Companies preparing for their annual shareholder meetings will need to consider a variety of factors, including new guidance from the Securities and Exchange Commission (SEC) and recommendations from Glass, Lewis & Co. (Glass Lewis) and Institutional Shareholder Services Inc. (ISS).
A. New SEC Guidance
Rule 14a-8 No-Action Requests
On September 6, 2019, the SEC’s Division of Corporate Finance announced changes to how it will process requests to exclude shareholder proposals from company proxies under Exchange Act Rule 14a-8.1 Starting with the 2019-2020 shareholder proposal season, the staff may respond orally instead of in writing to some no-action requests to exclude proposals. The staff will continue to issue no-action letters where doing so would provide additional value, such as “more broadly applicable guidance about complying with Rule 14a-8.” The SEC’s announcement also noted that the staff may decline to take a position on an individual request to exclude a proposal, but that that should not be interpreted as requiring the proposal to be included in the company’s proxy statement.
In response to the SEC’s announcement, Glass Lewis, a proxy advisory firm, has issued new recommendations on excluding shareholder proposals (see below). ISS, another proxy advisory firm, has not addressed this change. Its preexisting policy states that ISS will generally recommend that shareholders vote against directors of a company that has omitted a shareholder proposal from its proxy materials without the shareholder withdrawing the proposal or the company obtaining no-action relief from the SEC or a US District Court ruling that it can exclude the proposal.
B. Glass Lewis 2020 Proxy Season Updates
In November 2019, Glass Lewis released updates to its US Policy Guidelines for its voting recommendations for annual stockholder meetings occurring on or after February 1, 2020.2 New recommendations and policy clarifications include:
- Excluded Shareholder Proposals under Rule 14a-8: In response to the recent SEC guidance update (see above), Glass Lewis has updated its policy on excluded proposals. Glass Lewis will generally recommend voting against members of a company’s governance committee if the company excludes a proposal after the SEC declined to state a view in response to the company’s no-action request to exclude that proposal. Where the SEC has provided an oral response to a no-action request instead of a written response, Glass Lewis advises that companies should provide disclosure concerning this oral relief in the proxy statement in order to avoid a “vote against” recommendation.
- Say-On-Pay: Glass Lewis will generally recommend voting against members of a board’s compensation committee where the board determines to hold say-on-pay votes less frequently than the schedule approved by a plurality of the company’s shareholders. With respect to company responsiveness, Glass Lewis will take into account the severity and persistence of shareholder opposition to a company’s say-on-pay proposals when determining whether a company has adequately responded to low shareholder support.
- Compensation: Glass Lewis clarified several compensation-related proposals. For change-in-control arrangements, double-trigger change-in-control arrangements will be considered best practice, and definitions of “change-in-control” should not be overly broad. For short-term incentives, Glass Lewis will expect companies to provide a “robust discussion” of a compensation committee’s decision to apply “upward discretion,” such as by lowering goals mid-year or increasing calculated payouts. For contractual payments and arrangements, executive employment terms that may result in a negative say-on-pay recommendation include “excessively broad change-in-control triggers, inappropriate severance entitlements, inadequately explained or excessive sign-on arrangements, guaranteed bonuses (especially as a multi-year occurrence), and failure to address any concerning practices in amended employment agreements.”
Glass Lewis also codified its policies on board attendance, shareholder proposals seeking to eliminate supermajority voting requirements and shareholder proposals requesting disclosure of gender pay gaps, among other things.
C. ISS 2020 Proxy Season Updates
In November 2019, ISS released updates to its US Proxy Voting Policies and Procedures for its voting recommendations for annual stockholder meetings occurring on or after February 1, 2020.3 New recommendations and policy clarifications include:
- Gender Diversity: For meetings of companies in the Russell 3000 or the S&P 1500 indices occurring on or after February 1, 2020, ISS will generally recommend voting against the nominating committee chair if the board has no gender diversity. Other directors who are responsible for the board nomination process may also be impacted on a case-by-case basis, and ISS will also consider any exceptional circumstances explaining the absence of board gender diversity on a case-by-case basis. For the 2020 proxy season only, a board’s firm commitment to appoint a female director will be a mitigating factor. This change builds on ISS’s 2018 policy of highlighting companies that have no female directors in its proxy reports.
- Problematic Governance Structures at Newly-Public Companies: ISS has created new policies to address (1) problematic governance provisions at newly-listed entities and (2) multi-class capital structures with unequal voting rights. Under these new policies, ISS will focus on “highly problematic” governance structures, including supermajority voting requirements to amend a company’s charter or bylaws, classified board structures and other “egregious” provisions. ISS will also generally advise shareholders to vote against all members of the board of any company that, prior to or in connection with the company’s IPO, adopted a multi-class capital structure with unequal voting rights without a reasonable, time-based sunset provision of seven years or less.
- Shareholder Proposals: ISS has codified its holistic approach to evaluating independent chair proposals by explicitly identifying the various factors that will generally result in positive recommendations. It has also codified its approach to evaluating share repurchase plan proposals, and has adopted new safeguards against abusive uses of share repurchase plans such as “(1) the use of targeted share buybacks as greenmail or to reward company insiders by purchasing their shares at a price higher than they could receive in an open market sale, (2) the use of buybacks to boost EPS or other compensation metrics to increase payouts to executives or other insiders, and (3) repurchases that threaten a company's long-term viability (or a bank's capitalization level).”
ISS also announced that it will, among other things, update its policy on pay gap reporting shareholder proposals by adding “race or ethnicity” as a category for data requests and update its compensation-related policies. Notably, this will be the first year that ISS may issue a negative recommendation under its 2018 policy on excessive levels of non-employee director compensation without first requiring a recurring pattern of excessive pay.