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Principal [email protected] 212-921-9365 Theo Allen
Senior Analyst [email protected] 646-568-1157
Glass Lewis recently released its 2023 policy guidelines, with new amendments and clarifications on executive compensation, board diversity, oversight of environmental and social areas, and director overboarding. This article discusses key executive compensation and governance updates.
Executive Compensation-Related Updates
Short- and Long-Term Incentives
Glass Lewis added new discussion to codify its views on certain exercise of compensation committee discretion on incentive payouts. In Glass Lewis’ view, companies should provide thorough discussion of how material events were considered in the committee’s decisions to exercise, or refrain from applying, discretion over incentive pay outcomes.
Long-Term Incentive (LTI) Mix
Beginning in 2023, Glass Lewis revised the threshold for the minimum percentage of the LTI grant that should be performance-based from 33% to 50%. If less than half of an executive’s LTI awards are subject to performance-based vesting conditions, Glass Lewis may raise concerns in their analysis of executive pay programs and may refrain from a negative recommendation in the absence of other significant issues with the program’s design.
Pay for Performance
The new SEC disclosure requirements will not impact Glass Lewis’ pay for performance methodology for the 2023 proxy season; however, Glass Lewis notes that the new disclosure requirements may be reviewed in the evaluation of executive pay programs on a qualitative basis.
Grants of Front-Loaded Awards
Glass Lewis will continue to approach front-loaded awards with scrutiny because the grants may preclude improvements or changes to reflect evolving business strategies or to respond to other unforeseen factors. This year, Glass Lewis added language touching on the topic of the rise in the use of “mega-grants” or an outsized award valued at over $100 million. Further, Glass Lewis noted that if front-loaded awards are structured poorly, early vesting of such awards may reduce or eliminate the retentive power at great cost to shareholders.
Glass Lewis expanded discussion regarding what they consider reasonable disclosure in terms of one-time awards. In addition to providing a thorough description of the awards, including a cogent and convincing explanation of their necessity and why existing awards do not provide sufficient motivation, new for 2023, Glass Lewis expects the discussion to include how the quantum of the award and its structure were determined.
Glass Lewis revised the discussion on clawback policies to reflect the new regulatory developments following the SEC’s approval of final rules in October 2022. During the period between the announcement of the final rules and effective date of listing requirements, Glass Lewis will continue to raise concerns for companies that maintain policies that only meet the requirements set forth by Section 304 of the Sarbanes-Oxley Act.
Compensation Committee Performance
Glass Lewis will generally recommend against the chair of the compensation committee when certain outsized awards or “mega-grants” have been granted and the awards present concerns such as excessive quantum, lack of sufficient performance conditions, and/or are excessively dilutive, among others.
Company Responsiveness (for Say-on-Pay Analysis)
Glass Lewis clarified that they will scrutinize high levels of disinterested shareholders as an independent group when assessing the support levels for previous years’ say-on-pay votes. Further, when evaluating a company’s response to low support levels, Glass Lewis expanded the discussion of what they consider robust disclosure, including discussion of rationale for not implementing changes to pay decisions that drove low support and intentions going forward.
Board Diversity, Oversight and Overboarding Updates
Board Gender Diversity
As noted in last year’s updates, beginning in 2023, Glass Lewis will transition from a fixed numerical approach to a percentage-based approach. Glass Lewis will generally recommend against the nominating chair when the board is not at least 30% gender-diverse at Russell 3000 companies. For companies outside the Russell 3000 index, the existing policy requiring a minimum of one gender diverse director will remain in place. Additionally, when making voting recommendations, Glass Lewis will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending against when boards have provided a sufficient rationale or plan to address the lack of diversity on the board, including a timeline to appoint gender diverse directors.
Underrepresented Community Diversity
Beginning in 2023, Glass Lewis will generally recommend against the chair of the nominating committee of a board with fewer than one director from an underrepresented community on the board at companies within the Russell 1000 index. “Underrepresented community” is defined as an individual who self-identifies as Black, African American, North African, Middle Eastern, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaskan Native, or who self-identifies as gay, lesbian, bisexual, or transgender. Additionally, 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 when boards have provided a sufficient rationale or plan to address the lack of diversity on the board, including a timeline to appoint additional directors from an underrepresented community.
State Laws on Diversity
Glass Lewis revised the policy following recent changes to the status of California state laws. Where previously Glass Lewis had recommended in accordance with mandatory board composition requirements set forth in California, Glass Lewis will now refrain from providing recommendations pursuant to these state board composition requirements since the requirements on board diversity (gender and underrepresented community) were deemed to violate the equal protection clause of the California state constitution.
Disclosure of Director Diversity and Skills
As noted in last year’s updates, beginning in 2023, when companies in the Russell 1000 index have not provided any disclosure of individual or aggregate racial/ethnic minority demographic information, Glass Lewis will generally recommend voting against the chair of the nominating and/or governance committee. The previous policy applied to the S&P 500. As noted in last year's update, Glass Lewis expects companies to disclose the board’s current percentage of racial/ethnic diversity; (ii) whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity; (iii) 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 (aka “Rooney Rule”); and (iv) board skills disclosure.
Board Oversight of Environmental and Social Issues (E&S)
Effective January 1, 2023, Glass Lewis will generally recommend voting against the governance committee chair of a company in the Russell 1000 index that fails to provide explicit disclosure concerning the board’s role in overseeing E&S issues. The previous policy applied to the S&P 500. Furthermore, beginning in 2023 Glass Lewis will expand their tracking of board-level oversight of E&S issues to all companies within the Russell 3000 index.
Glass Lewis will generally recommend against a director who serves as an executive officer (other than executive chair) at a public company while serving on more than one external public company board; prior policy was more than two external boards. For a director that serves as executive chair of a public company, the limit is two external public company boards (new policy). The current policy for non-executive directors did not change (five public company boards).
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 2023 US Policy Guidelines.