ISS and Glass Lewis Update Their Proxy Voting Guidelines
Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis), two of the leading providers of corporate governance research and proxy voting services, have published their updated proxy voting guidelines for 2015. Both companies focused their updates on governance issues, including unilateral bylaw and charter amendments, as well as litigation rights, compensation, and environmental issues.
ISS Proxy Voting Guidelines for 2015
The ISS updates to its proxy voting guidelines are effective for annual meetings on or after February 1, 2015. ISS released updates for the United States as well as the Canadian, European, and Asian-Pacific markets, but this alert will focus only on the United States updates.
The most significant updates to the ISS proxy voting guidelines include:
Unilateral Bylaw/Charter Amendments
ISS will generally recommend voting “against” or “withhold” for individual directors, committee members or the entire board (except, potentially, new nominees) if the board amends the company’s charter or bylaws without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders. ISS will consider any relevant factor in its decision, including the following:
ISS decided to update its stance on unilateral bylaw/charter amendments based on its observation of a substantial increase in the amount of bylaw/charter amendments that were adopted without shareholder ratification. The substantial increase in such amendments is partly due to the recent trend of companies adopting bylaw and/or charter amendments right before, or in conjunction with, their IPOs.
Independent Chair Shareholder Proposals
ISS will generally recommend a vote “for” shareholder proposals requiring that the chairman’s position be filled by an independent director. ISS will take the following into account, among other things:
ISS updated its stance on shareholder proposals requiring that the chairman’s position be filled by an independent director because this type of shareholder proposal was the most prevalent type of shareholder proposal at U.S. companies’ annual meetings in 2014. The new policy takes a more holistic approach, considering a wide range of mitigating factors for determining how ISS will recommend shareholders vote on such proposals.
ISS will recommend voting case-by-case on bylaws that impact shareholders’ litigation rights, considering the following factors:
ISS will generally recommend a vote “against” bylaws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits. Unilateral adoption by the board of bylaw provisions which affect shareholders’ litigation rights will be evaluated under ISS’ policy on unilateral bylaw and charter amendments discussed above.
ISS updated this policy for a number of reasons, including that the Delaware legislature has not yet acted (as expected) to limit the applicability of a Delaware Supreme Court decision that allows companies to adopt fee-shifting bylaws to non-stock corporations. Due to the delay by the Delaware legislature, public companies are beginning to adopt these types of bylaw amendments by unilateral board action.
Compensation – Equity Based and Other Incentive Plans
ISS has decided to adopt a “scorecard” approach for equity plans. The “Equity Plan Scorecard” takes into account a wide range of positive and negative factors (instead of the previous pass/fail tests) to review proposals related to equity incentive plans. This new scorecard approach weighs positive and negative factors in three different main areas: plan cost, plan features, and grant practices.
Plan Cost – the total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated shareholder value transfer in relation to its peers.
Plan Features – features such as automatic single-trigger award vesting on a change of control, discretionary vesting authority, liberal share recycling on various award types, and minimum vesting period for grants made under the plan.
Grant Practices – three-year burn rate relative to the company’s industry and market cap peers, vesting requirements in most recent CEO equity grants, estimated duration of the plan, proportion of the CEO’s most recent equity grants and awards subject to performance conditions, whether there is a clawback policy and whether there are post-exercise/vesting share holding requirements.
ISS will generally vote "against" the plan proposal if a combination of the above factors suggests that the plan is not in the best interest of shareholders, or if any of the following apply:
Political Contributions and Greenhouse Gas Emissions
ISS will generally recommend a vote "for" proposals requesting more disclosure of a company’s trade associations spending policies and activities or its political contributions. Factors that ISS will consider when recommending a vote on such proposals are:
ISS will consider proposals that request the adoption of greenhouse gas reductions goals for emissions from the company’s products and operations on a case-by-case basis. ISS will consider the following factors:
Glass Lewis Policy Guidelines for the 2015 Proxy Season
Glass Lewis has released updates, which are generally effective for annual meetings after January 1, 2015, related to the following areas:
Governance Committee Performance
Where a board amends, without shareholder approval, the company’s governing documents to reduce or remove important shareholder rights, or to otherwise impede the ability of shareholders to exercise these rights, depending on the circumstances, Glass Lewis may recommend that shareholders vote "against" the chairman of the governance committee or "against" the entire governance committee. Examples of actions that could cause a vote "against", include:
In addition, Glass Lewis believes that amendments to a company’s charter or bylaws that restrict a shareholder’s choice of legal venue are not in the best interests of shareholders because such amendments essentially discourage shareholders from bringing claims against the company by increasing the cost of litigation. As a result, Glass Lewis will generally recommend a vote "against" an exclusive forum amendment unless the company: (1) provides a compelling argument for why the provision would directly benefit shareholders, (2) provides evidence of abuse of legal process in other jurisdictions besides the favored jurisdiction, (3) narrowly tailors such amendment to the appropriate risks involved, and (4) maintains a strong and appropriate corporate governance practices.
Glass Lewis strongly opposes fee-shifting bylaws because it believes they discourage even meritorious shareholder lawsuits by providing a financial disincentive to sue the company. Glass Lewis, therefore, will generally recommend voting "against" the members of the governance committee if a fee-shifting bylaw is adopted without shareholder approval.
Board Responsiveness to Majority-Approved Shareholder Approvals
Glass Lewis’ current policy is to recommend that shareholders vote "against" members of the board if during such members’ board tenure a shareholder proposal regarding important shareholder rights was approved by a majority of shareholders, but then the board did not properly respond to such majority approval. Glass Lewis has now expanded this policy to specify that, in determining whether a board has sufficiently implemented a proposal, Glass Lewis will examine the quality of the right enacted or proffered by the board for any conditions that may unreasonably interfere with the shareholder’s ability to exercise the right (e.g., overly prescriptive procedural requirements for calling a special meeting).
Vote Recommendations Following an IPO
While Glass Lewis will generally refrain from issuing voting recommendations during the one-year period after an IPO, it has now decided that it will scrutinize certain provisions adopted prior to an IPO. Specifically, Glass Lewis will:
Assessing “Material” Transactions with Directors
Glass Lewis has a $120,000 materiality threshold in place for directors employed by professional services firms (e.g., law firms, investment banks or consulting firms) where the company pays the firm and not the individual for services. Glass Lewis updated this policy so that the transaction will be deemed immaterial if the amount paid to the firm is less than 1% of such firm’s annual revenues and the board provides a compelling reason as to why the director’s independence is not affected.
Advisory Vote on Executive Compensation
Glass Lewis generally believes that shareholders should be wary of awards granted outside a company’s standard incentive schemes. However, Glass Lewis recognizes that, in certain circumstances, additional incentives may be appropriate. To that end, Glass Lewis recommends that companies that make grants outside standard incentive schemes should provide a thorough description of the awards, including a cogent and convincing explanation of their necessity and the reason why existing rewards do not provide sufficient motivation. In addition, companies should tie the awards to future service and performance, if possible, and describe if and how the regular compensation arrangements will be affected by the supplemental awards. Glass Lewis will review the terms and size of the awards in the context of the company’s overall incentive strategy, as well as its current operating environment.
Employee Stock Purchase Plans
Glass Lewis also clarified its policy on reviewing employee stock purchase plans (ESPPs). Specifically, Glass Lewis will generally recommend a vote "against" ESPPs that contain evergreen provisions that automatically increase the number of shares available each year under the ESPP. Glass Lewis will generally support ESPPs in compliance with the regulatory purchase limit of $25,000 per employee per year, which Glass Lewis considers reasonable. It also looks at the number of shares requested to see if either (i) an ESPP will significantly contribute to overall shareholder dilution or (ii) shareholders will not have a chance to approve the program for an excessive period of time.