November 30, 2020


Glass Lewis 2021 Policy Updates

Glass Lewis recently issued policy updates for 2021. This article summarizes the compensation-related policy updates and highlights other key changes to Glass Lewis’ policies.

Compensation-Related Policy Updates

Short-Term Incentives: Glass Lewis codified additional factors that will be considered when evaluating a company’s short-term incentive plan. While not specifically referencing changes due to COVID-19, Glass Lewis expects clearly disclosed justifications to accompany any significant changes to a company’s short-term incentive plan structure, which includes instances in which performance goals have been lowered from the previous year. Additionally, Glass Lewis has expanded its description of the application of upward discretion to include instances of retroactively prorated performance periods. Glass Lewis indicated that it would expect a robust discussion of why the decision was necessary.

Long-Term Incentives: Similar to short-term incentives, Glass Lewis codified additional factors that will be considered when evaluating a company’s long-term incentive plan. Specifically, Glass Lewis defined inappropriate performance-based award allocation1 as a criterion which may, in the presence of other major concerns, contribute to a negative say-on-pay recommendation. Additionally, any decision to significantly reduce or eliminate performance-based awards will be viewed negatively outside of exceptional circumstances and may lead to a negative recommendation on say-on-pay.

Excise Tax Gross-Ups and Votes on Golden Parachutes: Glass Lewis added language codifying how it evaluates the addition of new excise tax gross-ups with a specific change-in-control transaction. In such scenarios, Glass Lewis may consider expanding a negative recommendation beyond the golden parachute proposal in which the gross-up entitlements first appear to also include a subsequent recommendation against compensation committee members and the say-on-pay proposals for all involved corporate parties, as appropriate.

Option Exchanges and Repricing: Glass Lewis added language clarifying its approach in evaluating option exchanges and repricing proposals. Glass Lewis emphasized the importance of the exclusion of officers and board members from the program, as well as that the program be value-neutral or value-creative to shareholders, in driving any exceptions to Glass Lewis’ general opposition to such proposals.

Peer Group Methodology: Glass Lewis clarified that, in determining peer groups used in the A-F pay-for-performance letter grade, Glass Lewis will utilize a proprietary methodology that considers both country-based and sector-based peers, along with each company’s network of self-disclosed peers. Each component is considered on a weighted basis and is subject to size-based ranking and screening.

Other Notable Updates

Board Gender Diversity: Beginning in 2021, Glass Lewis will note as a concern boards with fewer than two female directors. The voting recommendations in 2021 will be based on the current requirement of having at least one female board member. Beginning with shareholder meetings held after January 1, 2022, Glass Lewis will generally recommend voting against the nominating committee chair when the board has fewer than two female directors. For boards with six or fewer total members, the current voting policy requiring a minimum of one female director will remain in place.

When making these voting recommendations, Glass Lewis will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending that shareholders vote against directors 1) when companies are outside the Russell 3000 index, or 2) when boards have provided a sufficient rationale or plan to address the lack of diversity on the board.

State Laws on Diversity: In addition to the standard policy on board diversity, Glass Lewis will make recommendations in accordance with board composition requirements set forth in applicable state laws when they come into effect. For example, in September 2020, California passed a bill that requires companies headquartered in the state to have one director from an “underrepresented community” on their board by the end of 2021 and two individuals by the end of 2022. For meetings held after December 31, 2021, if a company headquartered in California does not have a least one director from an underrepresented community on its board, Glass Lewis will generally recommend voting against the chair of the nominating committee.

Disclosure of Director Diversity and Skills: Glass Lewis will begin tracking the quality of disclosure on the mix of diverse attributes and skills of directors in company proxy statements. Beginning with the 2021 proxy season, Glass Lewis proxy reports for companies in the S&P 500 index will include an assessment of company disclosure in the proxy statement relating to board diversity, skills and the director nomination process. Specifically, Glass Lewis will reflect how a company’s proxy statement presents:

  1. the board’s current percentage of racial/ethnic diversity;
  2. whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity;
  3. whether the board has adopted a policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees (a.k.a., “Rooney Rule”); and
  4. board skills disclosure.

Glass Lewis will not be making voting recommendations solely on the basis of this assessment in 2021; however, such ratings will help inform Glass Lewis’ assessment of a company’s overall governance and may be a contributing factor in recommendations when additional board-related concerns have been identified.

Board Refreshment: Beginning in 2021, Glass Lewis will note as a potential concern instances where the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board in the past five years. Glass Lewis will not make voting recommendations solely on this basis in 2021; however, insufficient board refreshment may be a contributing factor in its recommendations when additional board-related concerns have been identified.

Environmental and Social Risk Oversight: Beginning in 2021, Glass Lewis will note as a concern when boards of companies in the S&P 500 index do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. Beginning with shareholder meetings held after January 1, 2022, Glass Lewis will generally recommend voting against the governance chair of a company in the S&P 500 who fails to provide explicit disclosure concerning the board’s role in overseeing these issues.

This article highlights changes to Glass Lewis’ policies and is not intended to be exhaustive. For information related to Glass Lewis‘ voting policies, please visit 2021 US Voting Guidelines.

1 Per Glass Lewis’ guidelines, Glass Lewis expects “a significant portion” of long-term incentive grants to be performance-based.