On November 1, 2019, Glass Lewis issued its voting guidelines for the 2020 proxy season (the “Guidelines”).1 Noteworthy changes are discussed below.
Nominating and Governance Committee
The Guidelines include several policy changes related to voting recommendations for nominating and governance committee members.
Evaluation of Company Action on Shareholder Proposals in Response to New SEC 14a-8 Policy
In September 2019, the SEC made a Rule 14a-8 announcement (the “New 14a-8 Policy”)2 in which it stated that the staff could concur, disagree or decline to state a view on a company’s no action request to exclude a shareholder proposal. In response to the New 14a-8 Policy, the Guidelines indicate that companies should only omit proposals in cases where the SEC has explicitly concurred with a company’s argument that a proposal should be excluded. If the SEC declines to state a view on whether a shareholder resolution should be excluded, Glass Lewis believes that such proposals should be included in a company’s proxy filings and that a “failure to do so will likely lead Glass Lewis to recommend that shareholders vote against the members of the governance committee.”
The New 14a-8 Policy also stated that beginning with the 2019-2020 shareholder proposal season, the staff may respond to some no-action requests orally, instead of in writing. The Guidelines note that if the SEC verbally permits a company to exclude a shareholder proposal and there is no “written record” of this determination by the SEC, Glass Lewis “expect[s] the company to provide some disclosure concerning this no-action relief.” The Guidelines note that “in cases where a company has failed to include a proposal on its ballot without such disclosure, [Glass Lewis] will generally recommend [that] shareholders vote against the members of the governance committee of the board.”
Codification of Factors in Evaluation of Performance
The Guidelines codify additional factors the Glass Lewis will consider when evaluating the performance of governance committee members. Specifically, the Guidelines state that “Glass Lewis will generally recommend voting against the governance committee chair when: (i) directors’ records for board and committee meeting attendance are not disclosed; or (ii) when it is indicated that a director attended less than 75% of board and committee meetings but disclosure is sufficiently vague that it is not possible to determine which specific director’s attendance was lacking.” This policy change, which focuses on disclosure already required under SEC rules for board and committee meeting attendance, builds on Glass Lewis’s existing policy to vote against a director who fails to attend a minimum of 75% of board and applicable committee meetings, absent proxy disclosure that a director served less than one full year or a director missed meetings due to serious illness or other extenuating circumstances.
Standards for Assessing the Audit Committee
The Guidelines codify additional factors that Glass Lewis will consider when evaluating the performance of audit committee members. Specifically, Glass Lewis will generally recommend voting against the audit committee chair when fees paid to the company’s external auditor are not disclosed. As this fee disclosure is a requirement under the SEC disclosure rules for proxy statements3, it should be a rare situation when a company would fail to make this disclosure, but the change in the Guidelines indicates the importance of this disclosure for Glass Lewis. Also important to keep in mind is Glass Lewis’s existing policy that it will also consider recommending that shareholders vote against members of an audit committee if audit and audit related fees total one-third or less of the total fees billed by the auditor. Glass Lewis believes the fees paid to the auditor for audit-related and non-audit services is crucial information, without which shareholders cannot make an informed judgement on the independence of the company’s external auditor.
Compensation Committee Performance
The Guidelines codify additional factors Glass Lewis will consider when evaluating the performance of compensation committee members. Specifically, Glass Lewis will generally recommend against all members of the compensation committee when the board adopts a frequency for its advisory vote on executive compensation other than the frequency approved by a plurality of shareholders. Although there is no required voting standard under SEC rules for the frequency vote, most companies have either adopted a majority or a plurality standard for this vote required once every six years for public companies.
Company Responsiveness to Low Support for Say-on-Pay Proposals
The Guidelines also contain an expanded discussion of what Glass Lewis considers to be an appropriate response following low shareholder support (20% or greater opposition) for the say-on-pay proposal at the previous annual meeting, including differing levels of responsiveness depending on the severity and persistence of shareholder opposition. The Guidelines note that Glass Lewis expects a “robust disclosure of engagement activities and specific changes made in response to shareholder feedback” and that, absent such disclosure, Glass Lewis “may consider recommending against the upcoming say-on-pay proposal.” Furthermore, the Guidelines note that appropriate responses to such low shareholder support include: (1) engaging with large shareholders to identify their concerns, and (2) where reasonable, implementing changes that directly address those concerns within the company’s compensation program. In the absence of evidence that the board is actively engaging shareholders on these issues and responding accordingly, it may recommend holding compensation committee members accountable for failing to adequately respond to shareholder opposition.
Contractual Payments and Arrangements
For its evaluations of say-on-pay proposals, Glass Lewis clarifies in the Guidelines that it generally disfavors contractual agreements that excessively favor an executive, including excessive severance payments such as golden handshakes or golden parachutes, new or renewed single-trigger change-in-control arrangements, excise tax gross ups and multi-year guaranteed awards, and further views the extension of such entitlements through renewed or revised employment agreements as a missed opportunity to remedy shareholder un friendly provisions.
Clarifying Amendments
The Guidelines also clarify and formalize certain aspects of Glass Lewis’s current approach with respect to:
Exclusive Forum Provisions Without Shareholder Approval
While Glass Lewis ordinarily recommends against the governance committee chair in situations where the board adopts an exclusive forum provision without shareholder approval, it will consider certain additional factors, and may make exceptions to this policy where it can be reasonably determined that the provisions of a forum selection clause are narrowly crafted to suit the unique circumstances facing the company.
Compensation
With respect to compensation, the Guidelines clarify the following circumstances:
- Glass Lewis will review any significant changes or modifications, including post-fiscal year end changes and one-time awards, particularly where the changes touch upon issues that are material to Glass Lewis recommendations4;
- if a company has lowered short-term incentive plan performance targets mid-year, Glass Lewis expects the company to provide a robust discussion of why such decision was necessary; and
- excessively broad definitions of “change in control” in employment agreements are potentially problematic as they may lead to situations where executives receive additional compensation where no meaningful change in status or duties has occurred.
Practical Considerations
As the 2020 proxy season approaches, companies should evaluate the influence that Glass Lewis has on their shareholder base and take that into account when evaluating strategic decisions. In addition, calendar year-end companies should begin drafting their proxy statement early in order to have flexibility to craft disclosure that is responsive to the Guidelines. Finally, companies that may submit no action requests should consider setting up a process by which designated individuals receive calls from the SEC staff in connection with any no-action requests and create a list of required information to document such calls in order to help the company craft appropriate disclosure around this topic.
1 The Guidelines are available here.
2 For more information on this guidance, see our prior alert “Shareholder Proposals – How the SEC’s Recently Announced New Policy May Impact the Rule 14a-8 No-Action Process.”
3 See Item 9(e) of Schedule 14A.
4 Such topics include: (i) the overall design and structure of the company’s executive compensation programs including selection and challenging nature of performance metrics; (ii) the implementation and effectiveness of the company’s executive compensation programs including pay mix and use of performance metrics in determining pay levels; (iii) the quality and content of the company’s disclosure; (iv) the quantum paid to executives; and (v) the link between compensation and performance as indicated by the company’s current and past pay-for-performance grades.
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