On October 25, Glass Lewis released its 2019 policy updates which will be applicable to all U.S. company meetings held on or after January 1, 2019. The updates are summarized below and the complete list of policy guidelines are available at www.glasslewis.com.
Policies Announced in 2017 Become Effective
Board gender diversity and virtual meeting policies announced by Glass Lewis in November 2017 become effective for shareholder meetings held after January 1, 2019.
Board Gender Diversity
Under its board diversity policy, Glass Lewis will generally recommend voting against the chair of a nominating committee (and potentially other nominating committee members) at a company with no female directors on the board unless the company has disclosed a sufficient rationale or provided a timetable to address the lack of diversity.
Since the announcement of this policy, the issue of board gender diversity has gathered further momentum, with several institutional investors adopting their own policy or otherwise addressing the issue. Given these developments, companies that lack board gender diversity should consider refreshing their board to add at least one female director in the near term.
Under its virtual meeting policy, Glass Lewis may recommend against members of the governance committee of a company that holds a virtual-only shareholder meeting, unless the shareholders are afforded the same rights and opportunities to participate as they would at an in-person meeting.
Companies holding virtual-only meetings should consider adopting best practices to enhance shareholder participation. The Council of Institutional Investors (CII), in its June 2017 letter to Broadridge, provides some useful tips on affording shareholders increased participation at virtual-only meetings.
Excise Tax Gross-Ups
In evaluating compensation committee performance, Glass Lewis will now consider as an additional factor the inclusion of excise tax gross-ups in new or amended executive employment agreements. Newly-added excise tax gross-ups, in particular for change-in-control payouts, may contribute to Glass Lewis recommending against the say-on-pay proposal and compensation committee members, especially in cases where the company had previously committed to eliminating such benefits.
The inclusion of excise tax gross-ups in new or amended executive employment agreement has significantly diminished as a result of opposition to this pay practice by investors. Glass Lewis's policy would add to the opposition in cases of newly included excise tax gross-ups. Given that the practice of adding excise tax gross-up often triggers automatic against votes, companies should carefully consider the inclusion of this provision in executive employment agreements.
Contractual Payments and Arrangements
Glass Lewis has provided additional guidance relating to sign-on and severance arrangements. Specifically, sign-on awards that are excessive or employment arrangements that provide for multi-year guaranteed bonuses may result in Glass Lewis recommending against a company's say-on-pay proposal. With respect to severance, Glass Lewis considers problematic any ad-hoc payments or payments in excess of three times salary and bonus. In addition to the magnitude of the payments, Glass Lewis will also view skeptically any contractual terms unduly favorable to executives.
Similar to excise tax gross-ups, excessive severance payouts is considered an egregious pay practice by many institutional investors, and often results in significant shareholder opposition to the say-on-pay proposal. Excessive sign-on awards are viewed skeptically, as well, and grant of any such award should be well explained and preferably include performance conditions intended to align the interests of executives with shareholders.
Executive Compensation Disclosure for Smaller Reporting Companies
In June 2018, additional public companies became eligible to take advantage of reduced disclosure requirements, following the SEC's amendments to rules governing smaller reporting company (SRC)1. Glass Lewis may consider recommending against members of the compensation committee at any SRC that has materially decreased its compensation disclosure to the extent that the changes have made it more difficult for investors to make an informed assessment of the company's compensation program.
Grants of Front-Loaded Awards
Glass Lewis has added a discussion of front-loaded awards to its policy guidelines. Front-loaded grants or large grants that provide compensation for multiple years are viewed skeptically by Glass Lewis; such grants may create perverse incentives and restrict the flexibility of the compensation committee to adjust to changing market conditions and company performance. Glass Lewis expects companies granting front-loaded awards to disclose a firm commitment to refrain from granting additional awards for a defined period. Any break in such commitment, without a compelling rationale, may cause Glass Lewis to recommend against the company's say-on-pay proposal.
The practice of providing ad-hoc grants is generally viewed unfavorably by investors. Companies considering making additional awards following front-loaded grants, or even more broadly any off-cycle grants, should provide convincing rationale of the special circumstances that warrant the issuance of such grants and how these awards align with shareholders' interests.
Executive Compensation Clarifications
Glass Lewis has also clarified several aspects of its current executive compensation policy guidelines relating to clawbacks, peer groups, its pay-for-performance model and discretion in incentive plans.
Glass Lewis's policy guidance has clarified that a company's recoupment policies should extend beyond the minimum legal requirements; in particular, clawbacks should be triggered in cases where a company has restated its financial results or other bonus-related financial measures.
Glass Lewis expects the companies that use significant discretion in short-term incentive programs to provide sufficient disclosure about the board's rationale for the use of non-formulaic plans and the criteria used in determining bonus payouts. When adequate disclosure is provided, significant use of discretion, in itself, would not lead to a negative recommendation, unless other significant pay concerns exist.
Conflicting and Excluded Proposals
In codifying its existing policy, Glass Lewis has specified that in cases of conflicting management and shareholder proposals at companies with an existing right to call a special meeting, Glass Lewis will generally support the shareholder proposal if it believes it is in shareholders' interests. Glass Lewis's reasoning is that generally the shareholder proposal seeks a lower threshold than the management proposal. In instances where no right to call a special meeting currently exists, Glass Lewis may consider supporting the shareholder proposal and recommending shareholders abstain on the management proposal.
During the 2018 proxy season, the approach taken by a couple of companies to exclude the shareholder proposal seeking to reduce the existing special meeting threshold faced some criticism from shareholders. The companies were to able obtain the no action relief from SEC on the basis that it conflicted with the management counterproposal to ratify an existing threshold. In cases where the company excludes the shareholder proposal on the basis of ratification of an existing right to call special meeting, Glass Lewis has adopted a policy to likely recommend against ratification of the management proposal and members of the nominating and governance committee. Moreover, Glass Lewis may, in limited circumstances, recommend against members of the nominating and governance committee when it believes that the company's exclusion of any kind of shareholder proposal is detrimental to shareholders' interest.
Glass Lewis has revised its policy and will now generally support shareholder proposals seeking disclosure of a company's workforce diversity and its initiatives to promote diversity. In determining its recommendation, Glass Lewis will consider the company's industry, current disclosure by the company and its peers, and any litigation or controversies.
Environmental and Social Risk Oversight
For large cap companies, Glass Lewis has codified its approach to reviewing how boards are overseeing environmental and social issues. In instances where, in Glass Lewis's view, mismanagement of social and environment risks has threatened shareholder value, Glass Lewis may recommend against the responsible directors (or against the audit committee members, if board oversight of environmental and social issues is not explicitly disclosed).
Given the differences in risk consequences for the companies, Glass Lewis will place significant emphasis on financial implications in evaluating environmental and social shareholder proposals. In determining financial materiality, Glass Lewis will consider the standards development by Sustainability Accounting Standards Board ("SASB").
Ratification of Auditors
Glass Lewis has codified the additional factors it would consider in reviewing auditor ratification proposals. The additional factors result from the updated disclosure standards and include the auditor's tenure, a pattern of inaccurate audits, and any ongoing litigation or significant controversies.
Finally, Glass Lewis has clarified its existing policies on:
- Auditor proposals at Business Development Companies
- Director Recommendations on the basis of Company Performance
- Director and Officer Indemnification
- NOL Protective Amendments
- OTC-listed Companies
- Quorum Requirements
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1 SEC’s release relating to rule changes governing smaller reporting companies can be accessed at: https://www.sec.gov/news/press-release/2018-116