Preparing for the 2023 Proxy and Annual Reporting Season

Siddharth Bahl


The 2023 Proxy and Annual Reporting season will be impacted by a number of new rules and guidance from the Securities and Exchange Commission (“SEC”), New York Stock Exchange (“NYSE”), Nasdaq Stock Market LLC (“Nasdaq”), as well as guidelines from proxy advisory firms Institutional Shareholder Services Inc. (“ISS”) and Glass, Lewis & Co. (“GL”). Below are some of the recent regulatory and advisory developments to consider this season.

Pay versus Performance

The SEC adopted final rules on pay versus performance disclosure, which require all reporting companies, except foreign private issuers, registered investment companies, and emerging growth companies, to provide a new compensation table with supporting narrative in the proxy statement. Such disclosure must be included in a registrant’s proxy statement in which executive compensation disclosure is required, beginning with fiscal years ending on or after December 16, 2022. For calendar-year companies, disclosure is required in the 2023 proxy or information statement. Additional information on the new pay versus performance disclosure rules can be found in our LEGALcurrents, SEC Adopts Final Pay Versus Performance Disclosure Rules.

Universal Proxy Cards

The SEC adopted final rules requiring public companies and shareholder proponents in contested director elections held after August 31, 2022 to use universal proxy cards that include all director nominees for election (e.g., the company’s slate and the shareholder proponent’s slate). Shareholders may now vote for any combination of director nominees included on the universal proxy card, which may result in a vote for a mixture of both management and shareholder nominated directors.

The new rules also require companies to describe the effect of each voting option presented to shareholders in their proxy statements. Proxy cards must include an “against” option in lieu of “withhold” where there is a legal effect to the vote. Where there is no legal effect, the “against” option is prohibited. Shareholders who neither support nor oppose a nominee must have the option to “abstain” rather than “withhold authority to vote” in director elections governed by the majority voting standard. Additional information on the new universal proxy card rules can be found in our LEGALcurrents, SEC Adopts New Rules for Universal Proxy Cards in Contested Director Elections.

Electronic Filing of “Glossy” Annual Report

The SEC adopted final rules requiring companies to electronically file their 2023 “glossy” annual reports provided to shareholders. The rules require that the electronically submitted “glossy” annual report capture the graphics, styles of presentation, and prominence of disclosure (including text size, placement, color, and offset, as applicable) contained in the reports. The reports should not be re-formatted, re-sized, or otherwise re-designed for purposes of the EDGAR submission. Additional information on the new electronic filing requirements can be found in our LEGALcurrents, SEC Adopts Rules Requiring EDGAR-Filed Electronic Form 144 Notices and “Glossy” Annual Reports.

Shareholder Proposals

In November 2021, the SEC’s Division of Corporation Finance published CF Staff Legal Bulletin No. 14L which is expected to result in public companies having to include more environmental, social, and corporate governance (“ESG”) shareholder proposals in their proxy statements under Rule 14a-8 of the Securities and Exchange Act of 1934, as amended. Such guidance took effect during the 2022 proxy season and will have a continued effect on the 2023 proxy season. For additional information, please refer to our LEGALcurrents, SEC Guidance Gives Green Light to Shareholder Proposals.

In addition, the SEC proposed rules to amend and clarify certain bases on which a company can exclude a shareholder proposal from its proxy statement. These rules are anticipated to be finalized this year. Pursuant to the proposed rules: (i) the “substantial implementation exclusion” is clarified to allow a company to exclude a shareholder proposal if the company has already implemented the essential elements of the proposal; (ii) the “duplication exclusion” is clarified to provide that a company can exclude a proposal that “addresses the same subject matter and seeks the same objective by the same means” as another proposal included in the proxy materials for the same meeting; and (iii) the “resubmission exclusion” is revised to reflect the definition of duplication in the duplication exclusion. These proposed amendments will likely heavily restrict a company’s ability to exclude shareholder proposals and result in an increase in shareholder proposals presented at annual meetings.

Climate-Related Disclosures

The SEC continues to focus on climate-related disclosures.  The SEC received an overwhelming number of public comments to its proposed rules and had to reopen the comment period this fall after technical glitches may have prevented the submission of some public comments.  The SEC is also weighing the impact of the Supreme Court’s West Virginia v. Environmental Protection Agency decision on its proposed climate change rules.  We are continuing to monitor the SEC’s proposed rule-making on climate-related disclosures and will keep you informed as rules are announced.  Additional information regarding the SEC’s focus on climate change disclosure can be found in our LEGALcurrents, SEC Focuses Attention on Climate Change Disclosure.

Cybersecurity-Related Disclosures

Cybersecurity disclosure has become an important area of focus for the SEC and while not relevant to the 2023 proxy season, the SEC is considering changes to required disclosure on material cybersecurity incidents that companies should be aware of for future annual reporting. The proposed rules would add disclosure requirements to periodic reports, require companies to file updates on existing cybersecurity incidents, identify cybersecurity risks in annual report risk factors, and report managerial actions in periodic reports.

Companies may also need to review their boards of directors to determine if they have individuals proficient enough in cybersecurity to oversee future disclosure. We expect the SEC to announce final cybersecurity disclosure rules this year and we ill continue to monitor the state of proposed rules and new rulemaking and will keep you informed as announcements are made.

Additional information regarding the SEC’s proposed cybersecurity disclosure rules can be found in our LEGALcurrents, SEC Proposes Rules Relating to Cybersecurity.

Say-on-Frequency Proposals

At least once every six years, public companies are required to submit a proposal with respect to how often (“say-on-frequency”) shareholders consider and vote on executive officer compensation (“say-on-pay”). Initial rules requiring the say-on-frequency vote were adopted in 2011, when many companies proposed their first say-on-frequency proposal. As a result, many companies will need to submit a say-on-frequency proposal to shareholders in their 2023 proxy statement. Smaller reporting companies were not required to submit their first say-on-frequency proposal until 2013, and for those that held their first vote in 2013, the next say-on-frequency proposal will not need to be submitted until 2025.

Executive Compensation Clawback Policies

While not impacting the 2023 proxy statement, we note the SEC has approved new rules requiring national securities exchanges to establish listing standards requiring listed companies to adopt written clawback policies. Such policies must allow companies to recover, from any current or former executive officer, incentive-based compensation (including stock options) erroneously awarded during the three years preceding the date the company is required to prepare an accounting restatement. Such accounting restatements include those to correct errors not material to previously issued financial statements, but which would result in a material misstatement if the errors were left uncorrected in the current report or the error correction was recognized in the current period (commonly referred to as “little r” restatements).

Listing standards are anticipated in 2023, and we expect publicly listed companies will need to adopt a clawback policy complying with such standards no later than early 2024. While we don’t anticipate these new rules to affect the 2023 proxy season, companies can begin to review their current clawback policies as well as existing performance-based compensation and award agreements to determine necessary amendments to subject future awards or compensation to the company’s clawback policies. Additional information on the new executive compensation clawback rules can be found in our LEGALcurrents, Final SEC Rules on Executive Compensation Clawbacks.

Board Diversity

Board diversity continues to be a topic of focus for state governments, securities exchanges, and stockholders. Nasdaq-listed companies are required to have at least one diverse director on their board of directors (one female or one from an underrepresented minority group or the LBGTQ community) or must publicly disclose its reasoning for failure to have such representation on its website or in its applicable proxy statement or Annual Report on Form 10-K by December 31, 2023. As of 2023, Nasdaq-listed companies must also annually provide statistical information about their board of directors, disclosed in the board diversity matrix format previously provided by Nasdaq. The NYSE, while having no official board diversity requirement, did establish the NYSE Board Advisory Council in 2019 and further guidance is expected.

Investors and activists are also involved in board diversity initiatives. Investment firms such as BlackRock, State Street, and Goldman Sachs have pushed for increased board diversity in recent years, with State Street going as far as voting against companies who failed to act on gender diversity.

State governments are also attempting to codify board diversity requirements. Washington, Illinois, Pennsylvania, and Colorado have passed laws encouraging board diversity, with more considering similar laws each year.

Companies should consider these pushes for board diversity in their director nominations and expanding their directors’ and officers’ questionnaires to obtain relevant diversity information as well as obtaining director or officer authorization to publicly disclose such information.

Voting Policy Updates

ISS and GL have updated their proxy voting policies for 2023. Overall, issues relating to climate change, board diversity, and board oversight of environmental and social issues continue to be hot topics for ISS and GL. Unless stated otherwise below, ISS updates take effect for meetings on or after February 1, 2023 and GL updates take effect for meetings on or after January 1, 2023.

2023 ISS Updates

Environment and Climate Change

In 2022, ISS instituted a policy in the U.S. for companies in the Climate Action 100+ Focus Group under which it will recommend a vote against or to withhold votes from the incumbent chair of the responsible committee or other directors of a company that is a significant greenhouse gas (“GHG”) emitter through its operations and supply chain if ISS determines that the company is not taking the minimum steps necessary to understand, assess, and mitigate climate-related risks to itself and the broader economy. The minimum criteria are: (i) having adequate disclosure of climate-related risks (such as in accordance with the Task Force on Climate-related Financial Disclosures); and (ii) have medium-term GHG reduction targets or Net Zero-by-2050 GHG reduction targets for a company’s operations (Scope 1) and electricity use (Scope 2), with such targets covering the vast majority (i.e., 95%) of the company’s direct emissions.

Social and Environmental Shareholder Proposals

ISS applies a common approach globally to evaluating social and environmental proposals. While a variety of factors go into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short or long-term. ISS will recommend case-by-case based on if the proposal is likely to enhance or protect shareholder value, considering the following factors:

  • if the issues presented in the proposal are being appropriately or effectively dealt with through legislation or government regulation;
  • if the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;
  • whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive;
  • the company’s approach compared with any industry standard practices for addressing the issue(s) raised by the proposal;
  • whether there are significant controversies, fines, penalties, or litigation associated with the company’s practices related to the issue(s) raised in the proposal;
  • if the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is currently available to shareholders from the company or from other publicly available sources; and
  • if the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage.

ESG Compensation-Related Proposals

ISS will continue to vote case-by-case on proposals seeking a report or additional disclosure on the company’s approach, policies, and practices on incorporating environmental and social criteria into its executive compensation strategy, keeping three of its existing factors and adding one new factor:

  • the scope and prescriptive nature of the proposal;
  • the company’s current level of disclosure regarding its environmental and social performance and governance;
  • the degree to which the board or compensation committee already discloses information on whether it has considered related environmental and social criteria (new factor); and
  • whether the company has significant controversies or regulatory violations regarding social or environmental issues.

Board Diversity

The existing ISS policy to recommend against the nominating committee chair (or other directors on a case-by-case basis) at boards with no women directors will be extended to all companies (not just Russell 3000 and S&P 1500 companies) beginning in 2023. An exception will be made if there was at least one woman on the board at the prior annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.

Unequal Voting Rights

Previously, ISS had a policy for newly public companies to generally vote withhold or against directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if the company employs a common stock structure with unequal voting rights (subject to certain exceptions including for newly public companies with a sunset provision of 7 years or less and where super-voting shares are less than 5% of total voting power). For 2023, ISS will extend this policy to all covered companies.

Poison Pills

For 2023, ISS has explicitly listed the company market capitalization (including absolute level and sudden changes) and trigger threshold as considerations in evaluating whether to vote against a board that adopts a short-term pill without shareholder approval. When looking at the trigger for the pill, ISS does not differentiate between the level for a Schedule 13D filer versus a Schedule 13G filer, but focuses on the lower trigger.

Exculpation of Officers

The Delaware General Corporation Law was amended effective August 1, 2022 to permit corporations to limit or eliminate the personal liability of officers for claims of breach of the fiduciary duty of care. ISS is adopting a policy to recommend case-by-case on proposals providing for director and officer indemnification, liability, and exculpation provisions in a company’s charter.

In addition to considering the stated rationale for the proposed change, ISS will also consider the extent to which the proposal would:

  • eliminate directors’ and officers’ liability for monetary damages for violating the duty of care;
  • eliminate directors’ and officers’ liability for monetary damages for violating the duty of loyalty;
  • expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation than mere carelessness; or
  • expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for, at the discretion of the company’s board (i.e., “permissive indemnification”), but that previously the company was not required to indemnify.


Amend Quorum Requirements

ISS is changing from a general against recommendation to a case-by-case approach for proposals to reduce shareholder meeting quorum requirements below a majority of shares outstanding. Factors ISS will take into consideration include: (i) the new quorum threshold requested; (ii) the rationale presented for the reduction; (iii) the market capitalization of the company (size, inclusion in indices); (iv) the company’s ownership structure; (v) previous voting turnout attempts to achieve quorum; (vi) any provisions or commitments to restore quorum to a majority of shares outstanding, should voter turnout improve sufficiently; and (vii) other factors as appropriate. ISS generally prefers a quorum threshold as close to a majority of shares outstanding as is achievable. Additionally, ISS will recommend case-by-case directors who “unilaterally lower” the quorum requirements below a majority of the shares outstanding, taking into consideration the factors listed above.

ISS has instituted this new policy to address situations where a growing number of smaller companies were unable to establish a quorum as several large brokerage firms no longer provided discretionary or proportionate broker voting on their client shares.

Severance Payments

ISS general recommends against a company’s say-on-pay proposal and/or compensation committee members if it maintains any egregious pay practice. For 2023, ISS will consider severance payments received by an executive when the termination is not clearly disclosed as involuntary (e.g., a termination without cause or resignation for good reason) to carry significant weight as a problematic pay practice that may result in an adverse vote recommendation. The new policy also clarifies that ISS’s approach to evaluating problematic pay practices is not confined to “non-performance-based pay elements” and that the examples of problematic pay practices identified in the policy language are not an exhaustive list of practices that may result in adverse vote recommendations.

Value-Adjusted Burn Rate

ISS will use a Value-Adjusted Burn Rate calculation for evaluating equity-based compensation plan proposals instead of its previous method of using a volatility-based adjusted burn rate. The Value-Adjusted Burn Rate method will use the company’s stock price for full value awards and the Black-Scholes value for options.

2023 GL Updates

Board Diversity

GL’s continues to implement a percentage-based approach to board diversity, recommending that boards of companies within the Russell 3000 index be at least 30 percent gender diverse. If the 30 percent threshold is not met, GL will generally recommend against the chair of the board’s nominating committee. For companies outside this index, GL’s current policy requiring at least one gender diverse director remains unchanged. Companies that do not meet these thresholds need to disclose a sufficient rationale or plan to address their lack of gender diversity, including a timeline to appoint additional gender diverse directors in order to avoid adverse voting recommendations from GL.

Beginning in 2023, GLwill generally recommend against the chair of the board’s nominating committee of companies within the Russell 1000 index with no directors who self-identify as being from an underrepresented community (Black, African American, North African, Middle Eastern, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaskan Native, or gay, lesbian, bisexual, or transgender). GL’s determination is based solely from the demographic information disclosed in a company’s proxy statement. Companies that do not meet this threshold need to disclose a sufficient rationale or plan (with a timeline) to address the lack of diversity in order to avoid an adverse voting recommendation from GL.

In 2023, GL will generally recommend voting against the chair of the board’s governance committee at Russell 1000 index companies that have not provided any disclosure of individual or aggregate racial/ethnic minority demographic information for directors. Additionally, it will generally recommend voting against the chair of the board’s nominating and/or governance committee where a Russell 1000 index company fails to provide any disclosures in each of the director diversity and skills categories tracked by GL.

Board Accountability for Cyber Risk

GL does not generally make voting recommendations on the basis of a company’s disclosure and oversight related to cybersecurity risk. However, GL encourages companies to clearly disclose the board’s role in cybersecurity oversight and the steps the company taken to educate their directors on cybersecurity. GL may recommend voting against appropriate directors of a company that has faced a cyber-attack that caused significant harm to shareholders if GL finds the company has provided insufficient disclosure or oversight over cyber-related issues.

Oversight of Environmental and Social Issues

Starting in 2023, GL will generally recommend voting against the governance committee chairs of Russell 1000 companies that fail to provide explicit disclosures about the board’s role in overseeing environmental and social issues. In 2023, GL will expand its tracking of board-level oversight of environmental and social issues to all companies within the Russell 3000 index. GL will look at a company’s proxy statement and governing documents (such as charters) to determine if directors maintain a meaningful level of oversight and accountability for a company’s material environmental and social risks.

Board Responsiveness

When 20 percent or more of shareholders vote contrary to management’s recommendation on a proposal, GL expects the board to engage with shareholders and demonstrate some responsiveness. For 2023, GL has clarified that if a majority of shareholders vote contrary to management’s recommendation on a proposal, GL expects the board to undertake a more robust to fully address shareholder concerns. GL also clarified that for controlled companies with multi-class share structures, board responsiveness will be evaluated based on voting results of unaffiliated shareholders, with response measured on a “one share, one vote” basis. Failure of the board to respond appropriately may impact GL’s vote recommendation on say-on-pay and the re-election of directors.

Company Responsiveness (Say-on-Pay)

When 20 percent or more of shareholders oppose the prior year say-on-pay proposal, GL expects a board’s compensation committee to engage with shareholders and demonstrate some level of engagement and responsiveness. For 2023, GL clarified that level of opposition on say-on-pay opposition among disinterested shareholders may be evaluated independently when assessing the compensation committee’s response. GL also clarified that is will “closely consider” whether changes were actually made to compensation programs in direct response to low say-on-pay support. Failure of the compensation committee to respond appropriately may impact GL’s vote recommendation on say-on-pay and the re-election of compensation committee members.

Director Overboarding

GL has revised when it will recommend that shareholders vote against directors who have multiple commitments. For 2023, GL will generally recommend that shareholders vote against: (i) a director who serves as an executive officer (other than executive chair) of any public company while serving on more than one external public company board; (ii) a director who serves as an executive chair of any public company while serving on more than two external public company boards; and (iii) any other director who serves on more than five public company boards.

Exculpation of Officers

As previously discussed, Delaware General Corporation Law now allows companies to limit or eliminate the personal liability of officers for claims of breach of the fiduciary duty of care. GL will generally recommend a vote against such proposals for such amendments unless the provision is reasonable and the board provides a compelling rationale for its adoption.

Climate Risks – Board Accountability

Beginning in 2023, GL may recommend a vote against responsible directors of Russell 1000 companies with material exposure to climate risk arising from their own operations (such as companies in the Climate Action 100+ Focus Group) if the company provides insufficient disclosure regarding climate issues in line with the Task Force on Climate-related Financial Disclosures requirements. GL also believe the boards of these companies should have explicit and clearly defined oversight responsibilities for climate-related issues. In instances where GL finds either (or both) of these disclosures to be absent or significantly lacking, it may recommend voting against the chair of the committee (or board) charged with oversight of climate-related issues, or if no committee has been charged with such oversight, the chair of the governance committee, and may extend its recommendations to other board members in certain situations.

Long-term Incentive Awards

GL revised its recommendation that the minimum percentage of a long-term incentives that should be performance-based is 50 percent, rather than the previous 33 percent, to align with market trends. A failure to satisfy this recommendation may impact GL’s vote recommendation on say-on-pay.

Pay for Performance

GL currently uses a proprietary model to evaluate pay-for-performance alignment on a grading scale of A-to-F. GL has clarified that the new SEC pay-for-performance disclosure rules will not affect its analysis.

Recoupment Provisions

GL supports the robust recoupment policies that extend beyond the minimum legal requirements. For 2023, GL clarifies that it expects companies to adopt recoupment policies that comply with the new SEC requirements, but a company’s recoupment policy will be viewed more favorably if it goes beyond the new SEC requirements, such as by covering recoupment for misconduct in addition to financial restatements. GL expects to see a robust policy in place in the absence of a fully compliant policy during the transition period (or for the company to provide evidence that it is working on adopting a compliant policy).

Short and Long-Term Incentive Awards

GL clarified for both short and long-term awards that it recognizes the importance of a compensation committee’s use of discretion for significant, material events that impact incentive payouts, but the use of such discretion should be accompanied by a thorough discussion of how significant, material events were considered in the committee’s discretion to exercise discretion or to refrain from applying discretion over incentive pay outcomes. A failure to satisfy these recommendations may impact GL’s vote recommendation on say-on-pay.

One-Time Awards

GL expects companies to provide a thorough description of special awards outside of their regular incentive award program and the rationale for why such special awards were necessary. For 2023, GL has clarified that the discussion of special awards should also cover how the award size and structure were determined. A failure to satisfy this expectation may impact GL’s vote recommendation on say-on-pay.

Front-Loaded Awards

GL generally views front-loaded grants unfavorably and expects such awards to be accompanied by a commitment to not make additional awards during a defined period. For 2023, GL clarified that the annualized value of front-loaded awards will be included in the determination of total compensation during the coverage period. GL also reinforced its expectation that no supplemental grants of an already front-loaded grant type be made during the vesting period.

Severance and Retirement Benefits

GL historically has been supportive of shareholder proposals to require approval of executive severance arrangements that exceed 2.99x base salary plus bonus. For 2023, GL clarified that it may recommend against shareholder proposals in instances where the company has already adopted a policy indicating that it will seek shareholder approval of any cash severance payments exceeding 2.99x base salary plus bonus.

What to Do Now

Companies should consider these rule changes, guidance, and voting policies updates when preparing for the 2023 proxy season.

If you have any questions, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets or Employee Benefits and Executive Compensation groups for the latest insights and industry response to these developments.

Attorney Advertising. Prior results do not guarantee a similar outcome. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. ©2023 Harter Secrest & Emery LLP