Glass Lewis has released updates to its proxy voting policies for the 2020 proxy season, available here. The policy updates will apply to annual meetings held on or after January 1, 2020. While updates primarily refine and clarify existing policies, several could impact director elections. Key takeaways from Glass Lewis’ voting policy update are as follows:
Nominating and Governance Committee.
- Rule 14a-8 No-Action Relief. As we discussed here, the SEC Staff announced that beginning with the 2019-2020 shareholder proposal season, the Staff may decline to state a view with respect to a request for no-action relief pursuant to Rule 14a-8. Although the Staff stated that its decision not to state a view should not be interpreted as a signal that the company must include the underlying shareholder proposal in its proxy materials, Glass Lewis believes that such proposal should be included in the company’s proxy materials, and failure to do so will likely lead to a recommendation against the election of members of the governance committee.
The SEC Staff also announced that it may respond orally to Rule 14a-8 no-action requests in lieu of issuing a written response. Where the Staff has verbally permitted a company to exclude a shareholder proposal, Glass Lewis now expects that the company will provide some disclosure concerning the no-action relief. If a company fails to include a shareholder proposal on its ballot without such disclosure, Glass Lewis will generally recommend voting against the members of the governance committee.
- Inadequate Disclosure of Director Non-Attendance. Glass Lewis has also codified a policy pursuant to which it will generally recommend voting against the chair of the governance committee if directors’ records for board and committee meeting attendance are not disclosed or 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. We expect that this codification will impact very few companies because Item 407(b) of Regulation S-K already requires that companies disclose in their proxy statement the name of each incumbent director who during the last full fiscal year attended fewer than 75 percent of the aggregate of (i) the total number of meetings of the board of directors … and (ii) the total number of meetings held by all committees of the board on which such director served.
- Exclusive Forum. While Glass Lewis typically recommends against the election of the governance committee chair where the company has adopted an exclusive forum provision without shareholder approval, Glass Lewis may now make exceptions where the exclusive forum provision is narrowly crafted to suit a company’s unique circumstances or includes a sunset provision.
Audit Committee. Glass Lewis will generally recommend voting against the chair of the audit committee if fees paid to the company’s external auditor for audit and non-audit services are not disclosed. In light of the requirements of Item 9 of Schedule 14A that companies disclose audit fees, audit-related fees, tax fees and all other fees in each of the last two fiscal years, we do not anticipate that this policy will impact many companies.
Compensation Committee. Glass Lewis will recommend against all members of the compensation committee where the board adopts a frequency for the advisory vote on executive compensation (say-on-pay) other than the frequency approved by a plurality of shareholders.
Company Responsiveness to Low Say-on-Pay Vote. In a year following low (80% or below) shareholder support on say-on-pay, Glass Lewis expects that companies include a robust disclosure in the company’s proxy statement of engagement activities and specific changes made in response to shareholder feedback. Absent such “robust” disclosure, Glass Lewis may recommend against the company’s upcoming say-on-pay proposal. With respect to the appropriate level of response by the company, Glass Lewis clarified its expectation that the acceptable minimum level of a company’s responsiveness will be gauged by Glass Lewis taking into account the level of opposition in a single year and persistent shareholder discontent. Responses it considers appropriate include, among other things, implementing changes that directly address those concerns within the company’s compensation program. In the absence of any evidence that the board is actively engaging shareholders on such issues, Glass Lewis may hold compensation committee members responsible.
Executive Contractual Payments and Arrangements. Glass Lewis clarified its approach to analyzing new, renewed and amended executive employment arrangements. The updated policy lists certain non-exclusive employment terms that may drive a negative say-on-pay recommendation such as (i) excessively broad change in control triggers, (ii) inappropriate severance entitlements, (iii) inadequately explained or excessive sign-on arrangements, (iv) guaranteed bonuses (especially as a multiyear occurrence), and (v) failure to address any concerning practices in amended employment agreements. Glass Lewis also believes that the extension of problematic pay practices through renewed or revised employment agreements represent a missed opportunity to remedy shareholder un-friendly provisions and cites practices such as excessive change in control entitlements, modified single-trigger change in control entitlements, excise tax gross-ups, and multi-year guaranteed awards as problematic. Accordingly, companies should take into account such provisions when amending executive employment agreements.
Impact of Change of Control Provisions. Glass Lewis clarified that it will only consider a change of control provision to be “double trigger” (a best practice according to Glass Lewis) where both a change in control and termination (or constructive termination) would result in a payment, and that any other arrangement would be viewed by Glass Lewis as single-trigger or modified single-trigger arrangement. Glass Lewis also warned that it will take issue with excessively broad definitions of change of control where a payment is triggered without a meaningful change in status or duties.