Like ISS (see this PubCo post), proxy advisor Glass Lewis has also revisited the application of its policies to take into account the impact of COVID-19—having conducted, in its words, “scenario planning in order to consider how this will impact governance and broader ESG issues in the present and future.” Glass Lewis advises that it expects, currently and probably through 2021, “all governance issues and most proposal types to be impacted by the pandemic,” including balance-sheet and executive comp issues, on which Glass Lewis expresses some rather strong opinions. Relying on the flexibility inherent in its “contextual approach,” Glass Lewis plans to exercise its “existing discretion and pragmatism” in connection with voting on any affected proposals.
Virtual annual meetings. While investor groups have expressed concerns about the potential mischief that could result from companies’ use of the virtual-only format, such as “silencing dissenting shareholders” and insulating management and the board from criticism, even these groups have recognized that the format could be indispensable for many companies during the pandemic. Glass Lewis acknowledges these concerns, but believes that, given the current situation, the virtual-only format provides “compelling advantages for both companies and shareholders to preserve the timing, certainty, agendas and voting of shareholder meetings.” Many matters require a shareholder vote, pandemic notwithstanding, and virtual-only meetings will help to preserve the fundamental shareholder right of voting.
Accordingly, for the duration of the 2020 proxy season (March 1, 2020 through June 30, 2020), Glass Lewis will review virtual-only meetings “on a case-by-case basis and will also note whether companies state their intention to resume holding in-person or hybrid meetings under normal circumstances.” In addition, for companies that hold virtual-only meetings this proxy season, Glass Lewis “will generally refrain from recommending to vote against members of the governance committee on this basis, provided that the company discloses, at a minimum, its rationale for doing so, including citing COVID-19.” However, if these companies continue holding virtual-only shareholder meetings in subsequent years, Glass Lewis expects to see prescribed robust disclosure concerning shareholder participation in their proxy statements. The standard policy will apply to all shareholder meetings occurring after June 30, 2020, notably, even “if the pandemic continues well beyond this date,” because “companies have been given sufficient time to address shareholder concerns as outlined in our standard policy.” [Emphasis added.] As an example that it views as acceptable during this proxy season, Glass Lewis refers to this notice from Starbucks on March 4.
Compensation. Notwithstanding the impact of the pandemic on performance and stock prices, Glass Lewis does not appear to be particularly susceptible to “crocodile tears for maintaining or even increasing executive compensation levels”; rather, there is “a heavy burden of proof for boards and executives to justify their compensation levels in a drastically different market for talent.” Glass Lewis predicts that shareholders will have serious concerns about “repricing, dilution, burn rates, hurdle adjustments, changes to vesting periods, caps and cuts on incentives, and the quality of disclosure concerning the limits and exercise of board discretion. Companies with strong pay structures will be challenged to abide by them, and firms with less robust programs will be forced to choose between lying in the bed they’ve made or changing arrangements and all but guaranteeing shareholder ire.”
Balance Sheets. Glass Lewis anticipates “widespread pausing of buyback programs, suspending dividends and an increase in capital raisings and placements…to be a forgone conclusion.” The level of capital raising may exceed shareholder norms and best practices, but Glass Lewis cautions that “[d]ogmatic application of pre-existing standards by investors could mean the difference between a company surviving this crisis and shareholders suffering even greater losses.” In its view, “responsible companies hit hard by the crisis have taken early and decisive action to roll back planned salary increases or above-target bonus outcomes, sharing the pain felt by employees and shareholders…. Trying to make executives whole at even further expense to shareholders and other employees is a certainty for proposals to be rejected and boards to get thrown out—and an open invitation for activists and lawsuits onto a company’s back for years to come. Even those companies [that] project a ‘business as usual’ approach to executive pay will face opposition if employees and shareholders see their own ‘paychecks’ cut. Companies would be wise to avoid this.”
Board Composition and Effectiveness. While ISS seemed to suggest that normal board diversity concerns might be overlooked this year if necessary, Glass Lewis sees diversity as a more acute issue—and even a “systematic risk to portfolios” —given the increased COVID-19 health risk associated with the dominant cohort (men over 65). Glass Lewis anticipates seeing reduced attendance rates and changes to committee and board independence as “most likely early consequences, with directors, particularly those already overcommitted, reducing their board seats as the crisis increases demands on their capacity. This will be an important test of succession planning and board renewal programs.” Glass Lewis also questions whether there will be an adverse impact on board effectiveness as a consequence of remote communications, compounded by increased demands on directors’ time. In the end, however, “the ability of boards and management to successfully navigate the crisis and outperform their competitors will highlight the stark differences in the effectiveness of boards, directors and their governance structures.”
Activism and M&A; Poison Pills. While the pandemic may delay shareholder activism at least initially, Glass Lewis believes that these market conditions have revealed new opportunities for activism, especially in the hardest hit sectors. Settlement activity could vary depending on company size, with more large companies pursuing settlements and mid-size and smaller firms perhaps more likely to “slug it out, taking campaigns to a shareholder vote. Generally, if conditions begin to stabilize in the second quarter we expect the number of contests and deal volume to increase in the second half of this year and into 2021, with an increase in shareholder votes to follow if settlements are not widespread.”
In a subsequent post, Glass Lewis acknowledges that, while it “remains generally skeptical of poison pills,” its “current policy is designed to apply a nuanced, contextual assessment of these provisions.” That means that Glass Lewis is supportive of poison pills that are limited in scope to accomplish a particular objective, such as “the closing of an important merger, managing a clear and present hostile takeover threat, or other contextual factors like a severe drop in stock price due to a widespread industry or market downturn.” Glass Lewis considers COVID-19 and the related economic crisis to be a “reasonable context for adopting a poison pill” where the duration of the pill is one year or less and the company discloses a sound COVID-19-related rationale for adoption of the pill. For pills that do not satisfy these conditions, Glass Lewis will recommend opposing the re-election of all board members who served at the time of the pill’s adoption. Similarly, if the company fails to seek shareholder approval for a future renewal of the pill, Glass Lewis will recommend opposing the re-election of all board members who served at the time of the pill’s renewal and encourages companies to assure shareholders at the time of adoption that they will seek shareholder approval of any renewal.
Shareholder Proposals and ESG. Most shareholder proposals were submitted pre-crisis and, as a result, probably did not take the pandemic into account. Proposals that may have sounded appropriate last year may seem much less so this year, especially in industries hard hit by the pandemic, such as airlines and restaurants, where proposals for resource-intensive actions or reporting could undermine companies’ ability to respond to more immediate concerns that are also in shareholders’ interests. On the other hand, the pandemic may have inspired some companies to look harder at “black swan-type risks, such as preparedness for climate change.” Glass Lewis also cautions companies not to use the crisis “to dismiss or hamper the ability of shareholder proponents to put forward their resolutions, speak at virtual meetings and have shareholders vote on such matters. Poor behavior or treatment towards shareholders will likely only encourage more activist attention and will certainly be reflected in future shareholder votes on directors and recommendations from proxy advisors.”
Glass Lewis’s contextual approach. Glass Lewis believes that its current guidelines already allow “appropriate discretion and pragmatism.” Critical to the exercise of that discretion will be disclosures provided by companies with regard to the reasonableness of and justifications for changes (such as any changes to executive comp) made as a result of the crisis, particularly in relation to the impact on shareholder interests and employees. Glass Lewis also believes that companies with “a good track record on governance, performance and the use of board discretion prior to the pandemic will be afforded more discretion in our analysis than those that do not.” Recognizing the benefit of acting quickly and decisively during a time of crisis, Glass Lewis “will exercise discretion when considering governance issues where there is a clear material benefit to shareholders for supporting proposals that bring timing and/or certainty of decisions and outcomes.” Finally, Glass Lewis believes that the crisis will reveal those companies with effective governance: they will be companies that are “well prepared and provide shareholders with certainty, effective disclosure and a consistent approach that reasonably considers the impact of their decisions on shareholders, executives and employees.”