Proxy Advisory Firms Release 2016 Policy Updates
Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass Lewis) recently released policy updates for the upcoming 2016 proxy season. Some of the key updates to both firms' proxy voting guidelines are summarized below.
ISS has changed its policy on negative vote recommendations for directors serving on multiple boards. Under the updated policy, non-CEO directors serving on more than five public company boards (down from six) will be labeled "overboarded," while CEO directors remain limited to two outside public company directorships. ISS notes that the time commitment required by directors of public companies has increased in recent years due to "new regulations, boards' increasing role in risk oversight, and rising demands for directors to engage with shareholders."
This new policy will take effect beginning in 2017, but during 2016, ISS voting analyses will note whether a director is "overboarded."
Unilateral Board Actions
ISS has updated its unilateral board action policy by dividing public companies into two separate classes. For established public companies, ISS will continue to issue against or "withhold" recommendations for directors voting in favor of changes that diminish shareholder rights, such as adopting classified board structures or supermajority voting requirements for amending bylaws. Directors of newly public companies, on the other hand, voting in favor of similar changes prior to or in connection with an IPO will no longer automatically receive negative recommendations. Rather, ISS will issue recommendations on a case-by-case basis. Under its new discretionary policy for newly public companies, ISS will give significant weight to shareholders' ability to (1) change governance structure through a simple majority vote and (2) otherwise hold directors accountable through annual elections.
Compensation of Externally Managed Issuers
ISS will now deem insufficient disclosure of compensation arrangements for executives at externally-managed issuers as "problematic pay practices," thus generating negative voting recommendations for "say on pay" proposals.
Conflicting Management and Shareholder Proposals
- In determining whether to support conflicting proposals submitted by management and shareholders, Glass Lewis will consider the following:
- The nature of the underlying issue
- The benefit to shareholders from implementation of the proposal
- The materiality of the differences between the terms of the shareholder proposal and management proposal
- The appropriateness of the provisions in the context of a company's shareholder base, corporate structure and other relevant circumstances
- A company's overall governance profile
Additionally, the policy update specifically mentions that a company's responsiveness to shareholders as evidenced by previous responses to shareholder proposals and its adoption of progressive shareholder rights provisions will affect its recommendations.
Exclusive Forum Provisions
Beginning in 2016, Glass Lewis will no longer automatically recommend that shareholders vote against the chair of the nominating and governance committee when the company adopts an exclusive forum provision in its governing documents in connection with an initial public offering. Instead, Glass Lewis will base its voting recommendation on the presence of other provisions that limit shareholder rights, for example, supermajority voting thresholds, classified board structures or fee-shifting bylaw provisions.
Outside of a spin-off, merger, or IPO, however, Glass Lewis will continue to recommend against the chair of the nominating and corporate governance committee when the company adopts exclusive forum provisions.
Environmental and Social Risk Oversight
Glass Lewis affirmed as a written policy its views regarding responsibilities of directors for oversight of environmental and social issues. Because companies face significant financial, legal and reputational risks associated with poor environmental and social practices, Glass Lewis will recommend that shareholders vote against directors who fail to identify and manage sufficiently material environmental and social risks that could affect shareholder value.
Nominating Committee Performance
Glass Lewis may consider recommending shareholders to vote against chairs of nominating committees where the board's failure to ensure that its directors have requisite experience, either through periodic director assessment or board refreshment, has contributed to a company's poor performance. This is a highly discretionary policy, because the policy update does not include a definition "poor performance."
Glass Lewis has set director overboarding thresholds commensurate with the updated ISS policy discussed above, with one minor change. Instead of distinguishing between non-CEO and CEO directors, the updated Glass Lewis policy draws a line between non-executive officer and executive officer directors. In this respect, the Glass Lewis policy may apply to a larger class of directors. Apart from this difference, however, the policies track one other closely (more than five public boards for non-executive officers, and more than two for executive officers). Also consistent with the ISS policy, in 2016 Glass Lewis may only note a concern when a director is overboarded, but, beginning in 2017, will recommend voting against overboarded directors.
For more information regarding policy changes by proxy firms for the 2016 proxy season, please contact Jack Bowling, Steve Quinlivan, Jim Swenson, Scott Gootee, Drew Kuettel, or your regular Stinson Leonard Street contact.