ISS, GLASS LEWIS RELEASE 2017 POLICY UPDATES

Boardroom2Within a span of a few days over the last week, both Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co. released their 2017 proxy voting policies.  As you gear up for the 2017 proxy season, you’ll need to take a close look at these changes, summarized below for U.S. companies.

GLASS LEWIS UPDATES

Glass Lewis’ updates covered three main areas—director overboarding, post-IPO or post-spinoff governance, and board evaluation and refreshment.

Director Overboarding

According to the proxy advisory firm, a “vote against” recommendation will typically be made if:

  • An executive director of a public company also serves as a director of more than two public company boards.
  • A director serves on more than five public company boards.

According to Glass Lewis, “When determining whether a director’s service on an excessive number of boards may limit the ability of the director to devote sufficient time to board duties, we may consider relevant factors such as the size and location of the other companies where the director serves on the board, the director’s board duties at the companies in question, whether the director serves on the board of any large privately-held companies, the director’s tenure on the boards in question, and the director’s attendance record at all companies.”

Post-IPO/Post-Spinoff Governance

In an effort to clarify its approach with newly-public companies, Glass Lewis will recommend voting against members of the governance committee and/or directors involved at the time of the adoption of the governing documents where those documents restrict shareholders’ ability to effect change.  The new guidelines cover restrictions such as “anti-takeover mechanisms, supermajority vote requirements, and general shareholder rights such as the ability of shareholders to remove directors and call special meetings.”

Board Evaluation & Refreshment

Glass Lewis will now focus on the board evaluation process to make sure it emphasizes the assessment and alignment of director skills with company strategy.  This, says the firm, “is more effective than solely relying on age or tenure limits.”

One other item to note before we turn to ISS.  On Nov. 17, Glass Lewis opened sign up for “its Issuer Data Report (IDR) service, which enables public companies to access, for free, a data-only version of the Glass Lewis Proxy Paper report prior to Glass Lewis completing its analysis and proxy voting recommendations relating to the annual general meeting of the subject companies.”  The IDR is available for U.S. companies, but only in limited numbers and on a first-come, first-serve basis.  Enrollment ends Jan. 6, so sign up today!

ISS UPDATES

ISS’s changes fall under three main categories—boards of directors, capital, and compensation.  The updates will be effective for annual meetings on or after Feb. 1, 2017.

Restricting Binding Shareholder Proposals

ISS will recommend voting against members of a governance committee if “the company’s charter imposes undue restrictions on shareholders’ ability to amend the bylaws.”  According to ISS, such restrictions may include:

  • outright prohibition on the submission of binding shareholder proposals, or
  • share ownership requirements or time holding requirements in excess of SEC Rule 14a-8.

Here, ISS is addressing the companies that have utilized their rights under state law to restrict the rights of shareholders to submit shareholder proposals under SEC Rule 14a-8. 

Unilateral Bylaw/Charter Amendments – IPO Companies

Similar to Glass Lewis, ISS addresses the governance of a newly public company in their policy update.  ISS states that it will recommend a “vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if, prior to or in connection with the company's public offering, the company or its board adopted bylaw or charter provisions materially adverse to shareholder rights, or implemented a multi-class capital structure in which the classes have unequal voting rights.”  In making this evaluation, ISS will consider:

  • the level of impairment of shareholders' rights;
  • the disclosed rationale;
  • the ability to change the governance structure (e.g., limitations on shareholders’ right to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter); 
  • the ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure; 
  • any reasonable sunset provision; and
  • other relevant factors.

According to ISS, the number of newly-public companies with multi-class shares has jumped considerably—there were 8 in 2006 and 17 through Aug. 30 of this year.

Overboarding

Also similar to Glass Lewis, ISS will recommend voting against a director who sits on more than five public company boards or CEOs of public companies who sit on the boards of more than two public companies besides their own (where the withhold vote would be only with their outside boards).

Stock Distributions

ISS will “generally vote for management proposals to increase the common share authorization for stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less than the allowable increase calculated in accordance with ISS' Common Stock Authorization policy.”  ISS is clarifying this policy “because proposals to increase authorized common shares may be tied to the implementation of a planned stock split or stock dividend.”

Equity-Based Compensation & Other Plans

In evaluating the plan, ISS will now include an additional factor: an evaluation of the payment of dividends on unvested awards. According to ISS,

From an incentive and retention perspective, dividends on unvested awards should be paid only after the underlying awards have been earned and not during the performance/service vesting period. Under this new factor, full points will be earned if the equity plan expressly prohibits, for all award types, the payment of dividends before the vesting of the underlying award (however, accrual of dividends payable upon vesting is acceptable). No points will be earned if this prohibition is absent or incomplete (i.e. not applicable to all award types). A company's general practice (not enumerated in the plan document) of not paying dividends until vesting will not suffice.

Amending Cash & Equity Plans

According to ISS, “this update more clearly differentiates the evaluation framework applicable to amendment proposals presented for Section 162(m) purposes only, or those involving multiple bundled amendments, amendments with or without new share requests, amendments potentially increasing cost, etc.”

Shareholder Ratification of Director Pay Programs

ISS will now “vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors:

  • if the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support; and 
  • An assessment of the following qualitative factors: 
    • the relative magnitude of director compensation as compared to companies of a similar profile; 
    • the presence of problematic pay practices relating to director compensation;
    • director stock ownership guidelines and holding requirements; 
    • equity award vesting schedules; 
    • the mix of cash and equity-based compensation; 
    • meaningful limits on director compensation;
    • the availability of retirement benefits or perquisites; and 
    • the quality of disclosure surrounding director compensation.”

Equity Plans for Non-Employee Directors

In this update, ISS clarifies and broadens the various factors considered when assessing the reasonableness of these equity plans.  ISS has also added new evaluation factors, including relative pay magnitude and meaningful pay limits.

For more on the ISS updates, see ISS Updates Policy on Shareholder Proposal Restrictions.