisory firms or are
responding to shareholder proposals in a manner that does not garner their
The ISS policy updates, which are effective for annualmeetings after February 1,
2015, are available on the ISS Policy Gateway at http://www.issgovernance.com/.
Glass Lewis’s voting guidelines, which can be found at
http://www.glasslewis.com/resource/guidelines/, are generally effective for
annual meetings after January 1, 2015.
ISS POLICY UPDATES
The key ISS policy changes for U.S. companies relate to:
The adoption of bylaw or charter amendments without shareholder
Independent chair shareholder proposals;
Litigation rights, particularly exclusive forumand fee-shifting bylaw
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Equity-based and other incentive plans; and
Proposals relating to political contributions and greenhouse gas emissions.
Unilateral Bylaw and Charter Amendments
Under a new policy, which ISS characterizes as a codification of existing practice,
if a board amends a company’s bylaws or charter without shareholder approval
in a manner that ISS believes materially diminishes shareholder rights or could
otherwise adversely impact shareholders, ISS will generally recommend voting
“against” or “withhold” from individual directors, relevant committee members
or the entire board. Previously, ISS would evaluate such changes as a potential
material governance failure in the context of director elections.
ISS will consider several factors when determining how to respond to unilateral
bylaw and charter amendments, including:
The board’s rationale for adopting the amendment without seeking
Disclosure by the company of any significant shareholder engagement
regarding the amendment;
The level of impairment of shareholders’ rights;
Key governance provisions, including the board’s track record on similar
actions, the company’s ownership structure and existing governance
The timing of the amendment with respect to the company’s IPO or a
significant business development, if applicable.
While the prevalence of seasoned equity issuers unilaterally adopting what ISS
deems to be shareholder-unfriendly governance provisions, such as poison pills
or an increased percentage of shares required to call a special meeting, may be
low absent unusual circumstances, ISS specifically calls out in its release the
adoption of such polices by IPO companies. As a result, the directors of recent
IPO companiesmay face stronger opposition fromISS than was previously the
Independent Chair Shareholder Proposals
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ISS has adopted what it considers to be a holistic approach to evaluating
independent chair proposals. When determining whether to recommend voting
“for” shareholder proposals requiring that the chairman position be held by an
independent director, ISS will consider a number of factors; no single factor
should result in a for or against recommendation. While this analysis may
benefit some companies, ISS has indicated that this new approach would have
resulted inmore ISS support of shareholder proposals during the 2014 proxy
season. Any company that is considering challenging an independent chair
shareholder proposal should carefully consider ISS’s new approach.
The factors that ISS will consider include:
The scope of the proposal. ISS will consider whether it is precatory or
binding or seeks immediate change in the chairman role prior to the next
Board leadership structure. Absent a compelling rationale, ISS will support a
proposal if there is an executive or non-independent chair, if the company
has recently recombined the CEO/chair role or if the company is removing
an independent chair. ISS will also consider whether there is a lead director
and any recent transitions in board leadership structure.
Governance structure and practices. ISS will consider board and committee
independence, governance guidelines, board tenure and its relationship to
CEO tenure and other relevant factors in addition to whether the company
has any poor governance practices, including those relating to
compensation,material failures of governance and risk oversight, related
party transactions or other issues that might impact director independence
as well as corporate ormanagement scandals or corporate actions that might
have a negative impact on shareholders.
Company performance. ISS will generally consider one, three and five year
total shareholder return (TSR) related to peers and the market as a whole.
Strong financial performance may be considered a mitigating factor in
considering whether ISS will recommend support of a proposed leadership
In circumstances where a company seeks shareholder approval of bylaw
amendments impacting shareholder litigation rights, rather than unilaterally
adopting those amendments, ISS has adopted a new policy under which it will
recommend voting on a case-by-case basis considering the following factors.
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The company’s rationale for adopting the provision;
Disclosure of past harm from relevant shareholder lawsuits;
The breadth of application of the by-law, including the types of lawsuits
covered and the definition of key terms; and
Governance features that permit shareholders to repeal the provision at a
later date or to hold directors accountable through annual elections with a
majority vote standard in uncontested elections.
ISS will generally recommend a vote against fee-shifting by-laws that apply
when plaintiffs are only partially successful. This new ISS policy could create
headwinds for companies looking to limit their litigation costs through what ISS
deems to be shareholder-unfriendly bylaw provisions.
Equity-Based and Other Compensation Plans
ISS has adopted a new scorecard model for evaluating changes to equity
compensation plans. Under thismodel, ISS will consider a range of positive and
negative factors and take what it believes is a more nuanced or holistic approach
in contrast to its current pass/fail approach for equity plan proposals.
The scorecard model will look at factors in the following three broad categories
(weighted as indicated for the S&P 500 and Russell 3000 companies):
Plan Cost (45%). The total estimated cost of the company’s equity plans
relative to industry/market cap peers as calculated using ISS’s proprietary
Shareholder Value Transfer analysis. ISS will calculate SVT using two
separate measurements, one which takes into account new shares and shares
remaining for future grants and one which also includes outstanding awards.
Grant Practices (35%). Practices ISS will review include: (i) the company’s
three-year burn rate relative to its industry/market cap peers; (ii) vesting
requirements in CEO grants for past three years; (iii) estimated duration of
the plan (based on the sumof shares remaining available and new shares
requested, divided by the average annual shares granted in the prior three
years); (iv) the proportion of the CEO’smost recent performanceconditioned
equity grants and awards; (v) whether the company has a
clawback policy; and (vi) whether the company has established postexercise/
vesting shareholding requirements.
Plan Features (20%). ISS will view several features negatively, including
automatic single-trigger award vesting on a change in control, discretionary
vesting authority, liberal share recycling on various award types, and
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minimum vesting periods for grants made under the plan.
Many of the details about the new scorecard model remain unclear and we
understand that ISS plans to issue guidance in the form of compensation FAQs
in December. As a generalmatter, it appears that the scorecard approach will
provide ISS more flexibility in evaluating recommendations on plans with both
positive and negative factors.
Political Contributions and Greenhouse Gas Emissions
ISS has made clarifications to its voting recommendations for shareholder
proposals relating to political contributions and greenhouse gas emissions. ISS
will generally recommend voting for proposals requesting greater disclosure on
political contributions and trade association spending policies and activities,
considering the company’s policies, management and board oversight, and
existing disclosure. In addition, ISS will consider any recent and significant
controversies, fines or litigation related thereto. For proposals seeking the
adoption of greenhouse gas reduction goals, ISS clarified that it will evaluate
such proposals on a case-by-case basis, taking into account severalmitigating
and supporting factors relating to the company’s existing polices, performance
GLASS LEWIS POLICY UPDATES
Glass Lewis released updates to its policies on governance and executive
compensation which are generally incremental.
Unilateral Board Amendments to Bylaws
In instances where a board has amended, without shareholder approval, a
company’s bylaws in a manner that negatively impacts shareholder rights, Glass
Lewis may, depending upon the circumstances, recommend shareholders vote
against the chairman of the governance committee or against the entire
governance committee. Cited amendments include: (i) eliminating the ability
of shareholders to call a special meeting or act by written consent; (ii) increasing
the ownership threshold for shareholders to call a special meeting; (iii)
increasing vote requirements for charter or bylaw amendments; (iv) adopting
provisions that require arbitration of shareholder claims or fee-shifting bylaws;
(v) adopting a classified, or staggered, board structure; and (vi) eliminating the
ability of shareholders to remove a director without cause.
Responsiveness toMajority-Supported Shareholder Proposals
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Glass Lewis will generally recommend that shareholders vote against all
directors who weremembers of the governance committee when the board
failed to respond adequately to a shareholder proposal relating to important
shareholder rights that receives support froma majority of votes cast. Such
shareholder proposals include those relating to declassifying a company’s board,
establishing amajority vote standard for director elections and providing
shareholders the right to call a special meeting. When determining whether a
board has sufficiently implemented a shareholder proposal, Glass Lewis will
examine the right that the board adopts to determine if there are conditions that
may unreasonably interfere with the shareholders’ ability to exercise the right.
An example cited by Glass Lewis was overly prescriptive procedural
requirements for calling a special meeting.
Vote Recommendations Following an IPO
Like ISS, Glass Lewis appears to be increasing its scrutiny of provisions adopted
in a company’s charter and bylaws prior to an IPO. Glass Lewis will generally
refrain from issuing voting recommendations on governance during the oneyear
following an IPO. However, it will consider recommending a vote against:
(i) all board members if an anti-takeover provision such as a poison pill or
classified board is adopted and not put to shareholder vote following the IPO; (ii)
the chair of the governance committee if an exclusive forum provision is
adopted and not put to shareholder vote following the IPO; and (iii) the entire
governance committee if a provision limiting litigation rights, such as a feeshifting
bylaw, is adopted and not put to shareholder vote following the IPO.
Material Transactions withDirectors
Glass Lewis has a materiality threshold of $120,000 for transactions with
directors employed by a professional services firmwhere the company pays the
firm and not the individual director. The 2015 guidelines clarify that Glass Lewis
may determine this amount immaterial if the amount represents less than 1% of
the firm’s revenues and the board provides a compelling rationale as to why the
director’s independence is not impacted.
With respect to one-off awards granted outside of existing incentive programs,
Glass Lewis has noted that shareholders should generally be wary of such
awards, while acknowledging that these one-off incentives may be appropriate in
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some circumstances. Glass Lewis indicates that it will review the terms and size
of any one-off grants in the context of the company’s overall incentive strategy
and granting practices, as well as the current operating environment, and
provides guidance for companies on providing a thorough description of the
awards. The guidance indicates that awards should be tied to future service and
performance whenever possible.
Glass Lewis also provides clarification on its approach to say-on-pay analysis,
noting that it will consider implementation and effectiveness of a company’s
executive compensation programs, including paymix and use of performance
metrics in determining pay levels.
Employee Stock Purchase Plans
Except in extreme cases, Glass Lewis will generally support employee stock
purchase plans (ESPPs) given the regulatory purchase limit of $25,000 per
employee which Glass Lewis deems reasonable. It has provided additional
guidance on its approach to analyzing ESPPs
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