Glass Lewis announced updates to its United States Proxy Voting Policy Guidelines late November 2020. The 2021 Proxy Voting Policy Guidelines include a variety of changes from the 2020 version, including new provisions addressing board diversity requirements, board refreshment, environmental and social risk oversight, special purpose acquisition companies (SPACs) and long-term and short-term incentives. In addition, Glass Lewis announced clarifications to several existing policies. These changes and clarifications, which generally apply to shareholder meetings beginning in 2021, are described in greater detail in the following alert.
Glass Lewis has decided to expand its gender diversity policy by increasing the number of women that must sit on a company’s board of directors. Beginning with shareholder meetings held after January 1, 2022, for boards with more than six members, Glass Lewis will generally recommend voting against the nominating committee chair of a board with less than two women directors. For boards with six or fewer total members, its existing voting policy requiring a minimum of one female director will remain in place. For the 2021 proxy season, Glass Lewis will just note such lack of gender diversity as a concern if a company still meets Glass Lewis’s current requirement of having at least one female board member.
Glass Lewis may also recommend against additional members of the nominating committee in cases where the committee chair is not standing for election due to a classified board, or based on other factors, including the company’s size and industry, applicable laws in its state of headquarters, and its overall governance profile. In making these voting recommendations, Glass Lewis will review a company’s disclosure of its diversity considerations and may decide to not recommend against directors of companies outside the Russell 3000 index, or when boards have provided a sufficient rationale or plan to address the lack of diversity on the board.
Unlike Institutional Shareholder Services (ISS), Glass Lewis has refrained from adopting a policy regarding racial and/or ethnic board diversity. However, it will make recommendations according to board composition requirements legislated by the states (see discussion below). It also seeks for companies to disclose racial and ethnic diversity in their proxy statements which may force them to address any lack of such diversity. ISS’s voting policy updates are covered in our client alert, “ISS Policy Changes for 2021: Increased Expectations for Diversity and Accountability.”
State Laws on Diversity
In addition to its stated policy on board diversity, Glass Lewis will make recommendations in accordance with state requirements for board diversity. Specifically, Glass Lewis cites S.B. 826 (previously discussed here) and A.B. 979 (previously discussed here), which require a minimum number of women and members from an “underrepresented community,” respectively, on boards of companies headquartered in California, as examples of such legislation. Accordingly, Glass Lewis’ recommendations for voting on the chair of the nominating committee may depend on any applicable state legislation regarding board gender or ethnic/racial composition and the subject company’s compliance with such legislation.
Board Diversity Disclosure
Starting with the 2021 proxy season, Glass Lewis will assess the quality of board diversity disclosure in company proxy statements for companies in the S&P 500 index. Its report will comment on how proxy statements present:
- The board’s current percentage of racial/ethnic diversity;
- Whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity;
- Whether the board has adopted a policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees; and
- Board skills disclosure.
Glass Lewis will use this assessment to help inform how it rates a company’s overall governance practices but will not make voting recommendations solely on this basis. However, Glass Lewis may still use the assessment of board diversity disclosure as a contributing factor in its recommendations when it has identified additional board-related concerns.
Glass Lewis will flag, as a potential concern, instances where (i) the average tenure of non-executive directors is ten years or more and (ii) no new independent directors have joined the board in the past five years. Its report will not make a voting recommendation solely for this reason, but lack of board refreshment may be a contributing factor in Glass Lewis’ voting recommendations if it has identified additional board-related concerns. This goes beyond prior guidance in setting objective criteria for board tenure rising to the level of concern.
Environmental and Social Risk Oversight
Beginning with the 2021 proxy season, Glass Lewis will note, as a concern, when boards of S&P 500 companies do not provide clear disclosure concerning the board-level oversight of environmental and/or social issues. In addition, beginning with shareholder meetings held after January 1, 2022, Glass Lewis will generally recommend voting against the governance committee chair of an S&P 500 company that does not explicitly disclose the board’s role in overseeing these issues. Glass Lewis’ policy provides companies with flexibility by not prescribing that a particular board committee oversee environmental and social risks. Glass Lewis will examine a company’s proxy statement and governing documents, including committee charters, to determine if directors maintain a meaningful level of oversight of and accountability for a company’s environmental and/or socially-related impacts and risks. This policy reflects the increased focus on environmental, social and governance (ESG) issues by many investors and other stakeholders and is consistent with their expectations of increased disclosure of ESG practices in companies’ proxy statements.
Changes to Incentive Plans (Say-on-Pay Proposals)
Glass Lewis also adopted policies with respect to incentive terms in executive compensation plans likely intended to address changes adopted in response to the economic impact of the COVID-19 pandemic. While some of these changes may be reasonable in light of the dire economic conditions faced by many companies, such changes may be judged harshly if they are seen as providing a windfall to executives, particularly if they are paired with adverse decisions such as employee lay-offs, furloughs or salary reductions.
Glass Lewis provides additional factors that it will consider in assessing a company’s short-term incentive plan. Specifically, it will expect companies to clearly disclose the justifications for any significant changes to a company’s short-term incentive plan structure, as well as any instances in which performance goals have been lowered from the previous year. It also has expanded its description of the application of upward discretion to include instances of retroactively prorated performance periods.
For long-term incentive plans, Glass Lewis favors performance-based awards and may recommend against a company’s executive compensation program where performance-based awards do not comprise a significant portion of the plan. Additionally, Glass Lewis may regard any decision by a company to significantly roll back performance-based award allocation as a regression of best practices that may lead to a negative recommendation absent exceptional circumstances. Glass Lewis expects companies to provide clear explanations for their long-term incentive equity granting practices, as well as any significant structural program changes or any use of upward discretion.
Special Purpose Acquisition Companies (SPACs)
Glass Lewis has added a new section discussing its approach to common issues associated with SPACs. Glass Lewis will generally support proposals seeking to extend business combination deadlines. It also sets forth how it considers the independence of board members at a post-combination entity who previously served as executives of the SPAC. In such cases, absent any evidence of an employment relationship or continuing material financial interest in the combined entity, Glass Lewis will generally consider such directors to be independent.
In addition to the new policies outlined above, Glass Lewis clarified several existing policies described below.
Virtual-Only Shareholder Meetings
Glass Lewis has removed language describing its temporary exception to its policy on virtual shareholder meeting disclosure that was in effect for meetings held between March 1, 2020 and June 30, 2020 in response to the COVID-19 pandemic. Its standard policy on virtual meeting disclosure, which requires companies holding their meeting in a virtual-only format to provide robust proxy statement disclosure addressing the ability of shareholders to participate in the meeting, applies going forward. Under this policy, companies should disclose:
- Shareholders’ ability to ask questions at the meeting;
- Procedures, if any, for posting appropriate questions received during the meeting and the company’s answers on its public website; and
- Logistical details for meeting access and technical support.
Where such disclosure is not provided, Glass Lewis will generally recommend against the governance committee chair.
Glass Lewis has modified its policy regarding board responsiveness for shareholder proposals. Under its new policy, in addition to expecting companies to address shareholder concerns when management proposals receive withhold or against votes of at least 20%, it will expect significant board action if a non-binding shareholder proposal receives majority approval at a shareholder meeting. This changes the previous policy which stated that 20% support for a shareholder proposal warranted a response from the board. Although this policy provides companies with a reprieve from addressing shareholder proposals that do not receive majority support, shareholders that do not follow Glass Lewis’ recommendations may still expect boards to respond to shareholder proposals that receive significant but less than majority support.
Governance Following IPO or Spin-off
For newly public companies with post-IPO corporate governance concerns (which it had defined in prior year updates), Glass Lewis will generally recommend against the members of the governance committee in director elections; however, if there is no governance committee, or if a portion of such committee members are not standing for election due to a classified board structure, it will expand its negative recommendations to include additional director nominees, based on who is standing for election.
Glass Lewis has also clarified its approach to companies that adopt a multi-class share structure with disproportionate voting rights, or other anti-takeover mechanisms, prior to their IPO. In such cases it will generally recommend voting against all members of the board who served at the time of the IPO if the board did not also commit to submitting these provisions to a shareholder vote at the first shareholder meeting following the IPO; or did not provide for reasonable sunset provisions (generally three to five years in the case of a classified board or poison pill; or seven years or less in the case of a multi-class share structure). In the case of a multi-class share structure, if these provisions are put to a shareholder vote, Glass Lewis will examine the level of approval or disapproval attributed to unaffiliated shareholders when determining the vote outcome.
Excise Tax Gross-ups and Votes on Golden Parachute Payments
Glass Lewis has codified how it evaluates the addition of new excise tax gross-ups to specific change-in-control transactions. In such cases, it may consider expanding a negative recommendation beyond the initial golden parachute proposal related to the gross-up entitlements to also include a subsequent recommendation against the compensation committee members and the say-on-pay proposals of any involved corporate parties.
Option Exchanges and Repricing
Glass Lewis has specified that in evaluating option exchanges and repricing proposals (which it generally opposes), its consideration of support for such proposals would require the exclusion of officers and board members from the program and that the program be value-neutral or value-creative.
Peer Group Methodology
In its pay-for-performance section, Glass Lewis clarifies that it uses a previously announced proprietary methodology to determine the peer groups used in its pay-for-performance letter grades. In forming this proprietary peer group, it considers country-based and sector-based peers, along with each company’s network of self-disclosed peers. Glass Lewis considers each component on a weighted basis and subjects each to size-based ranking and screening. A third-party provider, CGLytics, provides the peer groups based on Glass Lewis’ methodology and using its data.
Practical Advice to Companies
In response to the policy changes described above, we advise that companies do the following:
- Thoughtfully approach the solicitation of racial/ethnic self-identity, including explaining the form in which such information may be disclosed. In consultation with advisors, the board of directors should determine the best way to gather this potentially sensitive information. (See our prior discussion of diversity requirements on boards of California-based public companies in connection with A.B. 979).
- Consider providing more specific disclosure on racial/ethnic board diversity in the company’s 2021 proxy statement, including whether the board has adopted a policy requiring that women and minorities be included in the initial pool of candidates when selecting new director nominees. While the current Glass Lewis policy only applies to the companies in the S&P 500 index, it is likely to continue to expand across all public companies in the near future. Those that already have self-identified racial or ethnic diversity should disclose such information on at least an aggregate basis to meet the increasing demands of investors and to avoid Glass Lewis’ scrutiny (or on an individual basis if consistent with the company’s culture and the expectations for board members). Companies that do not currently have a racially or ethnically diverse board should include discussion of their plans for achieving it (counsel should carefully review any such disclosure). In this regard, attention should also be given to Nasdaq’s recently proposed board diversity and related disclosure requirements discussed here).
- To the extent that racial/ethnic diversity will be included in the proxy statement or other public securities filings, establish appropriate disclosure controls and procedures in connection with the recording, aggregation and disclosure of such sensitive information, including updating D&O questionnaire processes as applicable.
- Ensure that there is board-level oversight of environmental and social risks and amend relevant committee charters or other governance documents to ensure that responsibility for these areas is clearly stated. The board’s oversight should be described in the company’s proxy statement and appropriate controls should be established to facilitate the board’s oversight.
- Clearly describe the rationale of any changes made to short and long-term incentives in 2020 due to the COVID-19 pandemic in the 2021 proxy statement and be prepared to address such changes in engagement meetings with investors.