Institutional Shareholder Services Inc. and Glass, Lewis & Co., LLC both recently issued their annual proxy voting guideline updates. As revised, these guidelines have important implications for companies preparing for the 2019 proxy season.
ISS POLICY UPDATES
BOARD GENDER DIVERSITY: Institutional Shareholder Services Inc. (ISS) announced that adverse voting recommendations may be issued against nominating committee chairs for boards without any female members. This new policy will be effective for meetings and nominations on or after February 1, 2020.
DIRECTOR ATTENDANCE: In order to combat director absenteeism and chronic poor attendance, ISS will withhold recommendation from the chair of the nominating or governance committee after three years of poor attendance by a director. After four years of poor attendance, ISS will withhold recommendation from the full nominating or governance committee. If that director continues to have consistent poor attendance for five years or greater, ISS will withhold recommendation from the entire board.
CONFLICTING PROPOSALS: There was a significant increase in 2018 of board-sponsored proposals to ratify existing charter or bylaw provisions in order to protect against having the company adopt more onerous shareholder-sponsored charter or bylaw proposals. ISS will withhold recommendation from individual directors, members of the governance committee, or even the full board in instances when boards ask shareholders to ratify any existing charter or bylaw provisions. The decision to withhold recommendation will be based on a variety of factors, including any competing shareholder proposal, the board’s rationale, previous disclosure efforts, the effect on shareholders and the company’s history.
DIRECTOR PERFORMANCE: ISS will identify companies that have directors with long-term underperformance issues and boards with entrenchment-favoring policies. ISS changed the measurement of “sustained poor performance” based on total shareholder returns in the bottom half of a company’s industry group from a three-year interval to intervals of one, three and five years.
REVERSE STOCK SPLITS: ISS updated its policy on reverse stock splits to codify the approach currently utilized by companies not listed on major exchanges and who are not proportionately reducing their authorized shares. ISS will recommend voting for reverse stock split proposals if the number of authorized shares is proportionately reduced or when the effective increase in authorized shares is equal to or less than the allowable increase. If the above conditions are not met, ISS will vote on a case-by-case basis based on the company’s disclosure, financial status and the rationale for the proposed reverse stock split.
ENVIRONMENTAL AND SOCIAL: ISS has codified the existing factors it will use to analyze environmental and social shareholder proposals and indicated that significant controversies, fines, penalties or other litigation will also considered.
GLASS LEWIS POLICY UPDATES
BOARD GENDER DIVERSITY: Glass Lewis will recommend voting against nominating committee chairs of a board without a female member. For companies outside the Russell 3000 index or if the board provides sufficient rationale for not having any female board members, Glass Lewis may determine not to withhold its recommendation. This sufficient rationale includes timetables for addressing the lack of board gender diversity, notable governance and legal restrictions placed on the board, and any board agreements with investors. Glass Lewis will place special emphasis on companies headquartered in the state of California after the state passed a law that requires all California companies to have one woman on their board by the end of 2019, at least two women on boards of five members and at least three women on boards with six or more directors by 2021. Glass Lewis will recommend voting against any nominating committee chair of a California-based company unless there is adequate disclosure of compliance actions it will take to comply with the law.
CONFLICTING PROPOSALS: Glass Lewis has codified its conflicting special meeting shareholder resolution policy, including the following:
If a company places on its proxy ballot both a management and shareholder proposal that request different thresholds for the right to call a special meeting, Glass Lewis will uniformly recommend voting for the lower threshold;
If there are conflicting management and shareholder special meeting proposals and the company does not maintain any special meeting rights, Glass Lewis will recommend that shareholders vote in favor of their own proposal or alternatively to abstain from voting on the management’s proposal; and
If companies exclude a special meeting shareholder proposal in favor of a management proposal ratifying any existing special meeting right, Glass Lewis will typically recommend against that ratification proposal and will also withhold recommending voting for the election of the nominating and governance committee.
ENVIRONMENTAL AND SOCIAL: Glass Lewis will increasingly identify directors or committees charged with oversight of environmental and social material risks. Glass Lewis will provide investors notice of lack of board oversight and may also recommend that shareholders vote against members of the board’s audit committee based on these issues.
VIRTUAL SHAREHOLDER MEETINGS: Glass Lewis provided a non-exclusive list of effective disclosure for virtual shareholder meetings. These include:
Addressing the ability of shareholders to ask questions during the meeting, time guidelines for questions, what types of questions are allowed and how to disclose questions to other participants;
Procedures for posting questions received during the meeting and the company’s answers on the investor page of its website after the meeting; and
Addressing technical and logistical issues and procedures.
EXECUTIVE COMPENSATION: Glass Lewis has expanded its policies and guidelines relating to executive compensation including:
Recommending against voting for a member of the compensation committee when a new excise tax gross-up is provided in an executive employment agreement;
Requiring companies to provide shareholders with a meaningful explanation of any benefits agreed upon for severance arrangements;
Requiring companies to provide shareholders with a meaningful explanation of sign-on arrangements;
Increased scrutiny on large, front-loaded grants; and
For smaller reporting companies, recommending against voting for members of a company’s compensation committee if a reduction in executive compensation disclosure substantially impacts the shareholders’ ability to adequately assess the company’s executive compensation procedures.
A big takeaway from the 2019 ISS and Glass Lewis voting guideline updates is the focus on gender diversity on the board of directors. Following on similar measures published in recent years by large institutional shareholders and the new law passed in California, gender diversity is sure to be a hot topic on corporate boards in 2019.
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