Rob Swystun, Pristine Advisers
A new year often means change, including at Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass Lewis), which released their policy updates for the 2016 proxy season earlier in December.
Here is a summary of the important stuff, as highlighted by members of Stinson Leonard Street LLP for Lexocology.
ISS has updated its policy for directors who serve on multiple boards. Now, non-CEO directors who serve on more than five boards will be considered as “overboarded.” Previously, ISS had considered six boards to be overboarded. The number of outside boards a CEO can sit on before garnering a negative vote recommendation remains the same at two.
The reasoning for the decrease in boards directors can sit on before being deemed overboarded is that sitting on boards is considered by ISS to be more time consuming now than in the past. ISS says with boards’ increasing role in risk oversight coupled with a rising demand for directors to engage shareholders, directors are having to commit more time to the boards they sit on.
The new policy will take effect in 2017, but throughout 2016, ISS voting analyses will take note of whether it considers a given director to be overboarded.
Unilateral Board Actions
In its updated unilateral board action policy, ISS will divide companies into two classes: established and new.
ISS will issue against or withhold recommendations for directors of established public companies who vote in favor of changes that threaten shareholder rights, like adoption of classified board structures or supermajority voting requirements for amending company bylaws.
However, ISS will not automatically issue negative recommendations for directors of companies that have recently gone public who vote in favor of changes that threaten shareholder rights. Instead, ISS will issue recommendations case-by-case, giving significant weight to the ability of shareholders to change the company’s governance structure through a simple majority vote and their ability to hold directors of newly public companies accountable via annual elections.
Compensation of Externally Managed Issuers
Insufficient disclosure of compensation arrangements for executives at externally-managed issuers will now be deemed “problematic pay practices” and generate negative voting recommendations for “say on pay” proposals.
The updated Glass Lewis policy on overboarding is the same as ISS’s, but rather than distinguishing between non-CEO and CEO directors, Glass Lewis’s policy distinguishes between non-executive officer and executive officer directors, which may apply to a larger class of directors than ISS’s policy update.
Conflicting Management and Shareholder Proposals
Glass Lewis will consider the following when determining whether or not to support conflicting proposals from management and shareholders:
- The nature of the underlying issue that prompted the proposals
- The benefit to shareholders from implementation of each of the proposals
- The materiality of the differences between the terms of the shareholder proposal and management proposal
- The appropriateness of the provisions of the proposals
- The company’s governance profile
Recommendations will also be affected by a company’s responsiveness to shareholders during previous shareholder proposals and how much it has adopted progressive shareholder rights provisions.
Exclusive Forum Provisions
Glass Lewis will no longer automatically issue recommendations to vote against the chairs of the nominating and governance committees when a company adopts an exclusive forum provision as part of an initial public offering, a spin off or a merger. Rather, it will issue its recommendation based on other provisions that may limit shareholder rights, like fee-shifting bylaw provisions or the aforementioned supermajority voting thresholds or classified board structures.
If a company adopts exclusive forum provisions that are not connected to a spin-off, merger or IPO, Glass Lewis will continue to make recommendations to vote against the chairs of the nominating and corporate governance committees.
Environmental and Social Risk Oversight
Glass Lewis will recommend shareholders vote against directors who fail to sufficiently identify and manage material environmental and social risks that could affect shareholder value.
Nominating Committee Performance
Glass Lewis may consider recommending shareholders vote against chairs of nominating committees in cases where the board has failed to ensure its directors have requisite experience — either through periodic assessment or board refreshment — that has led to poor performance for the company. The policy does not actually define what Glass Lewis considers to be poor performance, though.
Now that the policies have been updated, let the 2016 proxy season begin.