Institutional Shareholder Services (ISS) and Glass Lewis, the leading proxy voting advisory firms in the United States, have announced updates and clarifications for their voting guidelines for the U.S. market for the 2024 proxy season. Their voting recommendations influence many institutional investors and play an important role in voting outcomes. This alert summarizes the key changes to their respective guidelines and suggests actions that companies can take to address them.
On December 19, 2023, ISS announced its 2024 Benchmark Policy Updates, which will generally take effect for meetings on or after February 1, 2024. ISS made its updates after reviewing and considering responses to its 2023 Global Benchmark Policy Survey, which was launched in August and ended in September 2023, and following a public comment period for its proposed policy changes.
Surprisingly, ISS did not make any updates to its benchmark U.S. policy; however, it did provide a clarification regarding its voting policy for shareholder proposals requiring shareholder approval of executive severance arrangements, including change-in-control agreements. Its clarification notes that ISS will support such proposals on a case-by-case basis, taking into account:
- the company’s severance or change-in-control agreements and any problematic features (e.g., excessive entitlements, single triggers, excise tax gross-ups);
- existing limits on cash severance payouts that require shareholder ratification above a certain threshold;
- recent severance-related controversies; and
- whether the proposal is overly prescriptive.
On November 16, 2023, Glass Lewis announced updates and clarifying amendments to its U.S. Benchmark Policy Guidelines for 2024, which apply to shareholder meetings held after January 1, 2024. Below are summaries of some of the key changes and clarifications for 2024.
Material Weaknesses. Glass Lewis will consider recommending that shareholders vote against all members of a company’s audit committee where a material weakness is reported and no remediation plan is disclosed, or where there has been a material weakness for more than a year without an updated remediation plan. Specifically, Glass Lewis will recommend against audit committee members who served on the committee during the time the material weakness was identified.
Cyber Risk Oversight. Glass Lewis will generally only make voting recommendations based on a company’s oversight or disclosure of cybersecurity issues if a cyber incident has significantly harmed shareholders. In such a case, Glass Lewis may recommend against appropriate directors at companies that have been materially impacted by a cyber-attack if it determines that the board’s oversight, response, or disclosure regarding cybersecurity issues was insufficient or not provided to shareholders. Glass Lewis also indicated that when a company is materially impacted by a cyber-attack, it should provide periodic updates around resolution and remediation of such attack, focusing particularly on the company’s response to address the impacts to affected stakeholders.
Board Oversight of E and S Issues. As noted last year, for Russell 1000 companies, Glass Lewis will generally recommend voting against the governance committee chair if the company fails to disclose the board’s role in overseeing environmental and social issues. In addition, for Russell 3000 companies, Glass Lewis had noted that where there are material concerns regarding the oversight of environmental and social issues, it would identify which directors or committees have oversight. For 2024, Glass Lewis makes clear that it will expect a company to codify such oversight in committee charters and other governing documents.
Board Accountability for Climate-Related Issues. Glass Lewis has expanded its policy to apply to S&P 500 companies operating in certain industries specified in the guidelines where the Sustainability Accounting Standards Board has determined that the companies’ greenhouse gas emissions represent a financially material risk (generally these are concentrated in transportation, energy or materials production), and companies where it believes emissions or climate impacts, or stakeholder scrutiny of these issues, represent “an outsized, financially material risk.” If such companies provide no or insufficient disclosures aligning with the Task Force on Climate-related Financial Disclosures recommendations or regarding board-level oversight of climate-related issues, Glass Lewis may recommend voting against the chair of the committee responsible for climate oversight, or the governance committee chair if there is no specific committee oversight.
Clawback Provisions. Glass Lewis has updated its commentary on the utility of clawback provisions, noting that they should be used by companies not only in the case of financial restatements, as provided under the securities exchanges’ listing requirements and SEC rules, but also where there is “evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure or a material operational failure.” Glass Lewis has previously indicated that the scope of a company’s clawback policy may inform its view of such company’s compensation program. Its policy also states that a company’s clawback authority should apply regardless of whether the executive officer was terminated for cause and should apply to current and former executives. If a company does not provide a detailed discussion regarding its decision not to claw back an award, it may impact Glass Lewis’ overall recommendation for the say-on-pay vote. Glass Lewis states that this “enhanced disclosure” may include “how the company has otherwise rectified the disconnect between executive pay outcomes and negative impacts of their actions on the company.”
Executive Ownership Guidelines. Glass Lewis has added a section voicing support for the adoption and enforcement of minimum share ownership requirements for executives, which should be disclosed in a company’s Compensation Discussion and Analysis section of its proxy statement. Companies should provide information regarding how the various types of outstanding equity awards are counted under such a share ownership policy. However, Glass Lewis notes that the inclusion of unearned performance-based awards and/or unexercised stock options for satisfying share ownership guidelines without a “cogent rationale” could be problematic. Glass Lewis may consider the existence of executive ownership guidelines in its overall assessment of say-on-pay.
Equity Awards for Shareholders. In the “Equity-Based Compensation Proposals” section of its guidelines, Glass Lewis has noted that for individual equity award proposals involving a recipient who is such a large shareholder of the company that his or her vote could materially affect the passage of the proposal, a required abstention or non-vote feature would be weighed favorably by Glass Lewis along with the structure, disclosure, dilution and other provisions of the award in assessing the proposal’s alignment with long-term shareholder interests.
Net Operating Loss Poison Pills. Glass Lewis updated its guidelines to include certain provisions, including acting in concert, and whether a poison pill is implemented following a Schedule 13D filing or evidence of hostile activity or shareholder activism, as part of its consideration for whether to recommend that shareholders vote against management proposals to approve net operating loss poison pills. Glass Lewis expresses concern that the use of operating in concert provisions and other terms are disadvantageous to shareholders and insulate the board and management.
Control Share Statutes. Glass Lewis added a discussion regarding control share statutes, which may act as an anti-takeover defense mechanism by limiting the voting rights of shareholders who exceed a certain threshold percentage of voting stock. Glass Lewis will generally recommend that shareholders vote against the chair of the nominating and governance committee, absent a compelling rationale, where a close-end fund or business development company received a public buyout offer and used a control share statute to defend against such an offer in the prior year.
Board Responsiveness. Glass Lewis removed a reference to shareholder proposals in its discussion of when a 20% or more shareholder vote is contrary to management, requiring a response from the company. It also makes clear that votes cast as “against” and/or “abstain” are included in calculating opposition to a proposal.
Interlocking Directorships. Glass Lewis will evaluate other types of interlocking relationships (e.g., family members of executives) on a case-by-case basis to determine potential conflicts of interest.
Board Diversity. Glass Lewis specifies that in assessing board gender and underrepresented community diversity, it will refrain from recommending votes against directors if a company provides a sufficient rationale or plan to address its lack of diversity, including a timeline for appointing gender diverse directors or directors from an underrepresented community to the board. Glass Lewis also revised the definition of “underrepresented community director” to include an individual who “self-identifies as a member of the LGBTQIA+ community.”
Non-GAAP to GAAP Reconciliation Disclosure. Glass Lewis provides additional information regarding its approach in evaluating the use of non-GAAP measures in incentive programs. In situations where significant adjustments affect pay outcomes and disclosure is insufficient in helping shareholders to reconcile differences between non-GAAP and GAAP results, Glass Lewis may consider that fact in making its say-on-pay recommendation.
Pay-Versus-Performance Disclosure. Glass Lewis indicates that the pay-versus-performance disclosure required by SEC rules may be used as part of its supplemental quantitative assessment for pay-for-performance.
Responsiveness for Say-on-Pay Opposition. Glass Lewis makes clear that in calculating votes in opposition to say-on-pay that would be considered significant and would warrant a response from the company, it includes votes cast as either “against” or “abstain.”
Companies should assess how the changes to these voting guidelines and policies may impact shareholder voting for any proposals on the agenda or the election of their directors for their annual meetings.
If a company identifies any issues that may result in a negative recommendation from one or both proxy advisory firms, it should consider engaging with its key shareholders on these issues prior to the start of the proxy season, as it may be difficult to schedule engagement meetings once the proxy season begins. If applicable, companies should also look to expand upon their last proxy statement disclosure on key topics to address some of these concerns, even though this is not mandated by SEC rules, as the proxy advisory firms may rely primarily on a company’s proxy statement disclosure and not on other sources (e.g., a corporate website) for such information.
In particular, companies should examine their disclosure of climate risk, cyber risk, and environmental and social risk oversight generally, and make any necessary enhancements to avoid adverse recommendations to their nominating and corporate governance committee chairs or other board members.
Companies may also wish to engage with shareholder proponents and their larger shareholder base on any shareholder proposals that may garner support based on proxy advisor recommendations.