Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis), the two leading providers of corporate governance research and proxy voting services, have published their updated proxy voting guidelines for 2020. Both companies focused their updates primarily on corporate governance, board composition and conduct, and compensation for executives and directors.
ISS PROXY VOTING GUIDELINES FOR 2020
The ISS proxy voting guidelines updates are effective for annual meetings on or after February 1, 2020. ISS released updates for the United States as well as Canadian and Latin American markets, but this alert will focus only on the United States updates.
The most significant updates to the ISS proxy voting guidelines relate to:
- Shareholder proposals for independent board chairs;
- Governance of new public companies;
- Gender diversity on boards;
- Approval of share repurchase programs;
- Restrictions on shareholder rights under bylaws;
- Clarification on board attendance exemptions;
- Pay gap information requests related to race and ethnicity; and
- “Evergreen” provisions in equity compensation plans.
Shareholder Proposals for Independent Board Chairs
ISS already generally recommends voting for proposals that require a board chair’s role to be held by an independent director and it now has outlined factors that will improve the chances it makes this recommendation. In particular, ISS will now scrutinize the “rationale” behind such a proposal before supporting it. Factors that will support a recommendation to vote in favor of an independent board chair role include: (i) a board comprised mostly of non-independent directors or their presence on key committees; (ii) a weak or poorly defined independent director role that is unable to act as counterweight to a combined CEO and chair; (iii) a CEO and chair that have been recently recombined, the abandonment of an independent chair model, or the existence of an executive or non-independent chair in addition to the CEO; (iv) facts indicating the board has not properly managed and addressed material risks related to the company; (v) the existence of material governance failures, especially if the board has tried to reduce shareholder rights or failed to respond adequately to shareholders; and (v) information showing that the board has not stepped in when management’s interests are adverse to shareholders’ interests.
Governance of New Public Companies
For companies that are newly public, ISS will typically recommend a vote against directors individually, committee members, or an entire board (with new nominees evaluated case-by-case) if ,before or in connection with the company’s recent public offering, the company or board adopted bylaws or charter provisions that are materially adverse to shareholder rights. The revised ISS policy guidance specifies that these provisions include, among others: supermajority vote requirements for charter or bylaw amendments and classified boards. A reasonable provision allowing these items to sunset after a period of time is a mitigating factor ISS will consider.
In its policy update, ISS also highlighted capital structures of newly public companies as among the reasons it will often recommend a vote against an entire board (with new nominees considered on a case-by-case basis). This applies where a newly public company has put in place a multi-class capital structure in which the classes have unequal voting rights without a provision allowing for this structure to sunset within a reasonable time period. The sunset provision’s reasonableness depends on the company’s lifespan and the rationale for the time period chosen. A sunset period of more than seven years from IPO will be viewed as unreasonable.
Gender Diversity on Boards
If a company in the Russell 3000 or S&P 1500 has no women on its board, ISS will now generally favor a vote against (or withhold from) the chair of the nominating committee (and other directors on a case-by-case basis). If there are no women currently serving on the board but a woman served on the board as of the previous annual meeting, companies can demonstrate a mitigating factor for ISS by making a firm commitment to add at least one woman within a year. Companies with no women on their boards and who had no women on their boards as of their preceding annual meeting can only demonstrate a mitigating factor by disclosing a firm commitment in their proxy statement to appoint at least one woman to their board by February 1, 2021. In other words, the ability to use a firm commitment to add a woman to the board as a mitigating factor will soon be gone (for companies that have never had a female board member).
Share Repurchase Programs
ISS generally supports open-market share repurchase programs in which all shareholders take part on the same terms. However, for this year ISS has clarified it will review these programs for potential exploitation or misuse by management. For example, ISS will monitor repurchase programs on a case-by-case basis to determine whether they are being used as “greenmail” or as a mechanism to allow insiders to buy back shares at a premium, to inappropriately manipulate incentive compensation metrics, or where the programs pose threats to the company’s long-term viability. In addition, ISS will vote on a case-by-case basis on proposals to repurchase shares directly from specified shareholders, balancing rationale against the possibility of misuse.
Restrictions on Shareholder Rights Under Bylaws
ISS already generally recommends voting against members of the governance committee if “a company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws.” Examples of these restrictions include “outright prohibition on the submission of binding shareholder proposals” and requirements for how long shareholders must hold their shares to be eligible to submit proposals that are longer than SEC Rule 14a-8’s time period of one year.
ISS notes that it has recently observed more companies submitting proposals to shareholders attempting to ratify or approve requirements that go beyond SEC Rule 14a-8, which regulates shareholders’ proposals. Now ISS has said it will watch more closely for management proposals to approve or ratify requirements in excess of SEC Rule 14a-8. ISS will maintain its negative recommendation until shareholders receive unfettered ability to amend bylaws or until a proposal providing that ability goes to shareholders for approval.
Clarification on Board Attendance Exemptions
ISS generally recommends voting against or withholding from directors who attend less than 75 percent of the total board and committee meetings for the time in which they have been on the board. Companies can still disclose acceptable reasons for absences including medical issues and family emergencies. For 2020, ISS clarified that an exemption applies to all nominees who served only part of the fiscal year.
Pay Gap Information Requests Related to Race and Ethnicity
ISS has already stated that it will vote case-by-case on shareholder proposals requesting reports on and disclosure of companies’ data related to potential gender pay disparities or publicly available reports on policies and goals meant to reduce such disparities. Now it has expanded this position to include requests for pay data reports and disclosure relating to potential racial and ethnic-based pay disparities as well.
“Evergreen” Provisions in Equity Compensation Plans
ISS recommends a case-by-case approach to votes on share-based compensation plans depending on plan features, plan cost, and grant practices in accordance with its “Equity Plan Scorecard.” Since recent tax reform eliminated the need for companies to obtain regular shareholder approval of plans, ISS will now consider an evergreen provision an egregious factor requiring that it recommend a vote against the equity compensation proposal.
GLASS LEWIS POLICY GUIDELINES FOR 2020
Glass Lewis updates are generally effective for annual meetings on or after January 1, 2020, and relate to the following areas:
- Excluding shareholder proposals when no SEC stance is taken;
- Additional scrutiny of say-on-pay votes;
- General approach to executive compensation;
- Director attendance; and
- Forum selection clauses.
Excluding Shareholder Proposals in Certain Situations
The SEC stated last year that starting in the 2019-2020 shareholder proposal season, SEC staff may now respond orally rather than in writing to some no-action requests relating to excluding shareholder proposals. If the SEC has “verbally permitted” a company to exclude a shareholder proposal without producing a written record, Glass Lewis will expect the company to disclose that in its proxy statement. If a company makes no such disclosure, Glass Lewis will recommend voting against members of the governance committee. This position essentially defeats the purpose of the SEC’s new position on oral responses by encouraging companies to make disclosures that would not otherwise have to be included in the proxy statement.
The SEC staff may decline (orally or in writing) to take a view on some no-action requests submitted by companies aiming to exclude Rule 14a-8 shareholder proposals from their proxy statement, and Glass Lewis has now said it will seek to encourage inclusion of such proposals by recommending against all members of the governance committee when a shareholder proposal on which the SEC has declined to take a view is excluded. Glass Lewis states that companies should only omit proposals where the SEC has “explicitly concurred” with a company’s argument for excluding a proposal.
Additional Scrutiny of Say-on-Pay Votes
Glass Lewis will now scrutinize say-on-pay votes in light of the say-on-pay proposal put forward at the previous annual meeting. If a say-on-pay vote passes with low shareholder support, which Glass Lewis defines as opposition of 20 percent or more, Glass Lewis will now analyze the company’s response to this vote going forward to determine whether it was sufficient. Unless the company discloses how it has addressed the low support or whether it has made specific changes in response to shareholder concerns regarding pay, Glass Lewis will consider a recommendation against the next say-on-proposal or against compensation committee members. Glass Lewis will consider companies’ responses relative to the level of shareholder opposition they receive in a particular year and whether such opposition continues for multiple years.
General Approach to Executive Compensation
Glass Lewis will be looking more closely at the structure of executive compensation, specifically focusing on terms it deems not to be in the company’s interests. For example, Glass Lewis identified the following as potentially weighing in favor of a negative recommendation on new executive entitlements: (i) change-in-control triggers that are excessively broad, including new or recently renewed “single-trigger” change-in-control provisions; (ii) severance entitlements deemed inappropriate or excessive; (iii) sign-on arrangements not fully explained or those that are excessive; (iv) guaranteed bonuses spanning multiple years; and (v) failure to address these practices when employment agreements are amended. Glass Lewis has said it considers “double trigger” change-in-control arrangements to be best practice for executive compensation agreements.
In general, Glass Lewis will recommend voting against the governance committee chair when companies do not disclose the board and committee meeting attendance records of individual directors. If a company discloses that a director attended fewer than 75 percent of board and committee meetings, the Glass Lewis position is that the reader should be able to determine which director is referenced in such disclosure, otherwise it will recommend a vote against the governance committee chair (if a director is on a board less than a year, however, Glass Lewis will usually not recommend a vote against for an attendance rate below 75 percent).
Forum Selection Clauses
Glass Lewis generally recommends a vote against the governance committee chair when a board adopts a forum selection clause without shareholder approval (or if it seeks shareholder approval of such a clause in a bylaw amendment rather than independently as a separate proposal). However, Glass Lewis has now clarified that it may make an exception to this approach when provisions mandating exclusive forums are narrowly tailored to the company’s discrete situation and a reasonable sunset provision is included.
In sum, both Glass Lewis and ISS emphasize governance, board composition, and compensation as key areas of focus in 2020. Despite recent SEC guidance that aims to more closely regulate proxy advisers by subjecting them to proxy rules under the Exchange Act, both firms will likely maintain their significant influence with institutional investors in 2020.
 Note: “Vote against” will be used throughout to include situations where ISS or Glass Lewis may recommend either withholding or voting against.