On 6 November 2014, Institutional Shareholder Services Inc. ("ISS") and Glass Lewis & Co. ("Glass Lewis") released their respective 2015 updates to their proxy voting policies. The 2015 policies generally will be effective for shareholder meetings of publicly traded companies held during the 2015 proxy season. The proxy requirements for which the ISS and Glass Lewis policies have been developed do not apply to foreign private issuers.
ISS 2015 Updates
As was the case in 2014, ISS has not adopted sweeping changes to its 2015 policies; however, the proposed modifications reflect movement away from rigid policies towards a more flexible, holistic approach. The ISS updates are in the following areas:
- Management Equity Compensation Plan Proposals
- Under its 2014 policies, ISS used a series of six
"pass/fail" tests to evaluate equity plan proposals. For
2015, ISS has adopted a more nuanced approach to evaluate proposals
for stock option plans, restricted stock plans, omnibus stock plans
and stock-settled stock appreciation rights plans for employees,
which will consider a range of positive and negative factors
related to plan features and historical grant practices. This is
referred to as the Equity Plan Scorecard ("EPSC"). ISS
issued frequently asked questions ("FAQs") on the EPSC on
22 December 2014. As described in the FAQs, the EPSC evaluates the
following three pillars:
- Plan Cost: This pillar considers the total potential cost to a company's shareholders of an equity plan relative to plan costs associated with the sponsoring company's industry or market peers. Cost is measured using ISS's proprietary Shareholder Value Transfer ("SVT") model. SVT represents the estimated cost of shares issued under a company's equity incentive plans, taking into account full value shares and stock options, if applicable. ISS's model measures SVT relative to two benchmarks: (1) new shares requested, combined with shares remaining for future grants and outstanding unvested/unexercised grants and (2) only new shares requested plus shares remaining for future grants. The relationship of these two SVT measures is weighed against the company's benchmark SVT, as determined by ISS using the company's GICS industry group, market cap size and operational and financial metrics that ISS identified as correlated with total shareholder return ("TSR") performance in the industry.
- Plan Features: The Plan Features pillar considers the following factors, the presence of which may have a negative impact on the EPSC score, depending on the company's size and circumstances: (1) automatic single-triggered award vesting upon a change in control; (2) broad discretionary authority to accelerate the vesting of an award unrelated to a change in control, death or disability; (3) liberal share recycling policies (notably, allowing shares withheld or tendered for taxes or to pay the exercise price of an award to be available for re-grant); and (4) the absence of a minimum required vesting period of at least one year.
- Grant Practices: The Grant Practices pillar is an amalgam of factors related to the past and future operation of the plan and the terms of the company's plan awards and equity grant policies. Factors include (1) the company's three year average burn rate relative to the comparative burn rate of its industry and its index peers, (2) vesting schedules under the CEO's most recent equity grants during the prior three years, (3) the plan's estimated duration, (4) the proportion of the CEO's most recent equity awards/grants subject to performance conditions, (5) clawback policies that include equity grants and (6) post-exercise or post-vesting shareholding requirements.
- The EPSC uses three different scoring models, depending on the type of company. Each of these models weights the three pillars differently. The maximum number of points that may be accrued is 100. A score of 53 points is required to result in a positive recommendation on a plan proposal.
- Notwithstanding a company's EPSC score, ISS may still recommend against a proposal that features certain egregious characteristics including (1) a liberal change of control definition (such as one defining a "change of control" to include shareholder approval of a merger or other transaction rather than the transaction's consummation), (2) the ability to reprice options without shareholder approval, (3) the plan's nature as a vehicle for problematic pay practices or a pay-for-performance disconnect and (4) any other plan features or company practices that are deemed detrimental to shareholder interests which may, on a case-by-case basis, include tax gross-ups related to plan awards or provisions for reload options.
- Under its 2014 policies, ISS used a series of six
"pass/fail" tests to evaluate equity plan proposals. For
2015, ISS has adopted a more nuanced approach to evaluate proposals
for stock option plans, restricted stock plans, omnibus stock plans
and stock-settled stock appreciation rights plans for employees,
which will consider a range of positive and negative factors
related to plan features and historical grant practices. This is
referred to as the Equity Plan Scorecard ("EPSC"). ISS
issued frequently asked questions ("FAQs") on the EPSC on
22 December 2014. As described in the FAQs, the EPSC evaluates the
following three pillars:
- Unilateral Bylaw/Charter Amendments
- Under its 2014 policies, ISS evaluated unilateral bylaw/charter amendments under its "Governance Failures Policy." For 2015, ISS has adopted a stand-alone policy that codifies the current policy application related to unilateral bylaw/charter amendments under the "Governance Failures Policy."
- ISS will generally recommend a vote "Against" or "Withhold" from directors individually, committee members or the entire board if the board amends the company's governance documents without shareholder approval in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders. In performing its analysis, ISS will consider the following factors: (1) the board's rationale for adopting the bylaw/charter amendment without shareholder ratification; (2) disclosure by the company of any significant engagement with shareholders regarding the amendment; (3) the level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter; (4) the board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions; (5) the company's ownership structure; (6) the company's existing governance provisions; (7) whether the amendment was made prior to or in connection with the company's initial public offering; (8) the timing of the board's amendment to the bylaws/charter in connection with a significant business development; and (9) other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
- Independent Board Chair Shareholder Proposals
- Under its 2014 policy, ISS would generally recommend a vote "For" shareholder proposals for independent chairs unless the company maintained a certain specific counterbalancing governance structure. This method of evaluation required that the company satisfy all of the criteria on ISS's list.
- For 2015, ISS has added new governance, board leadership and performance factors to the list of criteria considered when evaluating shareholder proposals for independent chairs, including (1) absence/presence of an executive chair; (2) recent board and executive leadership transitions at the company; (3) director and CEO tenure; and (4) a longer (five year) TSR performance period.
- ISS's new policy is to vote "For" shareholder proposals requiring that the chairman's position be filled by an independent director, taking into consideration (1) the scope of the proposal; (2) the company's current board leadership structure; (3) the company's governance structure and practices; and (4) any other relevant factors that may be applicable.
- As noted above, ISS has adopted a more holistic approach in evaluating these types of proposals. Therefore, a "For" or "Against" recommendation will not be determined by any single factor. Rather, ISS will consider all positive and negative aspects of the company based on the new expanded list of factors when assessing these shareholder proposals.
- Litigation Rights
- For 2015, ISS has expanded its policy on exclusive venue provisions to cover other types of bylaws that have a material impact on shareholders' litigation rights, including bylaws that mandate fee-shifting or arbitration. ISS will evaluate these bylaws on a case-by-case basis, taking into account factors such as (1) the company's stated rationale for adopting such a provision; (2) disclosure of past harm from shareholder lawsuits in which plaintiffs were unsuccessful or shareholder lawsuits outside the jurisdiction of incorporation; (3) the breadth of application of the bylaw, including the types of lawsuits to which it would apply and the definition of key terms; and (4) governance features such as shareholders' ability to repeal the provision at a later date (including the vote standard applied when shareholders attempt to amend the bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections.
- Political Contributions
- ISS has refined its policies relating to political contributions shareholder proposals. ISS will vote for proposals requesting greater disclosure of a company's political contributions and trade association spending policies and activities, considering (1) the company's policies and management and board oversight related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes; (2) the company's disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and (3) recent significant controversies, fines or litigation related to the company's political contributions or political activities.
- When reviewing disclosures of trade association support or participation, ISS will look at the comprehensiveness of a company's trade association membership disclosure, the nature of a company's trade association participation, the level of transparency provided regarding a company's trade association expenditures and other relevant factors.
- Greenhouse Gas Emissions
- ISS noted that during the 2014 proxy season, the most prevalent resolutions on climate change requested companies to adopt goals to reduce their greenhouse gas emissions ("GHG"). In this regard, ISS has updated its policies to provide greater clarity on the factors that are considered in its analysis of GHG-related proposals. Under the 2015 policy, ISS will make recommendations on a case-by-case basis on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account the following considerations: (1) whether the company provides disclosure of year-over-year GHG emissions performance data; (2) whether company disclosure lags behind industry peers; (3) the company's actual GHG emissions performance; (4) the company's current GHG emission policies, oversight mechanisms and related initiatives; and (5) whether the company has been the subject of recent, significant violations, fines, litigation or controversy related to GHG emissions.
Glass Lewis 2015 Updates
The Glass Lewis updates for the 2015 proxy season do not provide for sweeping changes to prior policies, but instead generally attempt to clarify Glass Lewis's policies. The Glass Lewis 2015 updates are in the following areas:
- Governance Committee Performance
- Glass Lewis adopted a new policy regarding instances where the board of directors, without seeking shareholder approval, has amended the company's governing documents to reduce, remove or otherwise impede the ability of shareholders to exercise shareholder rights that Glass Lewis deems important (e.g., the elimination of the ability of shareholders to call a special meeting or to act by written consent, an increase to the ownership threshold required for shareholders to call a special meeting or the adoption of a classified board structure). In these instances, Glass Lewis may recommend "Against" the chairman of the governance committee or the entire committee.
- Board Responsiveness to Majority-Approved Shareholder Proposals
-
- Under its 2014 policies, Glass Lewis would recommend "Against" all members of the governance committee during whose tenure a shareholder proposal relating to shareholder rights that Glass Lewis deems important received support from a majority of the votes cast if the board has not begun to implement or enact the proposal's subject matter.
- In its 2015 policies, Glass Lewis applies a more nuanced approach to evaluating the adequacy of a board's response to these types of proposals. Glass Lewis will not only consider whether the board has enacted the proposal's subject matter, but it will now examine the quality of the right enacted or proffered for any conditions that may unreasonably interfere with a shareholder's ability to actually exercise the right (e.g., overly restrictive procedural requirements).
- Vote Recommendations Following an IPO
-
- While Glass Lewis generally refrains from issuing voting recommendations on the basis of most corporate governance best practices during the one-year period following an IPO, its 2015 policies provide for increased scrutiny of certain provisions. These include anti-takeover provisions adopted in a company's charter or bylaws prior to an IPO that are not later put up for a shareholder vote following the IPO. The 2015 policies specifically provide that the adoption of an anti-takeover provision and the adoption of an exclusive forum provision or fee shifting bylaw warrant strong shareholder action against the board of a company that completed an IPO within the past year.
- "Material" Transactions with Directors
-
- In the context of determining director independence, Glass Lewis deems a "material" relationship to exist between the company and a director where such director is employed by a professional services firm (such as a law firm, investment bank or consulting firm) and the company has paid such firm $120,000 or more during the past three or five years, depending on the specific circumstances. For this category of "material" relationships, Glass Lewis has clarified in its 2015 policies that it may deem such a transaction to be immaterial where (1) the amount represents less than 1% of the firm's annual revenues and (2) the board provides a compelling rationale as to why the director's independence is not affected by the relationship.
- Advisory Vote on Executive Compensation ("say-on-pay")
-
- Glass Lewis applies a highly nuanced approach when evaluating say-on-pay proposals. This approach is less formulaic than the methodology used by ISS, allowing for more flexibility (and potentially, unpredictability). Glass Lewis reviews executive compensation on a case-by-case basis based on the company's industry, size, maturity, performance, financial condition, historic pay-for-performance practices and any other relevant internal or external factors.
- Under its 2014 policies, Glass Lewis reviewed say-on-pay proposals on both a qualitative and quantitative basis, focusing on (1) overall design and structure of the company's executive compensation program, including the selection and challenging nature of performance metrics; (2) the quality and content of the company's disclosure; (3) the quantum paid to executives; and (4) the link between compensation and performance as indicated by the company's current and past pay-for-performance grades.
- The 2015 policies add a fifth factor: the implementation and effectiveness of the company's executive compensation programs, including pay mix and use of performance metrics in determining pay levels.
- Glass Lewis will recommend "Against" a say-on-pay proposal if it finds deficiencies in the design, implementation or management of a company's compensation program, including (1) a pattern of poor pay-for-performance practices, (2) unclear disclosures regarding the overall compensation structure, (3) questionable adjustments to certain aspects of the overall compensation structure or (4) other egregious compensation practices.
- Glass Lewis's 2015 policies also include revised guidance on one-off compensation awards granted outside of a company's standard incentive scheme, clawback policies and compensation consultant independence.
- Employee Stock Purchase Plans
-
- The 2015 policies add a description of Glass Lewis's approach to evaluating proposals to adopt or amend employee stock purchase plans ("ESPPs"). Previously, Glass Lewis did not disclose its approach to ESPPs. For 2015, Glass Lewis maintains a quantitative model that estimates the cost of an ESPP by measuring the expected discount, purchase period, expected purchase activity and whether the ESPP has a "lookback" feature (e.g., the plan bases the purchase price on the stock price at either the beginning or end of the purchase period, whichever is lower). The model compares this data to ESPPs at similar companies. Glass Lewis will also analyse the potential shareholder dilution and whether shareholders will not have a chance to approve the program for an excessive period of time. In addition, ESPPs that contain evergreen provisions (that automatically increase the number of shares available under the ESPP each year) will generally receive a negative recommendation.
Our client publication discussing ISS's updates to its proxy voting guidelines is available at:
Our client publication discussing ISS's frequently asked questions regarding its EPSC program is available at:
Our client publication discussing Glass Lewis's updates to its proxy voting guidelines is available at:
http://www.shearman.com/en/newsinsights/publications/2014/11/2015-proxy-paper-guidelines.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
