Companies should be aware of certain regulatory and advisory developments while preparing annual reports and proxy statements for the upcoming 2025 Proxy and Annual Reporting Season. Below are some of the recent regulatory and advisory developments from the Securities and Exchange Commission (“SEC”), New York Stock Exchange (“NYSE”), and Nasdaq Stock Market LLC (“Nasdaq”) in addition to voting guidelines from proxy advisory firms Institutional Shareholder Services Inc. (“ISS”) and Glass, Lewis & Co. (“GL”) to consider this reporting season.
Regulatory Developments Affecting Annual Reports and Proxy Statements
Insider Trading Policy Disclosure
In 2025, companies will be required to disclose whether they have adopted a policy designed to promote compliance with insider trading laws (and if not, why not). This disclosure must be XBRL-tagged. A company must also file its insider trading policy as an exhibit to its Form 10-K. See our LEGALcurrents, SEC Adopts Amendments to Rule 10b5-1 and New Disclosure Requirements, for more information.
Option Grant Timing Disclosure
In 2025, companies will be required to add disclosure under Item 402(x) of Regulation S-K (Executive Compensation). First, a company must include a narrative description of its policies governing the timing of awarding stock options, stock appreciation rights and other option-like awards, including whether (and if so, how) the board or compensation committee takes material nonpublic information (“MNPI”) into account when granting such awards. If the company awarded stock options, stock appreciation rights or other option-like instruments to a named executive officer within four business days before and one business day after publicly releasing MNPI, the company must also include tabular disclosure of the details of these awards and the percentage change in market price for its securities after the MNPI was disclosed. This disclosure must be XBRL-tagged. For calendar year-end companies, this will first apply in the upcoming Form 10-K or proxy statement. Companies should consider adopting a formal policy governing the timing of stock options, stock appreciation rights and other option-like awards to clarify their granting practices in light of the new disclosure requirement. See our LEGALcurrents, SEC Adopts Amendments to Rule 10b5-1 and New Disclosure Requirements, for more information.
EDGAR Next
By September 15, 2025, all companies and individuals with EDGAR filing codes who file reports with the SEC through EDGAR must enroll in a new platform to receive updated credentials to ensure they can continue to make SEC filings. The change is intended to improve security measures for EDGAR. Unless filers take action before December 19, 2025, they will be locked out of their existing EDGAR account and unable to submit filings to the SEC. For more information about what is changing and what you need to do, see our LEGALcurrents, What’s EDGAR Next? Do I Need to Care?
Nasdaq Board Diversity Disclosure
In December 2024, the Fifth Circuit Court of Appeals held that the SEC did not have the authority to approve the Nasdaq board diversity rules, which had required Nasdaq-listed companies to include a board diversity matrix in their proxy statements. Nasdaq has indicated that it does not intend to seek review of this decision and it will not require listed companies to follow the former rules. Accordingly, the board diversity matrix will not be required in proxy statements this year. However, each company should consider whether institutional investors or the proxy advisory firms would view the company’s disclosure unfavorably if it did not include this information in some form. Companies should update their director questionnaires if necessary to adjust the reasoning for collecting this information from directors and to make sure they have the director’s consent to disclose this self-reported information.
Pay versus Performance
In 2025, most companies will need to include five years of pay versus performance disclosure, marking the end of the phase-in of this executive compensation disclosure requirement. Smaller reporting companies will be required to include three years of pay versus performance disclosure in 2025. Companies should confirm their filer status early in the year-end process to ensure they are ready for this disclosure in 2025. While companies will need to include five years (three for smaller reporting companies) of pay versus performance disclosure this year, companies only need to show the adjustments made to the total compensation reported in the summary compensation table for the most recent fiscal year in calculating the compensation actually paid to the CEO and the average paid to the other named executive officers.
The SEC updated its guidance in Fall 2023 and clarified some elements of the “compensation actually paid” calculation in the pay versus performance table. For an employee that becomes retirement eligible during the year, the employee’s equity awards should be treated as vesting if the equity awards have no other substantive vesting conditions.
Keep in mind that the “total shareholder return” element of the pay versus performance disclosure can tie back to the stock performance graph included in the Form 10-K and keep internal teams aligned on those separate disclosures. Additional information on pay versus performance disclosure can be found in our LEGALcurrents, SEC Adopts Final Pay Versus Performance Disclosure Rules and Practical Approach to Pay Versus Performance.
AI-Washing
The SEC has recently indicated that it is closely scrutinizing companies for overstating artificial intelligence (“AI”) capabilities or misrepresenting their use of AI to attract investors (“AI washing”). The SEC is concerned that this practice can distort market perceptions and mislead investors. Companies that use AI will need to: (i) be cautious of any AI-related disclosure ensuring that the disclosure is consistent across all public channels; (ii) ensure that any disclosure related to the use of AI is supported by actual business practices; and (iii) adequately address any AI-related risks in its Form 10-K. Additional information regarding AI washing enforcement actions can be found in our LEGALcurrents, Navigating AI Risks: Key SEC Enforcement Trends.
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. Smaller reporting companies were required to submit their first say-on-frequency proposal in 2013. In 2025, many smaller reporting companies will need to submit a say-on-frequency proposal to shareholders in their proxy statement. Companies should verify the last time they submitted a say-on-frequency proposal to shareholders to determine whether another say-on-frequency vote is needed in 2025.
Climate-Related Disclosure Changes
In March 2024, the SEC adopted rules that would require public companies to include certain climate-related disclosure in their public filings. The rules were stayed pending a challenge in the Eighth Circuit. Following the results of the presidential election, the rules are likely to be repealed or not defended in litigation.
In the absence of enforceable federal regulation, some states have begun taking action. For example, California has passed two laws that would, starting in 2026, require companies of a certain size that do business in California to disclose Scope 1, 2 and 3 emissions and submit climate-related financial risk reports, as discussed in our LEGALcurrents, California Climate Disclosure Laws Have Not Evaporated After SEC Climate-Related Rule Adoption. The California climate disclosure laws are currently being challenged in federal court by the U.S. Chamber of Commerce. Other states, including Washington, New York, Illinois and Minnesota are also considering climate disclosure legislation. In addition, any large U.S. public companies with significant operations in Europe must also consider how to comply with the European Union’s Corporate Sustainability Reporting Directive. Despite entering an anticipated deregulatory environment in the United States, this potential constellation of climate-related disclosure rules may complicate efforts to comply with the various requirements.
Voting Policy Updates
ISS and GL have updated their proxy voting policies for 2025. Other than updates to its executive compensation policy and voting policy guidelines, the updates from ISS were limited for 2025. ISS updated its voting policies related to poison pills, special purpose acquisition corporation (“SPAC”) extensions, and natural capital and community impact assessment. GL made limited changes to its guidelines and voting policy. GL updates included oversight of AI guidelines, board responsiveness to shareholder proposals, reincorporation proposals, change-in-control provisions for executive compensation, and updating its executive pay programs guidelines.
2025 ISS Updates
Poison Pills
ISS revised its policy on poison pills to clarify the factors that will be considered in a case-by-case evaluation of whether a board of directors’ actions in adopting a short-term poison pill were reasonable, or whether the adoption of the poison pill should be considered a governance failure warranting a recommendation to vote against the directors. The policy update is intended to increase transparency by specifically addressing factors that were previously considered in the “other factors as relevant” category. The newly explicit factors include the context in which the pill was adopted and the company’s overall track record with respect to corporate governance and responsiveness to shareholders. ISS did not update its policy as it applies to the adoption of a long-term poison pill without a shareholder vote, or when a pill is submitted to shareholders for approval or ratification.
SPAC Extensions
ISS updated its policy to codify its present approach to SPAC extension recommendations. ISS will generally support requests to extend the termination date by up to one year from a SPAC’s original termination date. Multiple extension requests may also be viewed favorably so long as they do not collectively exceed one year in total.
Natural Capital and Community Impact Assessment
To align with the recent focus seen in shareholder proposals on topics related to natural capital and/or community impact assessment risks, ISS updated its policy to group biodiversity and related environmental topics under the theme of natural capital. In 2025, in addition to factors previously considered, ISS will now consider the alignment of current disclosure of applicable policies, metrics, risk assessment reports, and risk management procedures with relevant broadly accepted reporting frameworks when assessing natural capital and/or community impact assessment proposals on a case-by-case basis. ISS indicated that this policy update will better align with recently developed frameworks and reflect the variety of nature-related and community impact assessment proposals companies may receive in coming years.
Updates to FAQs for Executive Compensation Policies
In 2025, ISS will consider how far a company’s clawback policy extends when determining whether the clawback policy is considered “robust.” In order to receive credit for a “robust” clawback policy in its pay-for-performance evaluation, a company’s clawback policy must extend beyond the minimum requirements under Dodd-Frank covering incentive-based equity compensation and explicitly cover time-vesting equity awards. Companies should understand that unless their clawback policy covers all time-vesting equity awards, it will not receive credit for a “robust” clawback policy, even if the company adopted a policy before 2024 as required by the NYSE and Nasdaq.
ISS will also place greater emphasis on performance-vesting equity disclosure and design aspects, particularly where there is a quantitative misalignment in pay versus performance disclosure. Existing qualitative considerations around performance equity programs will be subject to greater scrutiny in the context of a quantitative pay-versus-performance misalignment going forward. These qualitative considerations include: (i) non-disclosure of forward-looking goals; (ii) poor disclosure of closing-cycle vesting results; (iii) poor disclosure of the rationale for metric changes, metric adjustments or program designs; (iv) unusually large pay opportunities; (v) non-rigorous goals that do not appear to strongly incentivize outperformance; and (vi) overly complex performance equity structures. If a company has multiple concerns noted by ISS and misalignment of quantitative pay-for-performance measures, ISS will be more likely to recommend a vote against the company’s proposals.
ISS generally views any mid-cycle changes to in-progress incentive programs negatively. Mid-cycles changes include changes to metrics, performance targets, and/or measurements periods. Companies should disclose clear and compelling rationale for any mid-cycle changes and explain how the changes do not circumvent pay-versus-performance outcomes.
2025 Glass Lewis Updates
Board Oversight of AI
While GL does not generally make voting recommendations on the basis of a company’s oversight or disclosure related to AI issues, GL will evaluate a company’s overall governance practice and identify directors or committees charged with oversight when there is evidence of insufficient oversight or management of AI technologies that have resulted in material harm to shareholders. In these situations, GL will monitor and evaluate the company’s management of the incident and may recommend against voting for the appropriate director if the AI-related oversight, response or disclosure is found to be insufficient.
Board Responsiveness to Shareholder Proposals
GL updated its guideline to set forth its approach to board responsiveness to shareholder proposals. GL expects the board to engage with shareholders when a shareholder proposal receives significant shareholder support. Additionally, GL expects companies to engage with shareholders on the proposal and provide disclosure addressing shareholder concerns and outreach initiatives. Generally, GL views significant shareholder support as more than 30% but less than the majority of votes cast in favor of the proposal.
Reincorporation Proposals
GL clarified that it will evaluate reincorporation proposals on a case-by-case basis. GL outlined factors it will use to evaluate a company’s reincorporation proposal including changes in corporate governance provisions (such as shareholder rights), material differences in corporate statutes and legal precedents, and relevant financial benefits. GL generally disfavors shareholder proposals to change a company’s place of incorporation and will only support those proposals for exceptional circumstances.
Clawbacks
In addition to the requirements under Dodd-Frank, GL believes effective clawback policies should provide companies with the ability to recoup incentive compensation (whether performance-based or time-based) from an executive where there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure or a material operational failure. In addition, a clawback policy should provide recoupment authority regardless of whether the executive was terminated with cause.
Where a company determines not to recoup incentive compensation, GL will assess the appropriateness of such determination, and will expect a thorough, detailed discussion of the company’s decision to not pursue recoupment and, if applicable, how the company has otherwise rectified the disconnect between executive pay outcomes and negative impacts of their actions on the company and any alternative measures the company took. The absence of such enhanced disclosure may impact GL’s assessment of the quality of disclosure and its recommendation for the advisory vote on executive compensation.
Executive Ownership Guidelines
GL expects companies to include a discussion of their approach to executive ownership guidelines and how various types of awards are counted or excluded in the calculation. If a company counts unearned performance-based awards or unexercised stock options in applying ownership guidelines, it should provide a cogent rationale as to why they count these. Otherwise, GL may view such inclusion as a problematic pay practice.
Change in Control
GL updated its benchmark policy to set forth its approach to change in control arrangements that allow for committee discretion. Where a company’s compensation committee has discretion over the treatment of unvested awards, GL expects a clear rationale for the committee’s ultimate decision as to how such awards should be treated in the event a change in control occurs. GL considers double-trigger change in control arrangements, in which both a change in control and termination or constructive termination are required, to be best practice.
Executive Pay
GL clarified its guidelines to emphasize its holistic approach to analyzing executive compensation programs. In general, GL evaluates pay programs on a case-by-case basis and does not utilize a scorecard when considering individual features such as the allocation of the long-term incentive between performance-based awards and time-based awards. GL’s updated guidelines emphasize that unfavorable factors in a pay program are reviewed in the context of rationale, overall structure, overall disclosure quality, the program’s ability to align executive pay with performance and the shareholder experience and the trajectory of the pay program resulting from changes introduced by the compensation committee.
What to Do Now
Companies should consider these rule changes, guidance, and voting policies updates when preparing for the 2025 Proxy and Annual Reporting 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.