Summary of Guideline Updates
On November 1, Glass Lewis released its 2020 Policy Guideline updates for the U.S. market. These changes are expected to be effective for shareholder meetings taking place on or after January 1, 2020. They have identified several updates in the areas of compensation and governance with several covering Say on Pay votes.
Updates in Compensation and Governance
Post fiscal year-end changes
Glass Lewis clarified that in their review of Say on Pay proposals, they would include post fiscal year-end changes to executive compensation and one-time awards, “particularly where the changes touch upon issues that are material to Glass Lewis recommendations.”
Company responsiveness to Low shareholder support
Glass Lewis added “insufficient response to low shareholder support” to their non-exhaustive list of issues that may cause them to recommend voting against a company’s Say on Pay proposal. In addition, Glass Lewis clarified what they consider to be an appropriate response to low shareholder support of a Say on Pay proposal (i.e. those proposals not receiving at least 80% support). Glass Lewis noted that the level of responsiveness should corresponding with the level of shareholder opposition both in a single year and over time. Lower levels if support should lead to a higher level of responsiveness by a company. Glass Lewis also indicated that engaging with a company’s large shareholders to identify concerns and implement changes (where reasonable) to address those concerns would be considered an appropriate response. From a disclosure perspective, GGA would recommend outlining in a table a summary of what a company learned from its shareholder engagement in the prior year, what the board and management discussed and reviewed to address shareholder concerns, and finally what the board has ultimately decided that may address or not address the shareholder concern and a rationale for why they have done so as a best practice to address this concern.
Glass Lewis noted that in cases where a company lowered goals mid-year or increased calculated short-term incentive payouts from the original formula result, they expect a robust discussion of why the Board made that decision within the Form DEF 14A. GGA advises any of its clients who have applied discretion to adjust formulaic results to provide an adequate level of explanation of why this discretion was applied and why it is in the best interests of the company.
Change in control
Glass Lewis reiterated its belief that “double trigger” change in control arrangements that require a change in control and subsequent termination of employment of an executive in order to be triggered as a best practice. They also addressed broad definitions of change in control scenarios as being problematic as they could lead to situations where executives are paid additional compensation, but have not witnessed a material change in their position or duties.
Contractual arrangements and amended employment agreements
Glass Lewis provided an updated list of problematic practices that could lead to a negative Say on Pay vote recommendation. This includes:
- Excessively broad change in control triggers;
- Inappropriate severance entitlements;
- Inadequately explained or excessive sign-on arrangements;
- Guaranteed bonuses (especially as a multiyear occurrence); and
- Failure to address any concerning practices in amended employment agreements.
- Glass Lewis made it clear that they view failures to address problematic pay practices within an amended employment agreement as a missed opportunity and that companies should seek to align to current best practices when amending employment contracts.
Additional key updates for the 2020 proxy season
Glass Lewis stated that they believe “companies should only omit shareholder proposals in instances where the SEC has explicitly concurred with a company’s argument that a proposal should be excluded.” Therefore, Glass Lewis will now consider recommending a vote against all members of the Governance Committee where SEC Division staff:
- Decline to state a view on a shareholder proposal and the company does not include the shareholder proposal in its proxy statement; and
- Orally concurs with a company’s no-action request but the Division staff does not provide any written record and/or the company does not provide any disclosure relating to the result of its no-action request.
Standards for Assessing the Audit Committee
Glass Lewis will now consider recommending a vote against the Audit Committee Chair when fees paid to the company’s external auditor are not disclosed. If the company has a staggered board and the Audit Committee Chair is not up for re-election, then Glass Lewis will not recommend a vote against other Audit Committee members, but will note its concern regarding the Audit Committee Chair.
Compensation Committee Performance
Glass Lewis will now consider recommending a vote against all members of the Compensation Committee if the board adopts a frequency for Say on Pay votes that differs from the frequency that received the most votes from shareholders.
Nominating and Governance Committee Performance
Glass Lewis will now consider recommending a vote against the Governance Committee Chair when board and committee attendance is not disclosed in the Form DEF 14A or similar document. Glass Lewis will also consider recommending a vote against the Governance Committee Chair when a director’s attendance is less than 75% of the board and applicable committee meetings, but the disclosure is too vague to determine which director’s attendance was lacking.
Forum Selection Clauses
Glass Lewis will continue to consider recommending a vote against the Governance Committee Chair if the board adopted a forum selection clause without shareholder approval during the past year. They did clarify that they would “evaluate the circumstances surrounding the adoption,” and if the forum selection clause “is narrowly crafted to suit the particular circumstances facing the company and/or a reasonable sunset provision is included,” then it may make an exception to its voting policy.
Shareholder Proposals – Supermajority Vote Requirements
While Glass Lewis generally supports shareholder proposals seeking to eliminate supermajority voting provisions, they clarified that they may recommend that shareholders vote against proposals that seek to eliminate supermajority voting provisions at controlled companies, because these provisions may protect minority shareholders.
Shareholder Proposals – Gender Pay Equity
Glass Lewis will review on a case-by-case basis shareholder proposals requesting disclosure of a company’s median gender pay ratio. However, if a company has disclosed “sufficient information” about its diversity initiatives, including how it is “ensuring that women and men are paid equally for equal work,” then Glass Lewis will generally recommend a vote against these proposals.
GGA continues to monitor the evolving proxy voting guidelines on a regular basis and will be reporting on any finalized changes coming out of ISS in the coming weeks as they are confirmed. Companies should be reviewing their compensation and governance practices against these updated guidelines to ensure that their current designs align to the updated guidelines as we move into the 2020 proxy season.
For access to the full Glass Lewis’ 2020 Proxy Voting Guidelines for the United States, please click on the following link: https://www.glasslewis.com/wp-content/uploads/2016/11/Guidelines_US.pdf