On February 14, 2020, Legal & General Investment Management (LGIM) released 2020 updates to its Global and North American (NA) policies, which are applicable to all U.S. company meetings held on or after January 1, 2020. Key updates are summarized below by topic, and the complete list of policy guidelines are available at https://documentlibrary.lgim.com/documentlibrary/library_55458.html.
Georgeson summarized LGIM's 2019 policies. Read Legal & General Global and North American Policies: 2019 Updates Reflect Evolving Views on ESG Matters.
Long-Term Incentive Pay
LGIM has enhanced its expectations regarding the portion of long-term incentive pay that is linked to performance conditions. While its current expectation that 50% of long-term incentive awards be linked to performance conditions that cover not less than a three-year time period remains, LGIM has revised its NA policy to indicate an expectation that the level of performance-based pay will increase to at least 65% of long-term incentives by 2022.
With respect to holding periods applicable to equity compensation granted to directors, LGIM revised its Global policy to replace its expectation that directors hold shares equal to at least half of applicable minimum ownership guidelines for two years post-retirement with the expectation that directors hold "a significant portion" of their ownership requirement for two years. Presumably this change gives LGIM more flexibility in applying this policy in different global markets, although it does not provide any context for this change, including whether a significant portion would translate to an amount greater than 50% in any market.
Board Structure - Leadership and Diversity
In line with its announced policy changes in April of last year that LGIM will be voting against (i) any director that holds a combined Chair/CEO position beginning in 2020 and (ii) that it will be voting against S&P 500 company boards with fewer than 25% women on their boards (on a phased basis beginning with the largest 100 companies this year, and extending to the full index in 2021), it has revised its NA guidelines to indicate these practices are now in effect. It did not make any further changes to the previously announced policies from 2019.
In its Global policy, LGIM has added additional guidance addressing its expectations on the topic of board leadership. This includes clarification that LGIM believes the appointment of a lead independent director should not be limited to cases where a company has a combined chair/CEO role in place, as it believes this role should lead succession planning of the board chair role and assess the chair's performance, among other duties.
LGIM has revised its Global policy to indicate that it expects a 50% level of board independence in controlled companies (where at least 50% of the voting shares are held by one person/entity or group acting together), an increase from its general minimum global expectation of 30% independence.
Board Evaluation and Effectiveness
LGIM has revised its Global policy to add guidance regarding its expectations around external board reviews. Firstly, its policy now notes that an external reviewer who provides other services to the Board may present conflicts of interest, and therefore it (i) discourages the appointment of a third-party reviewer who provides any other services, and (ii) expects explanatory disclosure where an external reviewer has provided other services, including explanation of any applicable cooling-off period between the engagements. It also added to this policy an expectation that the external board reviewer be refreshed every two years, meaning the same board review provider would perform no more than two consecutive reviews before the company changes providers. We note that LGIM maintains a Guide to Board Effectiveness Reviews, among many other guides cited throughout its NA and Global policies, that may be a helpful resource for companies considering their review processes.
In its Global policy, LGIM has removed an example of how employee views are solicited and reported to the boards of UK companies, and replaced that example with an indication that, while it does not consider any single model for soliciting employee views to be superior, companies should "embrace their employees as assets and select a method [to consider employee viewpoints] that is most effective for their business model and circumstances."
LGIM's NA policy has added explicit disclosure expectations regarding culture, extending beyond its prior view that companies' disclosure should indicate that the board regularly discusses and monitors this topic. Specifically, it expects companies' annual reports to include disclosure on topics such as:
- How culture is measured and how it relates to business strategy
- How the mission statement of the company and its values are communicated and reinforced
- Any key performance indicators that are linked to culture
- Any relevant data linked to the workforce such as turnover percentage, attrition analysis, and how exit interviews are used
Audit Risk and Internal Control
In its global policies, LGIM added to its previous disclosure expectations regarding the independent auditor (which included the firm used, the lead audit partner, tenure of the firm, and why the board considers the auditor to be independent) that companies disclose how they mitigate any potential conflicts of the auditor. With respect to its expectation that companies put the role of auditor out for proposal at least every 10 years (and that total independent auditor tenure not exceed twenty years), LGIM has added that it expects companies to disclose their auditor RFP processes, and to explain their rationale for appointing the auditor selected.
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