iEach year Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass Lewis), the two leading proxy advisory firms, announce updates to their voting recommendation policies. While the recommendations of these firms are not binding on any shareholder, many institutional shareholders do follow them and, particularly in the case of a contested election, having these firms recommend in your favor can be crucial to the result of the vote. Even if there is not a proxy contest, public companies should be aware of any changes in ISS or Glass Lewis policies that may affect them so as to avoid an unexpected "withhold" vote in its next election of directors. The key updates that are effective for annual meetings on or after February 1, 2017, are as follows:
"Overboarding." Both firms announced last year that they would recommend a vote against or a withhold vote for a director they consider to be "overboarded" although they provided for a one-year transition period. This period has now ended. Both ISS and Glass Lewis consider a director to be overboarded if he or she serves on more than five public company boards. ISS policies also provide that chief executive officers may serve on no more than two public company boards in addition to their company's board. Glass Lewis' policy applies to any executive officer of a public company, not just the chief executive officer. Both firms provide that, in the case of officers, the recommendation to withhold a vote for director will only be with respect to any outside board on which the director sits, the assumption being that the director is likely to be devoting adequate time to the company for which he or she also serves as an executive officer.
Corporate Governance Following an IPO. For newly public companies that have adopted bylaws or charter provisions that are materially adverse to shareholder rights or adopted a multi-class capital structure in which classes have unequal voting rights, prior to or in connection with the company's initial public offering, ISS will now be generally recommending a vote against or withhold vote from directors individually, committee members or the entire board (except new members who will be considered on a case-by-case basis). The determination as to whether a provision is materially adverse will take into consideration such factors as the disclosed rationale for the provision, the ability for the provisions to be changed, the ability of shareholders to hold directors accountable through annual elections rather than a classified board, any reasonable sunset provision and other relevant factors.
Glass Lewis also announced that it will consider recommending that shareholders vote against the members of the governance committee or the directors that served on the board at the time of a company's formation if the company's governing documents include provisions that significantly restrict the ability of shareholders to effect change. Provisions that will be examined include anti-takeover provisions, supermajority vote requirements and general shareholder rights such as the ability of shareholders to remove directors and call special meetings.
Binding Shareholder Proposals. ISS has adopted a new recommendation that shareholders vote against or withhold their vote for members of the governance committee of a board if the company's chartering documents impose undue restrictions on a shareholder's ability to amend the bylaws. Such restrictions include any outright prohibition on the submission of binding shareholder proposals or share ownership requirements or holding periods in excess of those specified in Rule 14a-8 of the Exchange Act. While Glass Lewis did not adopt any specific change to its policies regarding this matter, it generally looks unfavorably at companies that have taken actions that may be perceived to disenfranchise shareholders.
Equity-Based and Other Incentive Plans. Both ISS and Glass Lewis have complex models to evaluate equity-based compensation proposals. ISS makes its recommendations with respect to voting on equity-based compensation plans on a case-by-case basis using an "equity plan scorecard" method that takes into consideration the plan's cost, its features and historical grant practices. For 2017, the most significant change to the scorecard was to add as a feature of a plan to be considered, whether the plan provides for dividends to be paid to recipients on unvested awards. Full positive points will be earned if the plan explicitly prohibits the payment of dividends on unvested awards of all types. No favorable points will be earned if this prohibition is absent or does not cover all award types. A company's general policy of not paying dividends until an award vests will not suffice.
ISS also modified its voting guidance with respect to the approval of amendments to existing cash and equity incentive plans. Previously, it had generally recommended approval of amendments that were ministerial in nature, addressed tax deductibility of awards, placed limitations on awards or established performance goals for existing plans. For 2017, it has stated that it will make its recommendations on a case-by-case basis and will generally recommend a vote against a proposal seeking approval of shareholders solely for purposes of Section 162(m) of the Internal Revenue Code if the plan's administering committee is not comprised entirely of independent directors.
Glass Lewis did not make any changes to its policies regarding equity compensation plans for the 2017 proxy season. It too makes its recommendations on a case-by-case basis taking into consideration the quantitative and qualitative aspects of a proposed plan. It will generally recommend against a proposal seeking approval of an incentive plan for Section 162(m) purposes unless a company (i) provides at least a list of performance targets; (ii) provides one of either a total maximum or an individual maximum; and (iii) the proposed plan or individual maximum award limits are not excessive when compared with the plans of the company's peers.
Non-employee Director Compensation. In recent years, some public companies have sought approval of advisory "say on pay" proposals with respect to the compensation of directors. This type of proposal had not previously been addressed by the ISS voting guidelines. For 2017, ISS stated that it will evaluate such proposals on a case-by-case basis taking into account a variety of factors such as the relative magnitude of the compensation of directors compared to other companies of a similar profile, the availability of retirement benefits, director stock ownership guidelines, the mix of cash and equity compensation and other factors. Glass Lewis does not have a specific policy addressing director "say on pay" proposals.
ISS also broadened the factors it will consider when deciding on a case-by-case basis how to vote with respect to proposals for equity compensation plans for directors. Factors considered include the total estimated cost of the company's equity plans relative to its peers, the company's three-year burn rate relative to its peers and the presence of any egregious plan features such as option repricing or a liberal change in control vesting provision.
Glass Lewis did not make any changes to its voting policies with respect to director compensation. Its existing policy provides that it will consider recommending approval of plans that provide for equity compensation for non-employee directors provided that the plans do not make performance-based equity grants as the role of the board is perceived to be as a check to undue risk taking. As with other plans, the financial cost of the plan will also be evaluated.
Stock Distributions, Splits and Dividends. ISS made a minor change in its policy with respect to the approval of proposals to increase the number of authorized shares for a stock split or stock dividend. As in the past, it will generally recommend approval provided that the number of shares being authorized is equal to or less than the amount allowed under its general common stock authorization policy but the policy has been revised to consider the effective increase rather than just the actual number as the proposal to increase the number of shares may be tied to the implementation of a planned stock split or stock dividend. Glass Lewis evaluates these proposals on a case-by-case basis depending on the rationale for the proposal and the number of shares being requested.
Board Evaluation and Refreshment. Glass Lewis clarified its approach to board evaluation, succession planning and refreshment. It stated that it believes in a robust board evaluation policy – one focused on the assessment and alignment of director skills with company strategy – rather than a policy focused simply on age or tenure limits. While ISS did not adopt any changes on this topic, its existing policy provides that it will generally recommend against proposals limiting the tenure of outside directors by establishing a retirement age or against management proposals to limit tenure through term limits. However, it will carefully scrutinize companies where the average tenure on the board exceeds 15 years due to concerns about independence and for sufficient turnover to ensure new perspectives are being added to the board.
