As we move into the heart of proxy season, Glass Lewis and Institutional Shareholder Services (ISS) have issued and updated guidance as to how they will adjust their voting policies to account for actions taken by public companies in response to the coronavirus (COVID-19) pandemic. While we discussed Glass Lewis’s March 19, 2020, guidance regarding virtual-only meetings due to the COVID-19 pandemic in our previous alert, Public Companies: How Regulators and Issuers Are Responding to a Pandemic, Glass Lewis followed up its initial guidance with additional guidance in a variety of areas on March 26 and April 8, 2020. On April 8, 2020, ISS also issued guidance regarding the impact of the COVID-19 pandemic on the application of its voting policies on a number of governance issues.
How public companies respond to this guidance—both in the specific actions they take and in the way they disclose those actions—will impact how ISS and Glass Lewis make voting recommendations during this year’s and next year’s proxy seasons. This alert first provides an executive overview of the key takeaways for public companies and their officers and directors based on (but also irrespective of) the guidance provided. It then summarizes the guidance provided by each of Glass Lewis and ISS in each key functional area covered, including specific practice recommendations for public companies and their officers and directors to consider as they continue to navigate the new reality brought about by the COVID-19 pandemic.
As more fully described below, the Glass Lewis and ISS guidance generally confirms that these proxy advisors recognize that the COVID-19 pandemic is an unprecedented situation requiring a contextual, facts-based approach to voting recommendations with respect to the business and corporate governance actions taken by public companies. Officers and directors should be aware of this guidance, but first and foremost they must focus on taking the actions that they believe in their considered judgment to be in the best interests of their companies and their shareholders irrespective of the views of proxy advisors. Applying the following key tenets will assist officers and directors in making decisions that are consistent with the exercise of their fiduciary duties and have the added benefit of being aligned with the guidance promulgated by Glass Lewis and ISS:
- Health and safety: The health and safety of all stakeholders is the paramount concern that should drive how public companies act.
- Disclosure: Public companies should focus on full, fair and timely disclosure regarding their businesses, prospects, operations and financial condition as well as with respect to matters submitted to shareholders for a vote at their annual meetings.
- Takeover defense: A thorough evaluation of existing takeover defenses, and a fresh consideration of shareholder rights plans, is important, especially if the company is experiencing significant share price declines.
- Financing transactions: Public companies should take appropriate actions to ensure they have the liquidity to weather the current environment, including through consideration of capital markets and other financing transactions and suspending or limiting share repurchases and dividends.
- Compensation: Public companies should evaluate director and executive officer compensation and consider adjustments that may be appropriate for them in light of the impact of the COVID-19 pandemic, keeping in mind that these matters will need to be disclosed in their proxy statements for their 2021 annual meetings.
The Glass Lewis and ISS guidance covers a wide range of governance matters, including the following:
- Annual Meetings of Shareholders
- Poison Pills
- Board Attendance and Changes to Board Composition
- Capital Structure and Payouts
Glass Lewis March 19, 2020, and March 26, 2020, Guidance:
- Meetings on or before June 30, 2020: Glass Lewis will generally refrain from recommending a vote against members of the governance committee on the basis that the company is holding a virtual-only meeting of shareholders so long as the public company discloses, at a minimum, its rationale for holding a virtual-only meeting, including citing the COVID-19 pandemic.
- Meetings after June 30, 2020: Glass Lewis expects “robust disclosure” in the proxy statement concerning shareholder participation at virtual-only meetings occurring after June 30, 2020, and its standard policy on virtual-only shareholder meetings will apply to those meetings.
- All meetings: Glass Lewis will note, regardless of meeting date, whether public companies holding virtual-only meetings state their intention to resume holding in-person or hybrid meetings under normal circumstances.
- Shareholder proposals: Given the lead time for shareholder proposal submissions, the content of most proposals will likely not include any consideration of the COVID-19 pandemic, and some proposals may not adequately account for public companies’ current circumstances or constraints. However, companies should not use the COVID-19 pandemic to dismiss or hamper the ability of shareholder proponents to put forward their resolutions, speak at virtual-only meetings and have shareholders vote on such matters.
ISS April 8, 2020, Guidance:
- Virtual-only meetings:
- No policy against virtual-only meetings: ISS will continue not to have a policy to recommend votes against directors of public companies that hold virtual-only meetings.
- Clear disclosure: ISS encourages companies that are holding virtual-only meetings as a result of the COVID-19 pandemic to clearly disclose the reason for their decision.
- Meaningful participation: Companies holding virtual-only meetings should strive to provide shareholders with a meaningful opportunity (subject to applicable legal requirements) to participate as fully as possible in such meetings, including being able to ask questions of and engage in dialogue with directors and senior management.
- Return to in-person meetings: Public companies should commit to return to in-person or hybrid meetings (or put the matter to shareholders to decide) as soon as practicable.
- Meeting postponements: Public companies should follow applicable regulatory guidance and only hold physical meetings when it is determined to be safe to do so. Companies should continue to use their standard disclosure documents, press releases and websites to keep all constituencies informed about material events and developments.
The guidance from Glass Lewis and ISS is consistent with the recommendations included in our prior alert regarding annual meetings that apply to all public companies, regardless of whether ISS and Glass Lewis have significant influence on the voting of their shares. Public companies should focus first on the safety of their officers, directors, employees and shareholders when determining when and how to hold an annual meeting. Once that threshold determination has been made, public companies should provide robust disclosure that gives shareholders timely information regarding the proposals to be voted on and why the meeting is being held in the manner in which it is. In addition, public companies allowing or requiring remote communication should work with experienced service providers to host their meetings to ensure compliance with applicable state law requirements and to provide shareholders a meaningful opportunity to participate.
Glass Lewis April 8, 2020, Guidance:
- “Generally skeptical”: Glass Lewis remains “generally skeptical” of poison pills.
- Structuring a reasonable poison pill: Poison pills adopted by public companies because of impacts from the COVID-19 pandemic will be considered reasonable in context so long as (i) the duration of the pill is limited to one year or less and (ii) the company discloses a sound rationale for adoption of the pill as a result of the pandemic (such as, for example, a severe drop in stock price due to a widespread industry or market downturn). If the pill does not meet these conditions, Glass Lewis will recommend opposing the re-election of all board members who served at the time of the pill’s adoption.
- Shareholder approval on renewal: If the public company does not put the pill up for shareholder approval in the future to renew it, Glass Lewis will recommend opposing the re-election of all board members who served at the time of the pill’s renewal. Public companies can provide shareholders with additional confidence by assuring them at the time of the pill’s adoption that any renewal of the pill will require shareholder approval.
- Contextual policy approach: Glass Lewis makes a point in its guidance of noting that its policy regarding poison pills is flexible and based on the specific facts and circumstances, even stating that its approach “is demonstrably different to the approach of other proxy advisors.”
ISS April 8, 2020, Guidance:
- Poison pills generally disfavored: ISS will generally recommend voting against each director of a public company that maintains a poison pill meeting certain criteria as described in our previous alert, Poison Pills in Response to the COVID-19 Pandemic. ISS’s guidance updates this analysis by providing that its existing policy, as described in that alert, is “appropriately flexible” to account for the adoption of poison pills in the face of “genuine, short-term potential threat situations,” giving the COVID-19 pandemic as such an example, and that it will continue to follow that policy.
- Severe stock price decline: A severe stock price decline as a result of the COVID-19 pandemic is likely to be considered by ISS as a valid justification in most cases for adopting a pill of less than one year in duration.
- Tailored to the circumstances: The structure (including triggers and length) of and disclosures (including rationale) regarding the shareholder rights plan should be tailored to the circumstances.
As discussed in our previous alert, Poison Pills in Response to the COVID-19 Pandemic, public companies should consider whether their existing corporate governance structures enable them to protect long-term shareholder interests from potential opportunistic acquirers. In many cases adopting a shareholder rights plan (or at least putting one on the shelf) is a critical component to such a defensive strategy, especially when a company has experienced a significant stock price decline. Public companies that appropriately tailor their poison pills to the specific risks they are facing from the COVID-19 pandemic and clearly articulate the rationale for such plans should stand on firm ground with shareholders and proxy advisory firms.
Glass Lewis March 26, 2020, Guidance:
- Board attendance: Glass Lewis describes a risk to the effectiveness of board meetings held entirely remotely without specialized software or clear governance procedures, but that the risk to effectiveness is “strongly preferable” to the health risks associated with physical meetings.
- Board composition: Glass Lewis describes a particular risk presented by the lack of age and gender diversity among directors, given the increased risk to men and those aged 65 or over presented by the COVID-19 pandemic and as amplified by directors sitting on multiple boards.
ISS April 8, 2020, Guidance:
- Board attendance: Directors should not feel that they must disregard concerns for the health and safety of themselves and others in order to attend in-person shareholders’ meetings or scheduled board meetings. Disclosure related to directors’ attendance records should provide shareholders with adequate information to allow them to make informed judgments and considered voting decisions, if relevant, about directors’ attendance at and any absences from board and committee meetings.
- Board composition: ISS reaffirms that its existing policies provide appropriate discretion and flexibility related to director independence, potential overboarding, board diversity, board vacancies, board expertise (such as adding pandemic-related expertise) and directors’ interim service in senior executive roles (such as due to disability or incapacity of an existing member of the management team due to the COVID-19 pandemic).
Boards of directors should continue to exercise appropriate judgment regarding participation in meetings and board composition and fully disclose those matters. Although nearly all boards met remotely at times even before the COVID-19 pandemic, boards should consider reassessing their existing platforms for remote meetings to make such meetings more effective (including by utilizing videoconferencing facilities where regular in-person meetings have been replaced by remote meetings). With respect to board composition, we recommend that boards generally continue to execute on their existing policies, with a focus on identifying whether additional board skills should be added as a result of weaknesses that have become more evident as a result of the COVID-19 pandemic.
Glass Lewis March 26, 2020, Guidance:
- Overview of COVID-19-related compensation changes: Glass Lewis highlights a variety of approaches being taken by public companies to change compensation programs in the context of the COVID-19 pandemic, but it provides limited insight into how the pandemic will affect its own voting policies.
- Difficult to justify current compensation levels: There is a “heavy burden of proof” for boards and executives to justify maintaining pre-COVID-19 compensation levels (particularly at the expense of shareholders and other employees) in what is now a challenging job market.
ISS April 8, 2020, Guidance:
- Short-term compensation plans: Many boards are likely to announce plans to materially change the performance metrics, goals or targets used in their short-term compensation plans in response to the COVID-19 pandemic. Public companies should provide contemporaneous disclosure to shareholders of their rationales for making such changes. Such disclosures will help frame the conversation with shareholders for next year’s annual meetings.
- Long-term compensation plans: ISS generally does not support mid-term changes to long-term compensation plans and will analyze such changes on a case-by-case basis to determine if directors exercised appropriate discretion and provided adequate explanation to shareholders of the rationale for such changes. ISS will analyze any changes to the structures of long-term compensation plans under its existing policy frameworks.
- Option repricing: Option repricings or similar actions without shareholder approval or ratification are subject to ISS’s board accountability provisions. Such actions with shareholder approval or ratification are subject to ISS’s case-by-case policy approach, where ISS will generally recommend opposing any repricing that occurs within one year of a “precipitous” drop in the public company’s stock price.
As noted in our prior alert, Public Companies: How Regulators and Issuers Are Responding to a Pandemic, public companies have already taken and disclosed steps to reduce executive officer and director compensation, and these trends have continued. For example, a survey by compensation consultant Semler Brossy notes that, as of April 13, 2020, over 200 public companies had reduced the base salaries of one or more senior executives, and approximately 150 reduced director compensation as well. As public companies gain additional insight into the impact of the COVID-19 pandemic for the full year, they should consider whether initial or further adjustments to executive or director compensation may be appropriate for their circumstances. Executive compensation reductions and/or changes to compensation plans may trigger immediate disclosure on Form 8-K depending on the materiality of the changes. As noted above, public companies should keep in mind that such actions (or inactions) will need to be described in their 2021 proxy statements, and companies that retain the status quo may have a more challenging story to tell shareholders and proxy advisors next year.
Glass Lewis March 26, 2020, Guidance:
- Share repurchases and dividends: Glass Lewis does not provide any specific guidance regarding suspending or limiting share repurchases or dividends but does note that such suspensions or limitations “appear to be a foregone conclusion.”
- Capital raises: Glass Lewis also does not provide any specific guidance regarding capital raising transactions but recognizes that some companies will need to seek more flexibility to carry out capital raisings than shareholders are used to granting in accordance with strict best practice recommendations.
ISS April 8, 2020, Guidance:
- Share repurchases: ISS will generally continue to recommend in favor of existing share repurchase authorities within customary limits but notes that the board’s actions related to repurchases over the course of 2020 will be reviewed in the context of the public company’s 2021 annual meeting to consider if the directors managed risks in a “responsible fashion” for any repurchases undertaken under the authority.
- Capital raises: ISS acknowledges that the economic fallout of the COVID-19 pandemic will continue to lead companies to seek additional sources of financing to help them through the pandemic. In general, ISS will continue to apply its case-by-case analysis with respect to capital raising transactions, with appropriate departures from the current framework in light of the COVID-19 pandemic.
It is critical that public companies evaluate their financing needs with a focus on protecting shareholder value and securing and ensuring the liquidity needed to survive the significant economic disruptions brought about by the COVID-19 pandemic irrespective of any policy positions of Glass Lewis or ISS. Given the continued instability in the financial markets and the uncertainty regarding the duration of the economic havoc being wreaked by the pandemic, we expect public companies to continue to access the capital markets and other financing sources to buoy their cash positions.
If you have any questions related to this alert, please do not hesitate to contact any member of the Public Companies group or your regular Smith Anderson lawyer. Please visit and bookmark our firm’s Coronavirus (COVID-19) Business Resource Center, which is continuously updated with useful materials and resources related to COVID-19. This tool has been made available to ensure that our clients and the broader business community stay informed on key issues that may impact their operations and to navigate the related business and legal issues during these challenging times.
 This alert only covers the U.S. market guidance provided by ISS, although ISS also provided guidance for other markets.