On November 1, Glass Lewis released its 2020 policy updates, which will be applicable to all U.S. company meetings held on or after January 1, 2020. Glass Lewis's policy update that will likely have the broadest impact during the 2020 proxy season is related to the Security Exchange Commission's (SEC) recently announced changes to the no-action process. For 2020, Glass Lewis will generally recommend voting against all members of the nominating and governance committee where a company excludes a shareholder proposal after requesting no-action relief, to which the SEC either declines to respond or does not provide a formal written response. This and other notable updates are summarized below. Glass Lewis's complete guidelines are available on their website: https://www.glasslewis.com/guidelines.
Evaluating Director Performance
Glass Lewis updated several policies relating to factors it considers when evaluating the performance of the members of each of the key standing board committees.
Nominating and Governance Committee
New this year, Glass Lewis will consider additional factors when evaluating nominating and governance committee members' performance related to (1) director attendance and (2) the handling of no-action relief.
With respect to director attendance, Glass Lewis will generally recommend voting against the governance committee chair if a company either does not disclose directors' board and committee attendance records, or if a director attended less than 75% of such meetings and a company does not include disclosure sufficient to determine which specific director's attendance was lacking. We expect this policy update will have minimal impact since Item 407(b) of Regulation S-K already requires disclosure regarding directors' attendance. Accordingly, most companies already provide this disclosure. However, where a director attends less than 75% of total board and committee meetings, we strongly encourage companies to provide specificity regarding the reason for the clearly identified director's absence.
More notably, Glass Lewis has adjusted its guidelines to account for the SEC's recently announced changes regarding how the Commission plans to respond (or decline to respond) to companies' requests for no-action relief on shareholder proposals under Rule 14a-8 of the Exchange Act. For 2020, Glass Lewis will generally recommend voting against all members of the governance committee where a company has requested no-action relief and the SEC either:
- declines to state a view on the exclusion of the proposal and the company excludes it from its 2020 proxy statement; or
- orally grants no-action relief without a written record of its determination and the company fails to provide some disclosure regarding such no-action relief in its proxy statement.
This policy change will be important for companies to consider in evaluating whether to exclude a shareholder proposal in the absence of receiving written no-action relief. While the SEC's recent guidance indicates that declining to state a view should not be interpreted as requiring the company to include the proposal in its proxy statement, Glass Lewis's updated guidelines do not follow that interpretation. It is also unclear whether the SEC's plan to record oral no-action relief on its website would constitute a written record under Glass Lewis's policy.
Glass Lewis has also clarified its policies this year to indicate that it will generally recommend a vote against the governance committee chair or any member of the committee, if a company includes a management proposal to ratify an existing special meeting right in order to exclude a shareholder proposal seeking a special meeting right that is materially different.
Lastly, Glass Lewis also added some flexibility to its general policy of recommending against the chair of the governance committee in the year a board adopts a forum selection clause without a shareholder vote. Specifically, the amended policy provides that Glass Lewis will consider whether an exception to the general policy is warranted by evaluating the circumstances surrounding adoption of the clause and whether it is sufficiently narrow or provides for a reasonable sunset period.
Glass Lewis's updated guidelines codify that it will recommend voting against all members of a company's compensation committee if the board adopts a say-on-pay frequency vote that differs from the frequency approved by a plurality of shareholders. Although this vote is advisory, Glass Lewis's reasoning is that adopting a frequency other than that approved by shareholders ignores the clearly expressed will of shareholders.
Glass Lewis will generally recommend voting against the chair of the audit committee if fees paid to the company's external auditor for audit and non-audit services are not disclosed. Given that Schedule 14A requires disclosure of audit, audit-related, tax and all other fees, we do not expect this update to significantly impact companies.
Glass Lewis's updated guidelines provided insight around its views towards the following key shareholder proposal topics going into 2020.
Gender Pay Equity Shareholder Proposals
Glass Lewis will continue to review on a case-by-case basis shareholder proposals that request a company to disclose median gender pay ratios (i.e., unadjusted median based on factors such as job title, tenure and geography). If the company in question provides sufficient disclosure regarding its diversity initiatives, as well as information as to how they are ensuring that women and men are paid equally for equal work, Glass Lewis will generally recommend against these proposals.
Supermajority Voting Requirements
Glass Lewis has codified its approach to shareholder proposals requesting that controlled companies eliminate a supermajority vote standard. Generally, it will recommend that shareholders vote against such a proposal, as the supermajority provision provides protection to minority shareholders.
Advisory Vote on Executive Compensation (Say-on-Pay) Updates
Glass Lewis made several clarifications or refinements to its analysis relating to say-on-pay vote recommendations. In assessing a company's compensation program and pay practices, Glass Lewis revised it guidelines to indicate that its review of significant changes or modifications to such programs or practices includes review of post-fiscal year-end changes and one-time awards and focuses in particular on company changes that are material to its recommendations.
Responsiveness to Low Shareholder Support for Say-on-Pay
Glass Lewis clarified its expectations regarding company responsiveness to low levels of shareholder support for say-on-pay. Where 20% or more of shareholders opposed a say on pay proposal at the prior annual meeting, Glass Lewis believes the board should demonstrate some level of engagement with shareholders in advance of the next annual meeting. Glass Lewis expanded its guidance to provide that the level of responsiveness should correlate with the magnitude of opposition, as well as the persistence of opposition over a period of years. Glass Lewis indicated that, in addition to engaging with large shareholders, an appropriate response would include implementing changes that directly address concerns voiced by shareholders. Glass Lewis's policy of recommending a vote against compensation committee member(s) in the absence of any evidence of board engagement on these matters is unchanged. However, its revised policies now indicate that Glass Lewis expects "robust" disclosure of engagement activities and specific changes made in response to shareholder feedback to evaluate the appropriateness of a company's response. Absent adequate disclosure, it may recommend that shareholders vote against say-on-pay. Essentially, it appears that Glass Lewis has codified a tiered approach to evaluating responsiveness, where no responsiveness triggers against recommendations for individual compensation committee members, whereas insufficiently robust disclosure would potentially spare directors from scrutiny but still result in an against say-on-pay recommendation.
Pay for Performance Analysis
Glass Lewis provided updates to its pay for performance model, most significantly to address that it will no longer be using Equilar designated peer groups for 2020. Its revised guidelines indicate that compensation and performance are measured against a peer group of appropriate companies, which may overlap to some extent with a company's self-chosen peer group. Companies that demonstrate a weaker link between pay for performance are more likely to receive a negative vote recommendation, but other qualitative factors such as overall incentive structure, significant forthcoming changes to the compensation program or reasonable long-term payout levels may mitigate concerns to some extent.
Additional insight on Glass Lewis's changes to peer methodology can be found in Georgeson August 2019 coverage of this topic: https://www.georgeson.com/us/glass-lewis-single-global-data-partner-potential-peer-methodology-changes
Amendments to Employment Agreements
Glass Lewis's updated policies add guidance providing that it will potentially view the failure to address problematic pay practices in materially amended employment agreements as a missed opportunity to align company policies with best practices, and accordingly may recommend against a say-on-pay vote. Problematic pay practices include excessive change in control entitlements, modified single-trigger change in control entitlements, excise tax gross-ups and multi-year guaranteed awards.
Contractual Payments and Arrangements
The 2020 updates add to or clarify the factors Glass Lewis considers when assessing the design of contractual payments and arrangements. Executive employment terms that may result in a negative say-on-pay vote 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 the failure to address any concerning practices in amended employment agreements, as noted above.
Change in Control
Glass Lewis has codified its position that double-trigger change in control arrangements – those that require both a change in control and termination of employment – are best practice. It may consider any arrangement that is not explicitly double-trigger to be single- or modified single-trigger and result in a negative say-on-pay vote recommendation. The updates also provide that Glass Lewis will characterize as problematic what it considers "excessively broad" definitions of change in control, because such arrangements may result in compensation being paid in the absence of a meaningful change in an executive's status or duties.
Glass Lewis's recent policy updates clarify its position on short-term incentives, indicating that where a company applies upward discretion to a short-term incentive, such as by lowering performance goals mid-year or increasing calculated payouts, Glass Lewis now expects a robust discussion of why the decision was necessary.
As a global company with worldwide reach and operations in most major financial markets, Georgeson has a unique perspective and understanding of corporate governance and proxy issues. While the advisory say-on-pay vote only has a ten-year history in the U.S., its debut traces back to the United Kingdom, which implemented the requirement in 2002. It is not uncommon for governance trends to emerge in European markets before making their way to the U.S. (e.g., gender pay gap disclosure or board diversity mandates, to name just a few current focuses). Accordingly, it is noteworthy to consider Glass Lewis's revised Continental Europe policy, which it updated in response to the Shareholder Rights Directive II. The updated policy provides that Glass Lewis could recommend against a company's remuneration policy if performance targets are not sufficiently challenging or not aligned with business strategy. Given the increased prevalence of investor interest in return-based metrics over the past several U.S. proxy seasons, we have our eye on inclusion of strategy alignment in pay policy as a consideration that may be ripe for migration across the pond in future seasons.
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