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ISS and Glass Lewis Update Proxy Voting Guidelines for 2019

Summary

Institutional Shareholder Services Inc. and Glass, Lewis & Co., LLC both recently issued their annual proxy voting guideline updates. As revised, these guidelines have important implications for companies preparing for the 2019 proxy season.

In Depth

ISS POLICY UPDATES

BOARD GENDER DIVERSITY: Institutional Shareholder Services Inc. (ISS) announced that adverse voting recommendations may be issued against nominating committee chairs for boards without any female members. This new policy will be effective for meetings and nominations on or after February 1, 2020.

DIRECTOR ATTENDANCE: In order to combat director absenteeism and chronic poor attendance, ISS will withhold recommendation from the chair of the nominating or governance committee after three years of poor attendance by a director. After four years of poor attendance, ISS will withhold recommendation from the full nominating or governance committee. If that director continues to have consistent poor attendance for five years or greater, ISS will withhold recommendation from the entire board.

CONFLICTING PROPOSALS: There was a significant increase in 2018 of board-sponsored proposals to ratify existing charter or bylaw provisions in order to protect against having the company adopt more onerous shareholder-sponsored charter or bylaw proposals. ISS will withhold recommendation from individual directors, members of the governance committee, or even the full board in instances when boards ask shareholders to ratify any existing charter or bylaw provisions. The decision to withhold recommendation will be based on a variety of factors, including any competing shareholder proposal, the board’s rationale, previous disclosure efforts, the effect on shareholders and the company’s history.

DIRECTOR PERFORMANCE: ISS will identify companies that have directors with long-term underperformance issues and boards with entrenchment-favoring policies. ISS changed the measurement of “sustained poor performance” based on total shareholder returns in the bottom half of a company’s industry group from a three-year interval to intervals of one, three and five years.

REVERSE STOCK SPLITS: ISS updated its policy on reverse stock splits to codify the approach currently utilized by companies not listed on major exchanges and who are not proportionately reducing their authorized shares. ISS will recommend voting for reverse stock split proposals if the number of authorized shares is proportionately reduced or when the effective increase in authorized shares is equal to or less than the allowable increase. If the above conditions are not met, ISS will vote on a case-by-case basis based on the company’s disclosure, financial status and the rationale for the proposed reverse stock split.

ENVIRONMENTAL AND SOCIAL: ISS has codified the existing factors it will use to analyze environmental and social shareholder proposals and indicated that significant controversies, fines, penalties or other litigation will also considered.

GLASS LEWIS POLICY UPDATES

BOARD GENDER DIVERSITY: Glass Lewis will recommend voting against nominating committee chairs of a board without a female member. For companies outside the Russell 3000 index or if the board provides sufficient rationale for not having any female board members, Glass Lewis may determine not to withhold its recommendation. This sufficient rationale includes timetables for addressing the lack of board gender diversity, notable governance and legal restrictions placed on the board, and any board agreements with investors. Glass Lewis will place special emphasis on companies headquartered in the state of California after the state passed a law that requires all California companies to have one woman on their board by the end of 2019, at least two women on boards of five members and at least three women on boards with six or more directors by 2021. Glass Lewis will recommend voting against any nominating committee chair of a California-based company unless there is adequate disclosure of compliance actions it will take to comply with the law.

CONFLICTING PROPOSALS: Glass Lewis has codified its conflicting special meeting shareholder resolution policy, including the following:

  • If a company places on its proxy ballot both a management and shareholder proposal that request different thresholds for the right to call a special meeting, Glass Lewis will uniformly recommend voting for the lower threshold;

  • If there are conflicting management and shareholder special meeting proposals and the company does not maintain any special meeting rights, Glass Lewis will recommend that shareholders vote in favor of their own proposal or alternatively to abstain from voting on the management’s proposal; and

  • If companies exclude a special meeting shareholder proposal in favor of a management proposal ratifying any existing special meeting right, Glass Lewis will typically recommend against that ratification proposal and will also withhold recommending voting for the election of the nominating and governance committee.

ENVIRONMENTAL AND SOCIAL: Glass Lewis will increasingly identify directors or committees charged with oversight of environmental and social material risks. Glass Lewis will provide investors notice of lack of board oversight and may also recommend that shareholders vote against members of the board’s audit committee based on these issues.

VIRTUAL SHAREHOLDER MEETINGS: Glass Lewis provided a non-exclusive list of effective disclosure for virtual shareholder meetings. These include:

  • Addressing the ability of shareholders to ask questions during the meeting, time guidelines for questions, what types of questions are allowed and how to disclose questions to other participants;

  • Procedures for posting questions received during the meeting and the company’s answers on the investor page of its website after the meeting; and

  • Addressing technical and logistical issues and procedures.

EXECUTIVE COMPENSATION: Glass Lewis has expanded its policies and guidelines relating to executive compensation including:

  • Recommending against voting for a member of the compensation committee when a new excise tax gross-up is provided in an executive employment agreement;

  • Requiring companies to provide shareholders with a meaningful explanation of any benefits agreed upon for severance arrangements;

  • Requiring companies to provide shareholders with a meaningful explanation of sign-on arrangements;

  • Increased scrutiny on large, front-loaded grants; and

  • For smaller reporting companies, recommending against voting for members of a company’s compensation committee if a reduction in executive compensation disclosure substantially impacts the shareholders’ ability to adequately assess the company’s executive compensation procedures.

Conclusion

A big takeaway from the 2019 ISS and Glass Lewis voting guideline updates is the focus on gender diversity on the board of directors. Following on similar measures published in recent years by large institutional shareholders and the new law passed in California, gender diversity is sure to be a hot topic on corporate boards in 2019.

© 2019 McDermott Will & Emery

TRENDING LEGAL ANALYSIS


About this Author

Robert H. Cohen, Corporate Attorney with McDermott Will law firm
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Robert H. Cohen is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s New York office.  He focuses his practice on transactional and securities work for a broad range of clients, including initial and follow-on public offerings, registered direct and PIPE financings, private placements, bridge financings, equity line and reverse mergers.

Bob has extensive experience in the areas of mergers and acquisitions, joint ventures, 1933 & 1944 Act representation and licensing and distribution arrangements...

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Thomas P. Conaghan, Mcdermott Will Emery law Firm,  (M&A), joint ventures, strategic investments, spin-offs,
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Thomas P. Conaghan is a partner in the law firm of McDermott Will & Emery and is based in the Firm’s Washington, D.C., office.  Tom represents both publicly held and closely held businesses, underwriters and other sources of capital, corporate boards and board committees and corporate executives.  He advises both U.S. and foreign-based public companies on issues relating to public and private offerings of securities, disclosure, periodic reporting, corporate governance, executive compensation, the rules of the New York Stock Exchange and the Nasdaq Stock Market and compliance with the Sarbanes-Oxley Act of 2002.

He advises US- and foreign-based public companies on issues relating to mergers and acquisitions (M&A), joint ventures, strategic investments, spin-offs, public and private offerings of securities (including initial public offerings (IPOs)), disclosure, Securities and Exchange Commission (SEC) reporting, corporate governance, executive compensation, and the stock exchange-listed company rules. Tom is co-head of the Firm's Capital Markets and Public Companies Group, and partner-in-charge of the Corporate Group in the Firm's Washington, DC office.

Tom is rated in Chambers USA and The Legal 500 for his M&A work, and is cited for being a "strong M&A lawyer who anticipates clients’ needs, exhibits strong management over deals, and translates his breadth of knowledge in a way that clients can easily understand and use." Tom has led several M&A transactions for alcohol beverage clients in conjunction with the Firm's Chambers USA top-rated beverage practice.

Tom represents real estate investment trusts (REITs) in connection with IPOs and M&A transactions. He also advises clients on large-scale global corporate reorganizations and spin-offs. His experience includes advising Tyco International (NYSE: TYC) in connection with is spin-offs of Covidien, TE Connectivity and The ADT Corporation.

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Gary Emmanuel is a partner in the law firm of McDermott Will & Emery and is based in the Firm’s New York office. He focuses his practice on corporate securities matters.

With over 15 years of experience, Gary represents both domestic and foreign companies that are navigating the process of capital raising including initial public offerings, registered direct offerings, follow-on offerings, private placements, PIPEs and bridge financings. Gary has worked extensively with biotechnology and other life science companies, both as company counsel...

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Andrew C. Liazos is a partner in the law firm of McDermott Will & Emery LLP based in the Firm’s Boston office. Andrew heads the Firm's Executive Compensation Group and the Boston Employee Benefits Practice.

Andrew regularly represents Fortune 500 companies, public companies, large closely held businesses and compensation committees on all aspects of executive compensation, ERISA fiduciary matters, employee benefits in business transactions and bankruptcy, and employee stock ownership plans. He also counsels executives in employment agreement and joint...

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Mark J. Mihanovic, McDermott Will Emery, Corporate Finance Attorney, Mergers Acquisitions Lawyer,
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Mark J. Mihanovic is a partner in the law firm of McDermott Will & Emery LLP.  Mark heads our Firm’s California corporate practice and serves as corporate liaison partner in the Firm’s strategic alliance with MWE China Law Offices based in Shanghai.  His practice is primarily focused in the areas of corporate finance and mergers and acquisitions involving companies in a broad range of industries, with a particular emphasis on technology, life science and health care companies.  Mark has served as lead counsel on behalf of issuers and underwriters in numerous public...

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