Proxy advisory firms Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”) have each recently issued updated U.S. voting guidelines for the 2016 proxy season. ISS’s updated policy generally will apply to shareholder meetings on or after February 1, 2016, and Glass Lewis’s updated policy generally will apply beginning with shareholder meetings in 2016. As discussed below, the 2016 guidelines include a few notable changes to the prior guidance that may be of interest to U.S. public companies.
- Overboarding. In response to the increasing time demands of board service, ISS has lowered the number of boards of directors on which a non-CEO director can serve without being considered “overboarded” from six to five, and kept the number of boards for a CEO director at three (i.e., the CEO director’s company’s board and two outside boards). There will be a one-year grace period in 2016 for overboarded directors during which only cautionary language will be included in proxy voting recommendations, and beginning with the 2017 proxy season, negative recommendations will generally be issued. For a CEO director, ISS will only issue a negative recommendation for such person’s election to an outside board. (Glass Lewis also updated its policy on overboarding; see “Glass Lewis Changes - Overboarding” below.)
- Proxy Access. ISS has clarified that when evaluating candidates nominated by proxy access, it will make recommendations on a case-by-case basis, generally applying the same factors that it uses to evaluate candidates in a proxy contest, but also considering “additional factors which may be relevant,” including factors specific to the company, to the nominees and/or to the nature of the election (such as whether there are more candidates than board seats). ISS has indicated that it will release FAQs in December 2015 about proxy access provisions that it considers overly restrictive.
- Unilateral Governance Changes. ISS will now apply its policy regarding charter and bylaw amendments without shareholder approval that materially diminish shareholder rights differently depending on whether an issuer is an established company or a newly public company. For newly public companies that have taken action to diminish shareholder rights prior to or in connection with the IPO, ISS will take a case-by-case approach, with significant weight given to shareholders’ ability to change the governance structure in the future through a simple majority vote, and shareholders’ ability to hold directors accountable through annual director elections. ISS will regard a public commitment to put adverse provisions to a shareholder vote within three years of the IPO as a mitigating factor.
- Compensation Practices for Externally Managed Issuers. ISS will now consider it to be a problematic pay practice for an externally managed issuer (typically a REIT) to fail to provide sufficient disclosure for shareholders to reasonably assess the compensation for named executive officers. In such cases, ISS will generally recommend a vote against the say-on-pay proposal.
- Other Changes and Developments. ISS has also updated its policy on shareholder proposals seeking adoption of equity holding periods for executive officers, as well as certain shareholder proposals on environmental and social issues. In addition, ISS issued updated FAQs regarding its equity plan scorecard, including changes related to its evaluation of change in control vesting provisions in equity awards.
A copy of the ISS policy guidelines is available at http://www.issgovernance.com/policy-gateway/2016-policy-information/policy-information/ and a copy of ISS’s updated U.S. equity plan scorecard FAQs is available at http://www.issgovernance.com/_le/policy/faq-on-iss-us-equity-plan-scorecard-methodology.pdf.
Glass Lewis Changes
- Overboarding. Glass Lewis has lowered the number of boards of directors on which a director who is not an executive can serve without being considered “overboarded” from six to five, and for a director who is also an executive from three to two. There will be a one-year grace period in 2016 for overboarded directors during which Glass Lewis will note as a concern a director serving on a number of boards that is more than the new limit, and beginning with the 2017 proxy season, negative recommendations will generally be issued. (ISS also updated its policy on overboarding; see “ISS Changes—Overboarding” above.)
- Conflicting Management and Shareholder Proposals. Glass Lewis has provided guidance on factors it will consider in assessing conflicting management and shareholder proposals. Specifically, Glass Lewis will consider: (i) the nature of the underlying issue; (ii) the benefit to shareholders from implementation of the proposal; (iii) the materiality of the differences between the terms of the shareholder proposal and management proposal; (iv) the appropriateness of the provisions in the context of the company’s shareholder base, corporate structure and other relevant circumstances; and (v) the company’s overall governance profile and, specifically, its responsiveness to shareholders as evidenced by its response to previous shareholder proposals and its adoption of progressive shareholder rights provisions.
- Exclusive Forum Provisions. Glass Lewis has announced that it will now take a different approach to companies that include exclusive forum provisions in their governing documents in connection with an initial public offering than it takes with established companies that include such provisions. For IPO companies, Glass Lewis will no longer automatically recommend that shareholders vote against the chairman of the nominating and governance committee in such situations. Instead, it will consider the existence of an exclusive forum provision in connection with other provisions that it believes unduly limit shareholder rights, such as supermajority vote requirements, a classified board or a fee-shifting bylaw.
- Environmental and Social Risk Oversight. Glass Lewis has formalized its position on directors’ responsibilities for oversight of environmental and social issues. Glass Lewis expects boards of directors to ensure that management performs a complete risk analysis of company operations, including environmental and social risks. If the board or management fails to sufficiently identify and manage material environmental and social risk that did or could negatively impact shareholder value, Glass Lewis will recommend votes against directors who are responsible for risk oversight.
- Nominating Committee Performance. Glass Lewis clarified that it may consider recommending that shareholders vote against the chair of the nominating committee if the board’s failure to ensure that the board has directors with relevant experience, either through periodic director assessment or board refreshment, has contributed to a company’s poor performance.
- Compensation Updates. Glass Lewis has clarified that companies should provide a thorough description of awards granted outside the company’s standard incentive schemes, including an explanation of their necessity and why existing awards do not provide sufficient motivation. Such awards should be tied to future service and performance whenever possible. Sign-on arrangements should be clearly disclosed and accompanied by a meaningful explanation of the payments and the process by which the amounts are determined. The details of any “make-whole” payments should also be provided. Glass Lewis also provided some minor clarifications regarding the quantitative and qualitative factors it uses to analyze equity compensation plans.
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