On November 13, 2015 and November 20, 2015, proxy advisors Glass, Lewis & Co., LLC (Glass Lewis) and Institutional Shareholder Services Inc. (ISS), respectively, released their final voting policies for the 2016 proxy season. ISS’s updates follow its late-October release of proposed changes to its policies and solicitation of comments from market participants, investors and advisors. Our previous Corporate Update detailing ISS’s proposed policies can be found here.
Glass Lewis’s policies concerning U.S. issuers for the 2016 proxy season include updates to:
- outline and clarify the factors it will consider when determining whether to support conflicting management and shareholder proposals;
- distinguish between well-established and newly public issuers when considering adverse recommendations resulting from an issuer’s adoption of exclusive forum provisions without shareholder approval;
- codify its policy in issuing recommendations against directors, based on their individual or committee performance in mitigating an issuer’s environmental and social risks;
- clarify that it may issue a recommendation against the chair of an issuer’s nominating committee, upon a finding that the issuer has suffered poor performance due to a perceived failure by the board of directors to ensure adequately qualified leadership;
- address director “overboarding,” by decreasing the number of public company boards on which non-executive officer directors may serve to five, and decreasing the number of public company boards on which executive officer directors may serve to two (including the executive’s home board); and
- clarify its method of evaluation when considering compensation awards to executives outside of standard compensation packages, such as one-time and transitional awards.
ISS’s policies concerning U.S. issuers for the 2016 proxy season include updates to:
- combat director “overboarding,” by decreasing the number of public company boards on which non-CEO directors may serve to five, while leaving the current policy for CEO directors unchanged at two boards (in addition to the CEO’s home board);
- distinguish between well-established and newly public issuers when issuing and maintaining recommendations against director nominees to boards that have unilaterally amended charters and bylaws to create classified boards or establish supermajority vote requirements, until such unilateral action is reversed or ratified by shareholders; and
- incentivize externally-managed issuers (EMIs) to increase compensation arrangement disclosures, by adding “Insufficient Executive Compensation Disclosure by Externally-Managed Issuers” as a problematic pay practice that could result in a recommendation against such EMIs’ say-on-pay or compensation-related proposals until sufficient disclosures are made.
A copy of the Glass Lewis Proxy Paper Guidelines for the 2016 Proxy Season is available here. An executive summary of the ISS 2016 Global Benchmark Policy Updates is available here, and a detailed report of the ISS 2016 Benchmark Policy Recommendations for the Americas (covering the United States, Canada and Brazil) is available here.
UPDATES TO GLASS LEWIS’S PROXY VOTING GUIDELINES
Glass Lewis’s new policies for the 2016 proxy season will be effective for meetings held on or after January 1, 2016.
Conflicting Management and Shareholder Proposals
In preparation for the 2015 proxy season, amidst ambiguity among issuers and shareholders in interpreting Rule 14a-8(i)(9) under the Securities Exchange Act of 1934 (which allows an issuer to exclude a shareholder proposal if it “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting”), the SEC announced that it planned to study the application of the Rule further and would temporarily halt expressing any view on the application of the Rule for the 2015 proxy season. In October 2015, the SEC issued Staff Legal Bulletin No. 14H, available here, to clarify that the SEC will “focus on whether there is a direct conflict between the management and shareholder proposals” and will find a conflict exists only “if a reasonable shareholder could not logically vote in favor of both proposals.” Though it increases the burden on issuers to demonstrate a “direct conflict” between competing company and shareholder proposals, SLB No. 14H leaves Rule 14a-8(i)(9) intact; thus, some issuers may still decide to submit both proposals for shareholder consideration.
Glass Lewis’s 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.
The policy does not indicate any ranking or order of priority among the factors listed above.
Exclusive Forum Provisions
Glass Lewis’s prior policy regarding exclusive forum provisions in an issuer’s bylaws resulted in a recommendation against such provisions and a vote against the chair of an issuer’s nominating and governance committee. In its updated policy for the 2016 proxy season, Glass Lewis has refined its approach to distinguish between a newly public company that included such exclusive forum provisions prior to its IPO, as opposed to a well-established company which has recently introduced such a provision. For a newly public issuer that adopted an exclusive forum provision in its governing documents prior to its IPO, Glass Lewis will consider the provision, on balance, with other provisions in such issuer’s governing documents rather than issuing an adverse recommendation outright.
Environmental and Social Risk Oversight
Glass Lewis also updated its comprehensive guide on shareholder initiatives for 2016, which details its approach to common shareholder proposals for the upcoming proxy season. The updates for the 2016 proxy season added a new section to formalize Glass Lewis’s approach when evaluating directors based on their individual or committee performance in mitigating companies’ environmental and social risks. Under this new policy, Glass Lewis could issue recommendations against directors who Glass Lewis believes have contributed to failed or imprudent management of environmental or social risks that could have a negative impact on shareholder value.
To review Glass Lewis’s approach to these and other proposals further, please reference the Glass Lewis Proxy Paper Guidelines on Shareholder Initiatives for the 2016 Proxy Season, available here.
Nominating Committee Performance
Glass Lewis also revised its policy for the 2016 proxy season to make clear that it could consider issuing a recommendation against the chair of an issuer’s nominating committee upon a finding that the board of directors has failed to ensure it attracts and retains directors with relevant experience, if it concludes that such failure resulted in the issuer’s poor corporate performance.
The revised policy does not provide significant guidance or enumerate any sample factors which could lead to such a conclusion, but does suggest periodic director assessments or board refreshments as suggested methods of ensuring a board retains experienced and qualified directors in its membership.
Both Glass Lewis’s and ISS’s policies for the 2015 proxy season considered individual non-executive or non-CEO directors, respectively, who sat on more than six public company boards, or executive or CEO directors, respectively, who sat on more than two public company boards (excluding their own, with certain exceptions for boards of controlled subsidiaries of their own company), to be overboarded. Please see below for a discussion of ISS’s proposed policy change released in October and the final policy adopted for the 2016 proxy season.
Glass Lewis noted in its policy update for 2016 that it will continue to review director board commitments for the 2016 proxy season, and may note its concern in instances where non-executive officer directors serve on more than five boards and instances where directors who are executives of a public company serve on more than two boards total (including their home boards). However, these notations will not draw recommendations against these individuals until the 2017 proxy season. A similar yearlong grace period under ISS’s new policies is detailed below.
Glass Lewis’s policy update provided a detailed discussion of its position on discretionary awards granted outside of customary and standard incentive and compensation packages, such as signing bonuses, make-whole payments (paid to compensate a new hire for forfeited awards from a previous employer), and other transitional awards. Glass Lewis reiterated its overall cautious approach in considering these awards, but acknowledged that there are instances in which these payments are appropriate. Glass Lewis’s policy encourages issuers to provide thorough descriptions of the terms of and reasons for the awards for shareholders to consider.
UPDATES TO ISS’S PROXY VOTING GUIDELINES
ISS’s new policies for the 2016 proxy season will be effective for meetings held on or after February 1, 2016.
Combating Director Overboarding
ISS’s proposal on director overboarding expressed a concern that there has been a marked increase in directors’ involvement across different public company boards in recent years. Under its 2015 Proxy Voting Guidelines, ISS’s general policy was to issue recommendations against or recommendations to withhold votes for individual non-CEO directors who sat on more than six public company boards, or CEO directors who sat on more than two public company boards (excluding their own, with certain exceptions for boards of controlled subsidiaries of their own company). In October, ISS proposed reducing the maximum number of public company boards for non-CEO directors to four or five, and reducing the current threshold for CEO directors from more than two public company boards besides the CEO’s own, to no more than one outside board besides the CEO’s own.
The final ISS 2016 Benchmark Policy Recommendations for the Americas (Final 2016 Policies) decreased the threshold for “overboarded” non-CEO directors from more than six to more than five public company boards. However, ISS has instituted a one-year grace period, until the 2017 proxy season, before the revised thresholds under the new policy will result in adverse recommendations. This grace period will allow both directors and companies to plan accordingly and implement changes to their engagement and leadership plans over the next year—if they so choose—before drawing a recommendation against or recommendation to withhold votes from ISS. For the 2016 season, ISS will simply note in its analyses and reports if a director is serving on more than five boards, but such a note will not result in an adverse recommendation at this time.
Additionally, ISS did not lower the threshold number of outside directorships for CEO directors (which remains at no more than two outside board seats for a CEO director). This differs from the new Glass Lewis policy outlined above in two key respects: (1) the Glass Lewis policy permits public company executives to serve on two boards total, including their own; and (2) the Glass Lewis policy applies to all executive-level leaders, not just CEOs. The Final 2016 Policies noted that ISS will continue to evaluate the optimal level of directorships for such individuals, but the threshold will remain unchanged for the time being.
Discouraging Unilateral Board Actions
ISS’s proposal on unilateral board actions considered issuing and maintaining recommendations against individual director nominees of boards who had acted unilaterally to (1) classify the board or (2) establish supermajority vote requirements for bylaw and charter amendments, in an attempt to discourage this practice among both pre-IPO and post-IPO issuers, until such actions are ratified by shareholder vote or unwound.
In the Final 2016 Policies, ISS noted that investors may have different expectations for well-established public issuers, as opposed to newly public issuers. Thus, ISS implemented two different policies. For well-established public issuers, ISS chose to maintain its current policy of issuing recommendations against the individual directors of a board that had unilaterally approved such actions, until the actions are reversed or submitted to a binding vote of public shareholders. For newly public issuers whose boards have acted unilaterally to diminish shareholder rights prior to the IPO (by, for instance, creating a classified board or establishing supermajority vote requirements for material bylaw and charter amendments), the new ISS policy will take a more lenient “case-by-case” approach and consider factors, such as public commitments by such an issuer to put the provisions to a shareholder vote within three years of the IPO, to be mitigating factors that may help prevent an adverse recommendation from ISS.
Incentivizing More Comprehensive Compensation Disclosures by Externally-Managed Issuers
ISS’s proposal to update its policies to increase disclosure of compensation arrangements for executives of externally-managed issuers (EMIs) resulted from its desire to increase and incentivize transparency and allow shareholders to make comparisons easily when looking across both externally-managed and non-externally managed issuers. Because EMI executives are not directly compensated by the EMI, but rather by an external manager (which is reimbursed by the EMI through a management fee), EMIs typically have not disclosed details about these compensation arrangements.
In the Final 2016 Policies, ISS noted that insufficient disclosure regarding compensation arrangements for EMI executives is not currently considered a “problematic pay practice” under ISS policy, and ISS has not generally issued recommendations against EMIs on this basis alone. However, according to ISS, investors responding to the policy survey and public comment period expressed overwhelming support for a policy change addressing this issue when the EMI has a say-on-pay proposal on the ballot. ISS adopted a final policy which adds “Insufficient Executive Compensation Disclosure by Externally-Managed Issuers” to the list of practices that could result in an adverse recommendation from ISS on the issuer’s say-on-pay proposal, if the insufficient disclosure precludes a “reasonable assessment” of the EMI’s practices. Notably, the Final 2016 Policies do not provide specific guidance on what will be considered “sufficient” disclosure to make a reasonable assessment of compensation arrangements for the EMI’s named executive officers. However, ISS notes that some EMIs disclose the aggregate portion of fees paid to the external manager that is allocable to executive compensation expenses and that a small number of EMIs disclose detailed information on behalf of their external managers, citing this disclosure as evidence that such information can be made available within the constraints of company agreements with external managers.
The Final 2016 Policies also modified a few additional ISS policies which were not included in the proposals released for comment in October. These changes include updates to develop an analytical framework for evaluating director candidates nominated pursuant to proxy access, which ISS will use to complement the existing framework for evaluating candidates nominated via proxy contest. ISS also announced plans to release a Frequently Asked Questions document in December 2015 that will provide additional information on this framework. Additional updates in the Final 2016 Policies include clarifications to ISS’s list of factors used in considering shareholder proposals to adopt policies requiring senior executives to retain portions of shares acquired through compensation plans and adjustments to expand the scope of the current language in ISS’s recommendation policies for evaluating proposals concerning an issuer’s animal welfare or animal welfare-related risk standards, pharmaceutical pricing or access to medicines policies, and climate change policies.