News & Insights

Client Alert

November 29, 2018

Proxy Advisory Firms Issue 2019 Voting Guidelines


Proxy advisory firms Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”) recently issued updated proxy voting guidelines for the upcoming 2019 proxy season. Notable updates were issued by one or both of ISS and Glass Lewis relating to the following:

  • Board Gender Diversity (ISS and Glass Lewis)
  • Conflicting and Excluded Proposals (ISS and Glass Lewis)
  • Environmental and Social Risk Oversight (ISS and Glass Lewis)
  • Virtual-Only Shareholder Meetings (Glass Lewis)
  • Executive Compensation (Glass Lewis)
  • Shareholder Proposal Guidance (Glass Lewis)

The full text of the 2019 updated proxy voting guidelines published by ISS and Glass Lewis may be accessed here and here, respectively.

In addition to these updates, Glass Lewis also issued updates to its shareholder initiatives, and ISS issued preliminary FAQs on its 2019 U.S. compensation policies.

Board Gender Diversity

During the 2018 proxy season, board gender diversity continued to be a priority for institutional investors.  As we discussed in our Client Alert recapping the 2018 proxy season, numerous institutional investors, led by State Street Global Investors (“State Street”) and BlackRock, Inc. (“BlackRock”) continue to push for diversity—particularly gender diversity—on public company boards.  Earlier this year, BlackRock sent letters to approximately 300 Russell 1000 companies with fewer than two female directors, asking them to disclose their approach to diversity and to establish a time frame in which they will improve their diversity. State Street’s 2017 Annual Stewardship Report noted that State Street has voted against directors at over 500 companies that have no women on their boards, and State Street recently announced that, beginning in 2020, it will vote against the entire nominating committee of companies that do not have at least one woman on the board. In September 2018, the state of California enacted a law mandating the addition of women on the boards of public companies headquartered in California, adding another element to the diversity discussion. 

Consistent with these initiatives, Glass Lewis and ISS have revised their respective proxy voting guidelines to further emphasize board gender diversity. Glass Lewis’s new policy regarding board gender diversity, which was originally announced in November 2017, will take effect for meetings held in 2019. Under this policy, Glass Lewis will generally recommend voting against the nominating committee chairs of boards with no female members. Glass Lewis will evaluate other factors, including company size, the relevant industry, and the company’s governance profile, to determine whether to extend this recommendation to vote against other nominating committee members. Companies that are not listed on the Russell 3000 index or that disclose a “sufficient rationale” for not having female board representation will be subject to a careful review and may avoid a negative recommendation.  Glass Lewis stated that this rationale could include a specific timetable for addressing the lack of board diversity or restrictions on board composition, such as director nomination rights of major shareholders.

ISS announced similar guidelines on board gender diversity that will become effective for shareholder meetings of Russell 3000 or S&P 1500 companies held on or after February 1, 2020. Under these guidelines, ISS will generally recommend voting against or withholding a vote from the chair of the nominating committee (or other directors on a case-by-case basis) of companies lacking female board representation, unless certain mitigating factors are present.  ISS stated that mitigating factors could include a firm commitment to appoint at least one female board member in the near term, or the presence of a female board member at the preceding annual meeting. These new guidelines arrive on the heels of ISS’s announcement that it would include a “Board Diversity” subcategory as a component of its QualityScore in order to examine board gender diversity (including examining the number of women serving in board leadership positions), number of female named executive officers, director age and director tenure. 

Conflicting and Excluded Proposals

The 2018 proxy season saw a number of shareholder proposals requesting the adoption of lower shareholder ownership thresholds in order to call a special meeting. In response, several companies submitted management proposals to ratify existing lower thresholds in their charter or bylaws and received no-action relief from the SEC to exclude the conflicting shareholder proposals. As a result, Glass Lewis codified its policies on conflicting shareholder special meeting proposals as follows:

  • Where management and shareholder proposals request different thresholds for the right to call a special meeting, Glass Lewis will generally recommend voting for the lower threshold and recommend voting against the higher threshold.
  • Where the company does not have a special meeting right and management and shareholder special meeting proposals conflict, Glass Lewis may recommend voting for the shareholder proposal and abstaining from voting on management’s proposal.
  • Where the company has excluded a special meeting shareholder proposal in favor of a management proposal ratifying an existing special meeting right, Glass Lewis will generally recommend against the ratification proposal and recommend against members of the nominating and governance committee.

Additionally, Glass Lewis may recommend voting against the members of the governance committee on a case by case basis in the event it believes the exclusion of a shareholder proposal was detrimental to shareholders. This applies even in instances where the exclusion was approved by the SEC.

ISS also adopted a policy that codified its approach to handling management proposals to ratify existing charter or bylaw provisions. ISS will now generally recommend voting against management proposals when boards ask shareholders to ratify existing charter or bylaw provisions, unless these governance provisions align with best practices. Furthermore, in such instances, ISS will generally recommend voting against or withholding votes from directors, members of the governance committee or the full board, subject to the consideration of the following factors:

  • The presence of a shareholder proposal addressing the same issue on the same ballot.
  • The board's rationale for seeking ratification.
  • Disclosure of actions to be taken by the board should the ratification proposal fail.
  • Disclosure of shareholder engagement regarding the board’s ratification request.
  • The level of impairment to shareholders' rights caused by the existing provision.
  • The history of management and shareholder proposals on the provision at the company’s past meetings.
  • Whether the current provision was adopted in response to the shareholder proposal.
  • The company's ownership structure.
  • Previous use of ratification proposals to exclude shareholder proposals.

Under ISS’s new policies, the board’s failure to act on a management proposal to ratify existing charter or bylaw provisions that did not receive majority support may result in a recommendation against individual directors, nominating committee members, or even the entire board.

Environmental and Social Risk Oversight

Glass Lewis codified its policies on board oversight of environmental and social issues. Glass Lewis will perform a holistic review of a company’s governance documents to identify which directors or board committees have been charged with oversight of environmental and social issues and will make note of instances where such responsibility and oversight has not been clearly defined in the governance documents. These policies clarify that Glass Lewis may recommend voting against directors responsible for oversight of environmental and social issues where companies have not properly managed or mitigated environmental or social risks to the actual or threatened detriment of shareholder value. Similarly, if companies lack explicit board oversight of environmental and social issues, Glass Lewis may recommend voting against members of the audit committee. However, such recommendations will only be issued after a careful review of the company’s governance policies, the effect of the lack of oversight on shareholder value, and any corrective action or other response from the company.

ISS updated its policies on social and environmental shareholder proposals to explicitly indicate that significant controversies, fines, penalties or litigation associated with the company’s environmental or social practices will be considered when evaluating such proposals.

In addition to these policy changes, Glass Lewis and ISS will begin including environmental, social and governance (“ESG”)  ratings in their reports and voting recommendations. ISS will do so through the introduction of its “E&S QualityScore” and Glass Lewis will integrate guidance on material ESG topics from the Sustainability Accounting Standards Board (“SASB”) into its research reports and its vote management application, Viewpoint. These initiatives, coupled with the introduction of newly codified guidelines on board oversight of ESG matters, as described above, demonstrate that Glass Lewis and ISS do not view ESG issues as a passing trend. 

Virtual-Only Shareholder Meetings

Glass Lewis’s policy regarding virtual-only shareholder meetings, which was originally announced in November 2017, will become effective for meetings held in 2019. Under the new policy, Glass Lewis may recommend voting against governance committee members if the company does not provide adequate disclosures that shareholders will have the same participation rights and opportunities as attendees of in-person meetings.

Executive Compensation

Glass Lewis introduced a number of changes to its executive compensation guidelines. These changes include:

  • Considering new excise tax gross-up provisions in executive employment agreements as a factor when making voting recommendations for members of the compensation committee.
  • Clarifying the terms of contractual payments and arrangements that may result in a negative voting recommendation on a say-on-pay proposal.
  • Considering whether the reduced Compensation Discussion and Analysis disclosures of smaller reporting companies substantially impact shareholders’ ability to make an informed assessment of pay practices when making voting recommendations for members of the compensation committee.
  • Adding a discussion of grants of front-loaded awards under the premise that there are inherent risks associated with their use.
  • Revising the policy on clawback provisions to focus on their specific terms rather than on whether the clawback satisfies minimum legal requirements under Sarbanes-Oxley.

ISS previously announced that it was considering replacing its GAAP-based secondary Financial Performance Assessment screen for evaluating CEO pay for performance with Economic Value Added (“EVA”) metrics. However, ISS chose not pursue the switch to EVA metrics for the 2019 proxy season, meaning there are no changes to the quantitative screens for the 2019 proxy season. As noted in its 2019 compensation FAQs, ISS will continue to explore the possibility of using EVA measures in the future and will include EVA metrics in its research reports on a phased-in basis over the 2019 proxy season, but will not use EVA metrics as part of its quantitative screen methodology.

ISS also announced the postponement until 2020 of its policy (introduced in its 2018 voting guideline updates) for potential adverse vote recommendations for the board committee responsible for approving or determining non-employee director compensation when there is an established pattern (two or more consecutive years) of excessive pay levels without a compelling rationale or other clearly explained mitigating factors.

Shareholder Proposal Guidance

In addition to updated guidance on conflicting and excluded shareholder proposals and environmental and social risk oversight (discussed above), Glass Lewis amended certain other policies relating to shareholder proposals.

Diversity Reporting

Glass Lewis amended its policy on shareholder proposals requesting disclosures on a company’s diversity initiatives. Glass Lewis will support shareholder proposals requesting disclosure on the diversity of the company’s workforce, as well as shareholder proposals requesting information on how companies promote diversity internally. Glass Lewis’s recommendations will take into account the following:

  • The industry in which the company operates and the nature of its operations.
  • The company’s current level of disclosure on issues related to workforce diversity.
  • The level of such disclosure by the company’s peers.
  • Any lawsuits or accusations of discrimination within the company.

Materiality Considerations

Glass Lewis formalized its consideration of materiality when reviewing and making voting recommendations on shareholder proposals and will place significant emphasis on the financial implications of a company adopting, or not adopting, any proposed shareholder resolution.   In addition, to assist in determining financial materiality, Glass Lewis will consider the standards developed by the SASB.

Recoupment Provisions (“Clawbacks”)

Glass Lewis revised its policy concerning proposals requesting that companies adopt enhanced recoupment provisions. In instances where companies have not adopted policies that provide sufficient protections for reputational and financial harm, Glass Lewis may consider supporting well-crafted resolutions seeking to expand a company’s recoupment policy.

Shareholder Actions by Written Consent

Glass Lewis also amended its policy on shareholder proposals requesting that companies amend their bylaws to allow shareholder actions by written consent. Where the requirement for shareholders to call a special meeting is 15% or below and the Company has adopted reasonable proxy access provisions, Glass Lewis will generally recommend that shareholders vote against shareholder proposals to allow actions by written consent.

Other Clarifying Amendments

In addition to the changes discussed above, Glass Lewis released several clarifying amendments to existing guidelines, including those related to:

  • Auditor ratification.
  • Director recommendations on the basis of company performance.
  • Director and officer indemnification.
  • NOL protective amendments.
  • OTC-listed companies.
  • Quorum requirements.

ISS also issued clarifying amendments related to:

  • Poor director attendance.
  • Director performance evaluations.
  • Reverse stock splits.