ISS and Glass Lewis have released updates to their 2016 policies. Harvard’s Law School Forum on Corporate Governance and Financial Regulation provided a brief overview of the changes, see below. For the full article please click here.
Highlights of the ISS and Glass Lewis Updates
- Overboarding. Citing an “explosion” in the time commitment needed for board service, both ISS and Glass Lewis have lowered from 6 to 5 the maximum number of directorships a director (other than the CEO) may have before being considered “overboarded.” For the CEO, ISS has kept the ceiling at 3 (counting subsidiary boards separately); Glass Lewis has lowered it to 2. In 2016, overboarding will result in cautionary language in the proxy voting report; in 2017, a negative recommendation. However, in the case of overboarded CEOs, ISS will recommend against the CEO only for election to outside boards.
- Proxy Access. Neither ISS nor Glass Lewis has provided any new insight on how they will evaluate shareholder proposals on proxy access, or which proxy access bylaw provisions will be considered so restrictive as to call into question a board’s responsiveness to a majority-supported shareholder proposal. ISS promised more information in FAQs to be released in mid-December. ISS did provide a framework, similar to that used to evaluate candidates in a contested election, to evaluate candidates nominated by proxy access. ISS also added proxy access as a “zero weight” factor for QuickScore 3.0 (likely presaging a weighting next year).
- Unilateral Board Actions. Directors of IPO companies are for the first time expressly susceptible to negative recommendations if, prior to or in connection with the IPO, the company’s board adopted charter or bylaw amendments that ISS believes materially diminish shareholder rights. In addition, amendments by post-IPO companies to (1) classify the board, (2) establish supermajority vote requirements or (3) eliminate shareholders’ ability to amend bylaws will result in a negative recommendation against directors until such time as the rights are restored or the unilateral action is ratified by a shareholder vote.
- Insufficient Compensation Disclosure by Externally-Managed Issuers (EMIs). ISS will now generally recommend against say-on-pay where insufficient compensation disclosure (e.g., disclosure of only the aggregate management fee) precludes a reasonable assessment of pay programs and practices applicable to the EMI’s named executive officers. Many REITs are EMIs.
- Shareholder Proposals Seeking Environmental and Social Disclosure. ISS has clarified and somewhat broadened the criteria it will consider in evaluating shareholder proposals seeking company reports on (1) animal welfare, (2) pharmaceutical pricing and related matters and (3) climate change/greenhouse gas emissions. In the case of animal welfare, the criteria will now include practices in the supply chain.
- Conflicting Management and Shareholder Proposals. Glass Lewis now specifies the factors it will consider in assessing conflicting shareholder and management proposals. This is of increasing importance in light of the SEC’s recent indication that it will strictly construe whether a shareholder proposal is truly “conflicting” and therefore qualifies for exclusion under Rule 14a-8(i)(9).
- Performance Failures Associated with Board Composition or Environmental or Social Risk Oversight. Glass Lewis “may consider” recommending against the nominating committee chair where it believes a board’s failure to ensure that it has directors with relevant experience, either through periodic director assessment or board refreshment, has contributed to the company’s “poor performance.” (Glass Lewis did not indicate how it will establish that board composition has contributed to “poor performance” or how it will define such performance.) Glass Lewis also has indicated that, where the board or management has failed to sufficiently identify and manage a material environmental or social risk that either did—or could—negatively impact shareholder value, it will recommend against directors responsible for risk oversight.
- Exclusive Forum Bylaws for IPO Companies. For newly public companies, Glass Lewis will no longer automatically recommend against the nominating committee chair due to the presence of an exclusive forum bylaw at the time of the IPO. Instead, Glass Lewis will consider such provision in the context of a company’s overall shareholder rights profile.