As the new year approaches, Institutional Shareholder Services Inc. (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”) have released their annual updates to their respective proxy voting guidelines. The recommendations made by these two heavyweights of the proxy advisory market have significant consequences on the makeup of the board of directors of publicly traded companies throughout the world, and this year’s updates reflect an effort to increase the power of institutional shareholders while focusing on holding directors accountable for proper governance. Below, this article summarizes the key policy changes proposed by ISS and Glass Lewis for the 2017 proxy season.
The following revisions to ISS’s proxy voting guidelines will take affect for annual meetings held on or after February 17, 2017:
Restricting binding shareholder proposals
Through this new policy, ISS will advocate generally voting against or withholding votes from directors if the company’s charter imposes undue restrictions on shareholders’ ability to amend provisions of the bylaws of company that (1) include an outright prohibition on the submission of binding shareholder proposals or (2) provisions for such proposals that include share ownership or time holding requirements. ISS rationalizes this update by stating that the ability to amend such bylaw provisions is a fundamental shareholder right. As a result, any restrictions on the exercise of that right constitute a material diminution of shareholders’ rights.
Multi-class capital structures in newly public companies
ISS recommends, in order to protect shareholders of newly public company, generally vote against or withhold vote from directors if, prior to or in connection with a newly public company’s initial public offering, the company or its board amends the charter to implement a multi-class capital structure with unequal voting rights between the classes of shares.
This new policy announced by ISS in 2015 will first apply in 2017. Under the policy, ISS recommends voting against (1) a director who serves as CEO of a publicly traded company while serving on more than three public company boards (including the board of the company in question); and (2) any other director who serves on more than five total public company boards.
Evaluating non-employee director compensation
ISS recommends evaluating management proposals seeking approval of non-employee director compensation on a case-by-case basis, focusing on the following factors:
- The relative magnitude of the director’s compensation as compared to similar companies;
- The presence of problematic pay practices relating to director compensation;
- Director stock ownership guidelines and holding requirements;
- Equity award vesting schedules;
- The mix of cash and equity-base compensation;
- Meaningful limits on director compensation
- The availability of retirement benefits or perquisites; and
- The quality of the disclosure surrounding director compensation.
This approach moves away from a minimum criteria approach and more towards a holistic look at the compensation scheme.
Evaluating equity plans
While the general approach to evaluating equity plans has not changed, ISS will not grant full points during an evaluation of an equity plan unless the plan expressly prohibits the payment of dividends before the underlying award vests for all award types. Previously, a commitment to not paying such dividends was sufficient.
Additionally, in order to receive full points under this approach, an equity plan must have a vesting period of at least one year for all award types. No points will be awarded for plans that allow for one-off award agreements that reduce or eliminate this vesting requirement.
Glass Lewis updates
The following revisions to Glass Lewis’s proxy voting guidelines will take affect for annual meetings held on or after January 1, 2017:
Governance following an IPO or spinoff
If an evaluation of a company’s governing documents reveal that the board approved provisions significantly restricting the shareholders’ ability to effectuate change, Glass Lewis will consider adverse recommendations against the director or the governance committee members that approved such restrictions. When making this determination, Glass Lewis will review the following areas of governance:
- Anti-takeover mechanisms;
- Supermajority vote requirements to amend governing documents;
- Exclusive forum or fee-shifting provisions;
- Shareholders’ ability to call special meetings or act by written consent;
- Voting standards for the election of directors;
- Shareholders’ ability to remove a director without cause; and
- Evergreen provisions in compensation documents.
Glass Lewis will generally recommend voting against (1) a director serving as an executive officer of any public company while serving on more than two public company boards; and (2) any director who serves on more than five total public company boards. These recommendations, however, come with multiple caveats.
First, Glass Lewis generally does not recommend voting against a “overcommitted” director at the companies where such director serves as an executive. Instead, evaluating whether such an executive director is “overcommitted” requires the consideration of (1) the size and location of the other companies; (2) the director’s board roles; (3) whether the director serves on the board of any large privately-held companies; (4) the director’s overall tenure with such company; and (5) the director’s attendance record.
Second, Glass Lewis would not recommend voting against a director as described above if (1) the director provides sufficient rationale for his/her board service; or (2) the director in question serves (a) on an excessive number of boards within a consolidated group of companies or (b) as a private equity or hedge fund designee, i.e. represents a firm that manages a portfolio of investments that include the company, which would require special consideration.
Glass Lewis has significantly altered its approach to evaluating a board’s performance and planning for succession or refreshment. Instead of imposing inflexible rules regarding age or term limits, Glass Lewis recommends taking a holistic approach, considering each director’s areas of expertise, the overall ranges of skillsets within the board, the board’s overall approach to governance, and the board’s role in the company’s performance.
Use of non-GAAP metrics
To facilitate shareholder evaluation, Glass Lewis recommends that if a Company uses non-GAAP financial measures in their incentive compensation disclosures, the Company should provide clear reconciliations to GAAP for ease of evaluation purposes and an explanation of the rationale behind using non-GAAP measures.