Proxy advisor Glass Lewis has posted its 2019 Proxy Guidelines and 2019 Guidelines Regarding Shareholder Initiatives. One of the more striking points is that GL indicates that it may, albeit in limited circumstances, recommend against the members of the nominating/governance committee simply for successfully requesting no-action relief from the SEC to exclude (and presumably excluding) a shareholder proposal, where GL views the exclusion to have been detrimental to shareholders. GL’s new guidance includes the following updates:
- Board gender diversity: Under the new policy, GL will generally recommend voting against the chair of the nom/gov committee if the board has no women directors. GL may also recommend a vote against other members of the committee, depending on factors such as company size, industry and governance profile. Companies may be able to avoid a negative recommendation if, in disclosing their diversity considerations, they provide an adequate rationale for the absence of female board members, including a timetable for remedying the failure and any notable restrictions on board composition, such as outstanding director nomination agreements with shareholders. GL may also refrain from issuing a negative recommendation for companies outside the Russell 3000. The new policy will be effective for meetings beginning in 2019.
- Conflicting and excluded proposals regarding special meetings: GL generally favors a threshold of 10% to 15% for the right to call a special meeting and will generally recommend in favor of proposals in that range. Where conflicting proposals would provide different thresholds for the right to call a special meeting, GL will recommend a vote for the proposal with the lower threshold and a vote against the proposal with the higher threshold. If there is no current special meeting right, GL may recommend in favor of the shareholder proposal and recommend an abstention on the conflicting management proposal to establish a special meeting right. However, if companies exclude the special meeting shareholder proposal and include a management proposal to ratify an existing provision that is materially different from the shareholder proposal, GL will typically recommend against ratification and against the chair of the nom/gov committee. GL indicates that it finds “the exclusion of these shareholder proposals to be especially problematic as, in these instances, shareholders are not offered any enhanced shareholder right, nor would the approval (or rejection) of the ratification proposal initiate any type of meaningful change to shareholders’ rights.” (See this PubCo post and the GL blog post/case study on this issue.) As noted above, if GL views any proposal excluded as permitted under an SEC no-action letter as detrimental to shareholders, it may recommend against members of the nom/gov committee.
- Diversity reporting: GL will generally recommend in favor of shareholder proposals requesting additional disclosure on employee diversity and promotion of workforce diversity, taking into account the company’s industry, current level of disclosure by the company and its peers and any litigation or accusations of discrimination.
- Environmental and social risk oversight: Under its new codified approach to ES, for large cap companies and any company where GL identifies material oversight issues, GL will review the company’s overall governance and identify those directors or board committees responsible for ES oversight, including where oversight has not been clearly defined in governance documents. Where ES risks have not been properly managed or mitigated and shareholder value has been adversely affected or threatened, GL may recommend against the responsible directors or, where oversight responsibility is not explicit, GL may recommend against members of the audit committee. In reaching its recommendation, GL will take into account the effect on shareholder value and any corrective action or other response made by the company.
- Materiality considerations in shareholder proposals: Given that ES risks differ among companies depending on operations, workforce, structure and geography, in determining recommendations regarding ES shareholder proposals, GL will emphasize the financial implications, taking into account the SASB standards.
- Ratification of auditor: additional considerations: Among the additional factors GL will now consider in this context are auditor tenure, a pattern of “inaccurate audits” and “ongoing litigation or significant controversies which call into question an auditor’s effectiveness.” These factors could lead GL to recommend against auditor ratification. (See this PubCo post and this PubCo post.)
- Virtual-only shareholder meetings: The GL policy regarding virtual-only shareholder meetings was announced in November 2017 and is effective for meetings beginning in 2019. Under the policy, if companies elect to hold virtual-only annual meetings, GL may recommend against the members of the nom/gov committee if the disclosure about the procedures does not ensure that “shareholders will be afforded the same rights and opportunities to participate as they would at an in-person meeting. To be effective, the disclosure should include:
“(i) addressing the ability of shareholders to ask questions during the meeting, including time guidelines for shareholder questions, rules around what types of questions are allowed, and rules for how questions and comments will be recognized and disclosed to meeting participants;
(ii) procedures, if any, for posting appropriate questions received during the meeting, and the company’s answers, on the investor page of their website as soon as is practical after the meeting;
(iii) addressing technical and logistical issues related to accessing the virtual meeting platform; and
(iv) procedures for accessing technical support to assist in the event of any difficulties accessing the virtual meeting.”
- Executive and director compensation: GL will consider
- in recommendations on comp committee members, inclusion of new excise tax gross-ups in executive employment agreements, especially where there was a prior commitment not to provide gross-ups;
- in recommendations on say-on-pay proposals, severance and sign-on arrangements in relation to market practice, as well as the size and design of entitlements;
- in recommendations regarding comp committee members, for newly minted smaller reporting companies, the impact of materially decreased CD&A disclosure on shareholders’ ability to make an informed assessment of the company’s executive pay practices (remember that SRCs are not required to provide a CD&A, see this PubCo post and this Cooley Alert);
- in recommendations on say-on-pay proposals, the amount, design and rationale for grants of front-loaded awards (which GL believes to have certain risks).
- the specific terms of clawback provisions, including whether they apply only in the event of restatement or also cover “similar revision of performance indicators upon which bonuses were based.” GL may support a shareholder proposal to enhance a clawback policy if a company’s existing policy does not provide sufficient protection against reputational and financial harm.
- Clarifications: The updates also clarify GL’s use of peer groups, its pay-for-performance analysis, the use of discretion in incentive plans, and recent developments in director compensation and bonus plans.
- Written consent shareholder proposals: Where companies have adopted proxy access and a right to call a special meeting with a threshold of 15% or lower, GL will now generally recommend against shareholder proposals requesting that companies adopt a shareholder right to action by written consent.
- Other updates: GL has also codified its policies regarding director recommendations on the basis of company performance, director and officer indemnification, NOL protective amendments, OTC-listed companies and quorum requirements.
See also this corporatecounsel.net blogpost.