Glass Lewis has recently published its 2019 proxy voting guidelines for the United States and Canada. While there are some differences observed between the two jurisdictions, Glass Lewis has provided clarity on changes in the following areas:
- Corporate Governance Issues:
- Board Gender Diversity (U.S. and Canada)
- Board Skills (Canada)
- Environmental and Social Risk Oversight (U.S. and Canada)
- Ratification of Auditors (U.S. and Canada)
- Virtual-Only Shareholder Meetings (U.S. and Canada)
- Director and Officer Indemnification (U.S. and Canada)
- Conflicting and Excluded Proposals (U.S.)
- Executive Compensation Issues:
- Contractual Payments and Obligations (U.S. and Canada)
- Grants of Front-Loaded Awards (U.S. and Canada)
- Recoupment Provisions “Clawbacks” (U.S. and Canada)
- Other Executive Compensation Clarifications (U.S. and Canada)
- Added Excise Tax Gross-Ups (U.S.)
- Executive Compensation Disclosure for Smaller Reporting Companies (U.S.)
- Housekeeping Changes
Corporate Governance Issues:
1. Board Gender Diversity (U.S. and Canada)
Their policy regarding board gender diversity, announced in November 2017, will take effect for meetings held after January 1, 2019. Under the updated policy, Glass Lewis will generally recommend voting against the nominating committee chair of a board that has no female members. In addition, they may recommend voting against the nominating committee chair if the board has not adopted a formal written diversity policy. Depending on other factors, including the size of the company, the industry in which the company operates and the governance profile of the company, they may extend this recommendation to vote against other nominating committee members. When making these voting recommendations, Glass Lewis will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending shareholders vote against directors of companies outside the Russell 3000 Index (U.S.) or S&P/TSX Composite Index (Canada), or when boards have provided a sufficient rationale for not having any female board members.
2. Board Skills (Canada)
Glass Lewis has updated its guidelines to reflect their view with regards to an emerging best practice for boards to disclose their skills and competencies. They have shared their belief that companies should disclose enough information to allow a meaningful assessment of a board’s skills and competencies. From 2019 onwards, their analyses of director elections at companies in the S&P/TSX 60 Index will include board skills matrices in order to assist Glass Lewis and others in assessing a board’s competencies and identifying any potential skills gaps at those companies.
3. Environmental and Social Risk Oversight (U.S. and Canada)
For large cap companies, and instances where they identify material oversight issues, Glass Lewis will review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of environmental and/or social issues. Glass Lewis will also note situations when such oversight has not been clearly defined by companies in their governance documents. If a company has not properly managed or mitigated environmental or social risks appropriately, they may consider recommending that shareholders vote against members of the board who are responsible for oversight of environmental and social risks. If explicit board oversight of environmental and social issues is unclear, Glass Lewis may recommend that shareholders vote against members of the audit committee. Glass Lewis will carefully review the situation, its effect on shareholder value, as well as any response made by the company in order to take corrective action before making any final voting recommendations.
4. Ratification of Auditors (U.S. and Canada)
Glass Lewis will now include factors such as the auditor’s tenure, a pattern of inaccurate audits, and any ongoing litigation or significant controversies that call into question an auditor’s effectiveness in their review. In limited cases, these factors may lead Glass Lewis to recommend against auditor ratification.
5. Virtual-Only Shareholder Meetings (U.S. and Canada)
Glass Lewis’ policy regarding virtual-only shareholder meetings, announced in November 2017, will take effect for meetings held after January 1, 2019. Under this new policy, for companies that opt to hold their annual shareholder meeting exclusively by virtual means, without providing the option of attending the meeting in person, Glass Lewis will examine the company’s disclosure of its virtual meeting procedures and may recommend voting against members of the governance committee. An against vote will occur if the company does not provide disclosure assuring that shareholders will be afforded the same rights and opportunities to participate as they would at an in-person meeting.
Examples of effective disclosure to support a virtual-only meeting are:
- addressing technical and logistical issues related to accessing the virtual meeting platform; and
- 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;
- 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;
- procedures for accessing technical support to assist in the event of any difficulties accessing the virtual meeting.
6. Director and Officer Indemnification (U.S. and Canada)
While Glass Lewis has not changed its current policy, they have added clarity on their approach to analyzing indemnification provisions for directors and officers. Glass Lewis strongly believes that directors and officers should be held to the highest standard when carrying out their duties to shareholders, and they feel that some protection from liability is reasonable to protect directors and officers against certain suits so that these individuals feel comfortable taking measured risks that may benefit shareholders. As such, they find it appropriate for a company to provide indemnification and/or enroll in liability insurance to cover its directors and officers so long as the terms of such agreements are reasonable.
7. Conflicting and Excluded Proposals (U.S.)
Glass Lewis has now codified its policy regarding conflicting special meeting shareholder resolutions:
- In situations where companies have excluded a special meeting shareholder proposal in favor of a management proposal ratifying an existing special meeting right, Glass Lewis will typically recommend against the ratification proposal as well as members of the nominating and governance committee.
- In situations where there are conflicting management and shareholder special meeting proposals and the company does not currently maintain a special meeting right, Glass Lewis may consider recommending that shareholders vote in favor of the shareholder proposal and that shareholders abstain from voting on management’s proposal.
- In situations where companies have both a management and shareholder proposal on the ballot requesting different thresholds for the right to call a special meeting, Glass Lewis will generally recommend voting for the lower threshold (in most instances, the shareholder proposal) and recommend voting against the higher threshold.
- Glass Lewis will also note situations where the SEC has allowed companies to exclude shareholder proposals, which may result in recommendations against members of the governance committee. In recent years, the dynamic nature of the considerations given by the SEC, when determining whether companies may exclude certain shareholder proposals, has been witnessed by Glass Lewis. They understand that not all shareholder proposals serve the long-term interests of shareholders and value and respect the limitations placed on shareholder proponents when submitting proposals to a vote of shareholders, as certain shareholder proposals can unduly burden companies. However, in the event that Glass Lewis believes that the exclusion of a shareholder proposal was detrimental to shareholders, they may recommend against the members of the governance committee.
Executive Compensation Issues:
1. Contractual Payments and Arrangements (U.S. and Canada)
Glass Lewis has extended its policy regarding contractual payments and arrangements as part of their analysis of executive compensation and clarified terms that drive a negative Glass Lewis recommendation. When evaluating severance and sign-on arrangements, they will consider general market practice (according to each jurisdiction), the size and design of entitlements.
2. Grants of Front-Loaded Awards (U.S. and Canada)
Glass Lewis has added a discussion of grants of front-loaded awards to their policy, which are often referred to as “mega grants”. They believe that there are certain risks associated with the use of this type of granting structure for long-term incentives. When evaluating such awards, Glass Lewis will consider the quantum, design and the company’s rationale for granting awards using a front-loaded structure.
3. Recoupment Provisions “Clawbacks” (U.S. and Canada)
Glass Lewis has clarified its policy regarding clawbacks as they are increasingly focusing attention on the specific terms used as part of these policies by companies. They have stated that their view on the adequacy of clawback policies will not directly affect their voting recommendations with respect to Say on Pay votes, but the terms of a policy will inform their overall view of a company’s compensation program.
4. Other Executive Compensation Clarifications (U.S. and Canada)
Glass Lewis has formalized several aspects of their executive compensation policies, which includes re-framing how peer groups contribute to their voting recommendations, a revised description of their pay-for-performance model and consideration of discretion in incentive plans. They have also added an explanation of the structure and disclosure ratings used in their Proxy Papers and addressed certain recent developments in their discussion of director compensation and bonus plans.
5. Added Excise Tax Gross-Ups (U.S.)
When analyzing the performance of the board’s compensation committee, Glass Lewis will now include new excise tax gross-up provisions, as an additional factor that may contribute to a negative voting recommendation from them. When new excise tax gross-ups are provided for in executive employment agreements, Glass Lewis will consider recommending against members of the compensation committee, particularly in situations where a company previously committed not to provide any such entitlements in the future.
6. Executive Compensation Disclosure for Smaller Reporting Companies (U.S.)
When analyzing the performance of a board’s compensation committee, Glass Lewis will now consider the impact of a material reduction in the amount of CD&A disclosure provided by a company when formulating their recommendations and may consider recommending against members of the committee where a reduction in disclosure substantially impacts shareholders’ ability to make an informed assessment of the company’s executive pay practices. This update takes into account the SEC amendments, made in June 2018, that raised the thresholds in the definition of a “smaller reporting company” (or “SRC”), thereby significantly expanding the number of companies eligible to comply with reduced disclosure requirements. Under the updated lower disclosure standard from the SEC, a company defined as an SRC is only required to disclose two years of summary compensation table information rather than the standard three years. It also only has to report on compensation for only the top three named executive officers rather than the standard five. SRCs are also not required to provide a compensation discussion and analysis or tables detailing grants of plan-based awards to executives.
1. Glass Lewis has also made several minor edits to its U.S. and Canadian policies, including the removal of several outdated references, in order to enhance clarity and readability for readers.
Global Governance Advisors (“GGA”) continues to monitor the evolving proxy voting guidelines on a regular basis and will be reporting on any changes coming out of ISS in the coming weeks as they emerge. 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 2019 proxy season.
For access to the Glass Lewis’ 2019 U.S. Clarifying Amendments please click here: Glass Lewis Release 2019 U.S. Clarifying Amendments
For access to the full Glass Lewis’ 2019 Proxy Voting Guidelines for the United States and Canada, please click on the following link: http://www.glasslewis.com/2019-policy-guideline-updates-united-states-canada-shareholder-initiatives-israel/