Glass Lewis recently released its 2024 policy guidelines, with new amendments and clarifications on executive compensation, board diversity, oversight of environmental and social areas, and board responsiveness. This article discusses key executive compensation and governance updates.
Executive Compensation-Related Updates
Non-GAAP to GAAP Reconciliation Disclosure
Glass Lewis expanded the discussion of its approach to the use of non-GAAP metrics in incentive programs to emphasize the need for thorough and transparent disclosure in the proxy statement. The disclosure will assist shareholders in reconciling the difference between non-GAAP results used for incentive payout determinations and reported GAAP results. In situations where significant adjustments were applied and materially impacted incentive pay outcomes, the lack of such disclosure will affect Glass Lewis’ assessment of the quality of executive pay disclosure and may be a factor in the say-on-pay recommendation.
SEC Pay-Versus-Performance Disclosure
Glass Lewis revised the discussion of the pay-for-performance analysis to note that the pay-versus-performance disclosure mandated by the SEC may be used as part of the supplemental quantitative assessments supporting Glass Lewis’ primary pay-for-performance grade.
Glass Lewis updated their views on clawback provisions. In addition to meeting the SEC’s requirements, in Glass Lewis’ view effective clawback policies should provide companies with the ability to recoup incentive compensation (whether time-based or performance-based) from an executive or former executive when there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure, or a material operational failure. Such ability to recoup should be provided regardless of whether the employment of the executive officer was terminated with or without cause.
In situations where the company determines not to follow through with the recovery, Glass Lewis will assess the appropriateness of such determination for each case. In these circumstances, rationale should be provided if the company determines to refrain from recouping compensation as well as disclosure of alternative measures that are instead pursued, such as the exercise of negative discretion on future payments. The absence of enhanced disclosure may impact Glass Lewis’ assessment of the quality of disclosure and, in turn, may play a role in Glass Lewis’ overall say-on-pay recommendation.
Executive Ownership Guidelines
Glass Lewis added a discussion to formally outline the approach to executive ownership guidelines. In the CD&A, companies should clearly disclose their executive ownership requirements and how the various types of outstanding equity awards are counted or excluded from the ownership level calculation. In determining whether executives have met the requirements or not, the inclusion of unearned performance-based full value awards and/or unexercised stock options without rationale may be viewed as problematic.
Proposals for Equity Awards for Shareholders
Glass Lewis added new discussion of provisions that require a non-vote, or vote of abstention, from a shareholder that owns significant equity in the company if that same shareholder is also the recipient of the proposed grant. These provisions help to address potential conflict of interest issues and provide shareholders that do not hold a significant percentage of company stock with more meaningful say over the proposal. The inclusion of such provisions will be viewed positively by Glass Lewis, especially when a vote from the recipient of the proposed grant would materially influence the passage of the proposal.
Company Responsiveness (for Say-on-Pay Analysis)
Glass Lewis clarified that in calculating whether a say-on-pay proposal has opposition of at least 20%, both AGAINST and ABSTAIN votes will be counted as opposing votes.
Board Governance-Related Highlights
Underrepresented Community Diversity
Glass Lewis revised the definition of “underrepresented community director” to replace the reference to an individual who self-identifies as gay, lesbian, bisexual, or transgender with an individual who self-identifies as a member of the LGBTQIA+ community.
Board Oversight of Environmental and Social Issues (E&S)
Glass Lewis updated the discussion of board oversight of E&S issues. Glass Lewis believes that these responsibilities should be formally designated and codified in the appropriate committee charters or governing documents. When evaluating the board’s role in overseeing E&S issues, such as climate change, human capital management, diversity, stakeholder relations and social risk, Glass Lewis will examine a company’s committee charters and governing documents to determine if the company has codified a meaningful level of oversight of and accountability for a company’s material environmental and social impacts.
For companies in the Russell 3000 and in instances where material oversight concerns are identified, Glass Lewis will review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of environmental and/or social issues. 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 these issues.
Glass Lewis has removed a reference when 20% or more of shareholders vote contrary to management for a shareholder proposal. Glass Lewis will no longer expect Boards to be responsive to shareholders and engage on the issue. In addition, Glass Lewis clarified that the calculation of opposition for all proposals includes votes cast as either AGAINST and/or ABSTAIN.
Board Accountability for Climate-Related Issues
Glass Lewis has updated how their policy on board accountability for climate-related issues is applied. In last year’s update, the policy was applied to the largest, most significant emitters; however beginning in 2024, Glass Lewis will apply this policy to S&P 500 index companies operating in industries where the Sustainability Accounting Standards Board (SASB) has determined that the companies’ GHG emissions represent a financially material risk, and companies where Glass Lewis believes emissions or climate impacts, or stakeholder scrutiny thereof, represent an outsized, financially material risk.
Glass Lewis will evaluate whether such companies have produced disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Glass Lewis also clarified that they will also evaluate whether these companies have disclosed clearly defined board-level oversight responsibilities for climate-related issues. In instances where these disclosures are absent or significantly lacking, they may recommend voting against responsible directors.
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 2024 US Policy Guidelines.
Each year, ISS and Glass Lewis update their benchmark policy proxy voting guidelines. ISS has annually surveyed institutional investors, public companies and service providers (e.g., law firms, consultants) for their views on corporate governance best practices to support the process of updating proxy voting guidelines. This year, Glass Lewis joined in with its first policy survey. The results of the surveys are used by the proxy advisory firms to update their benchmark policy guidelines but do not necessarily dictate what the proxy advisory firms ultimately adopt.
Over the last week, ISS and Glass Lewis published the results of their respective 2023 benchmark policy surveys. Consistent with historical results, the findings of the surveys generally show a contrast between investor responses and non-investor responses (primarily, public companies and service providers). The ISS survey covered only one compensation-related issue about disclosure of non-GAAP metrics used in incentive plans, whereas Glass Lewis conducted a broad survey soliciting views on many compensation topics. Final updates to benchmark policies are typically released in November and December. ISS provides a comment period on proposed changes before final policy guidelines are adopted for the year.
Key findings on executive compensation and board-related matters from the policy surveys are summarized below:
1. Executive Incentive Compensation Plans
ISS asked respondents whether companies should disclose line-item reconciliation of non-GAAP adjustments to metrics used in incentive plans.
60% of investors replied that line-item reconciliation of non-GAAP metrics should always be disclosed, and 35% replied the disclosure is only needed when adjustments significantly impact payouts, or when non-GAAP results vary significantly from GAAP. Non-investor respondents were not as strongly supported, though more than 50% replied that non-GAAP reconciliation should be provided at least some of the time.
Glass Lewis asked about the extent to which companies should incorporate ESG metrics in executive compensation plans.
43% of investors and 37% of non-investors believe all companies should incorporate ESG metrics in compensation plans. 37% of investors and 54% of non-investors believe the inclusion of ESG metrics in executive incentive plans should be decided on an individual company basis.
Glass Lewis asked if vote recommendations should be modified if companies do not provide a reconciliation of non-GAAP metrics used in incentive plans when incentive outcomes are materially impacted by using non-GAAP metrics.
81% of investors and 52% of non-investors believe that a lack of disclosure of reconciliation from GAAP to non-GAAP metrics in the proxy statement should be a factor in Say on Pay vote recommendations. 54% of investors and 23% of non-investors believe it should be a strong factor.
2. Pay for Performance Alignment
Glass Lewis polled respondents on the importance of various relationships used in assessing executive pay for performance alignment.
Financial results excluding TSR received the most support as a “Very Important” factor for both investors and non-investors in evaluating the relationship between pay and performance. In response to the new SEC Pay versus Performance disclosure, 81% of investors view the change in value of outstanding CEO pay compared to TSR performance as important whereas only 58% of non-investors viewed the same as important. Non-investors were most likely to identify this relationship as not a factor at all in assessing the pay for performance relationship.
Glass Lewis polled respondents on the importance of certain features in mitigating concerns with executive pay quantum.
Investors and non-investors replied somewhat evenly across each feature in terms of their importance. Disclosure of established payout limits for variable incentives, disclosure of actual pay outcomes for short- and long-term incentives, disclosure of all targets for performance-based incentives, vesting period of at least three years for long-term incentives and weighting CEO pay more heavily towards equity than cash were all viewed as important to a majority of both investors and non-investors.
Glass Lewis polled respondents for their views on termination benefits when an executive is terminated without cause.
On average, 55% of investors and 37% of non-investors are concerned by termination benefits in cases of termination without cause. Specifically, continued and accelerated vesting of equity awards was most commonly concerning to investors and non-investors. This includes performance awards allowed to continue to vest based on performance achieved after termination (without pro-ration) and accelerated vesting of outstanding time-based awards (without pro-ration). Most investors and non-investors were not concerned with cash severance payments in connection with termination without cause.
Glass Lewis polled respondents on whether clawbacks should be applied under various scenarios.
Investors are far more likely than non-investors to support the application of clawbacks, particularly in instances of a company’s material operational failure, risk management failure and reputational failure. There is more consensus among investors and non-investors that clawback policies should be applied to instances of material misconduct and incorrect payout due to miscalculation. Only 4% of investors and 14% of non-investors believe that clawbacks should only apply in cases of restatement, which shows that most respondents support the use of clawbacks in at least some scenarios beyond those covered by the new SEC regulation on clawbacks.
5. Executive Shareholding Requirements
Glass Lewis polled participants on the importance of certain features used in assessing a company’s executive share ownership features.
Investors were more likely to view post-vesting and post-employment holding requirements as important (66% and 53%, respectively) than non-investors (39% and 30%, respectively). Investors and non-investors generally agreed that the presence and size of ownership requirements is important. 79% of investors and 80% of non-investors view the presence of any ownership requirement as important, and 78% of investors and 79% of non-investors view the size of the ownership requirement as important.
6. Board of Directors
ISS asked whether a director should be classified as non-independent if an immediate family members provides professional services to the company in excess of a certain amount (currently $10,000).
51% of investors view this policy as appropriate, compared to 27% of non-investors. 36% of investors and 47% of non-investors generally support a policy but think that the thresholds should be increased or the policy should apply differently to relatives who do not share a household with the director.
Glass Lewis asked whether a mandatory retirement policy is a reasonable method to promote board refreshment.
42% of investors and 41% of non-investors replied that yes, mandatory retirement policies are a reasonable method to ensure board refreshment. 31% of investors and 41% of non-investors view such policies as posing greater disadvantages than advantages.
Glass Lewis asked whether boards should require a “cooling-off period” for former executives that join the board before the former executive can be viewed as independent.
27% of investors and 51% of non-investors do not view cooling-off periods as necessary. Among supporters of a cooling-off period, most support a period of three to five years.
Glass Lewis asked whether companies that use a plurality vote standard for director elections (thereby virtually guaranteeing a director’s election in uncontested elections) should be subject to an adverse recommendation.
42% of investors believe at least one adverse recommendation is warranted for companies employing a plurality standard for director elections, and 32% of non-investors believe same. The most common view among investors was that a nomination and governance committee member should be held accountable via an adverse vote recommendation (20%) with all board members being held accountable the second most common view (17% of both investors and non-investors).
Additionally, most investors and non-investors believe that resignation policies (that require directors who did not receive majority support to submit a letter of resignation) mitigate concerns about plurality voting, but many qualified that these policies are undermined by boards’ over-reliance on discretion to reject resignations.
Glass Lewis polled participants on their views of the maximum number of public company boards a non-executive should serve on simultaneously.
89% of investors and 92% of non-investors responded that five or fewer boards is reasonable. The most common response among investors was three boards, and among non-investors it was four boards.
On the follow-up question, only 30% of investors and 39% of non-investors think that directors at companies with a robust director commitments policy should receive leniency on their board commitment levels.
The vast majority of respondents think that directors’ leadership roles (e.g., board chair, committee chair) should be considered if the director serves on multiple boards when assessing their total board commitment level.
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.
ISS recently issued Frequently Asked Questions (FAQs) related to COVID-19 pay decisions. The updated FAQs explain how ISS will approach COVID-related compensation issues for the 2022 proxy season. This article focuses on changes since last year’s guidance and we also note where the FAQs did not change. CAP’s 2020 summary can be found here.
Similar to the guidance provided last year, ISS’ qualitative evaluation will take into consideration the impact on company operations as a result of the pandemic and an elevated concern from the quantitative screen will continue to result in a more in-depth qualitative review of the company’s pay programs and practices. ISS also highlighted the fact that investors believe that in 2021 boards were in a position to return to traditional pre-pandemic incentive structures and want a strong link to performance.
COVID-Related Changes to Annual Incentive Programs
Given that 2022 will be the third proxy season since the advent of the COVID-19 pandemic, ISS states that the “surprise element of the pandemic in early 2020 is generally no longer applicable.” As such, the presence of mid-year changes to metrics, performance targets, and/or performance measures, or programs that rely heavily on discretion, will be viewed negatively by ISS, especially if the company displays a quantitative pay for performance misalignment. ISS will allow for lower pre-set targets relative to the prior year as well as moderate increases to the weighting of subjective criteria if the company in question has “continued to incur severe economic impacts and uncertainties as a result of the pandemic in 2021.”
ISS emphasizes that a lower performance target should be accompanied by disclosure explaining the board’s rationale and how the board determined payout possibilities, particularly if the payout opportunities are not commensurately reduced.
COVID-Related Changes to Long-Term Incentive Programs
ISS’ guidance has not changed since last year. Adjustments to in-progress long-term incentive programs will be viewed negatively, particularly if the company has been flagged for having a quantitative pay for performance misalignment. If companies continue to incur negative impacts over a long-term period, modest alterations to going-forward awards may be considered reasonable by ISS. More drastic changes, such as making long-term equity predominantly time-based or instituting shorter performance periods, will continue to be viewed negatively. Any changes to the program should be explained clearly by the company.
Changes to Pay Program Beyond the Year in Review
If a company has made significant adjustments to its pay program that ISS would typically view as concerning, a clear statement that the company intends to return to a robust performance-based program going forward may be viewed as a mitigating factor by ISS. The extent to which ISS may support the changes depends on the detail of disclosure and extent to which the changes are meaningfully positive.
COVID-Related Retention or One-Time Awards
ISS’ guidance has not changed since last year. In the event of a one-time award, a rationale for the award should be clearly disclosed, as well as a description on how the award is in shareholders’ interests. Companies should avoid boilerplate language regarding “retention concerns.” Any such award should be reasonable in magnitude and an isolated practice. Vesting conditions to any such award should be significantly performance-based and long-term. The award should have guardrails, such as limitations on termination-related vesting, to avoid windfall scenarios.
Well-structured retention or other one-time awards may be appropriate in limited circumstances, but investors do not expect companies to grant such awards as a replacement for forfeited performance-based awards. To the extent that this is the case, companies should explain the specific issues driving the decision to grant the awards and how the awards further investors’ interests, as well as how such awards do not merely insulate executives from lower pay.
ISS also released information about its responsiveness policy considering COVID-19. When a company receives less than 70 percent support on a say-on-pay proposal, ISS’ responsiveness policy reviews three factors:
- The disclosure of the board’s shareholder engagement efforts (no change);
- The disclosure of the specific feedback received from dissenting investors (no change); and
- Any actions or changes made to pay programs and practices to address investors’ concerns.
The guidance notes that the expectations regarding the first two factors will remain consistent with prior years. ISS’ policy with respect to the third factor will return to its pre-pandemic application. The company must demonstrate that it has responded to negative shareholder feedback, including feedback in response to one-time COVID pay decisions, in which case the board could demonstrate responsiveness by committing not to repeat the action viewed as problematic by the investors. The previous ISS guidance for the third bullet noted above had stated, “With respect to the third factor, if a company is unable to implement changes due to the pandemic, the proxy statement should disclose specifically how the pandemic has impeded the company’s ability to address shareholders’ concerns. If pay program changes are delayed, or do not necessarily fully address shareholder feedback, the company should disclose a longer-term plan on how it intends to address investors’ concerns.”
This article highlights updates to ISS’ COVID-related compensation FAQs. The ISS document can be found here.
ISS recently published its 2022 policy updates, which will go into effect for annual meetings held on or after February 1, 2022 (and, in some instances, February 1, 2023). This article discusses key updates made to ISS’ compensation and Environmental, Social and Governance (ESG) voting policies.
Executive Compensation-Related Update
For stock plan valuations, ISS has changed its burn rate calculation, which will be in effect for meetings on or after February 1, 2023. The burn rate will be referred to as the “Value-Adjusted Burn Rate” and will be calculated as follows:
The calculation currently in effect is:
Note: The volatility multiplier is used to provide a more equivalent valuation between stock options and full-value shares and is based on a company’s historical stock price volatility.
The Value-Adjusted Burn Rate benchmark will be the greater of: (1) an industry-specific threshold based on three-year burn rate within the company’s GICS group (broken down by S&P 500, Russell 3000 excluding the S&P 500, and non-Russell 3000) and (2) a minimum threshold for each of the three segmented groups noted above. The change in the burn rate benchmark year-over-year will be limited to a predetermined range above or below the prior year’s burn rate benchmark.
The current burn rate benchmarks are calculated as the greater of: (1) the mean plus one standard deviation of the company’s GICS group (broken down by S&P 500, Russell 3000 excluding the S&P 500, and non-Russell 3000) and (2) two percent of weighted average common shares outstanding. Year-over-year benchmark changes are limited to a maximum of two percentage points plus or minus the prior year’s benchmark.
Per ISS, the new Value-Adjusted Burn Rate calculation will more accurately measure the value of recently granted equity awards, as the methodology is based on the actual stock price for full-value awards and the Black-Scholes value for stock options. The current calculation uses a multiplier based on three-year stock price volatility and groups companies into broad categories based on six volatility-based multiplier buckets.
Details on the new Value-Adjusted Burn Rate calculations have not been released to date.
Board Gender Diversity
ISS has made certain updates to its policies on board gender diversity. ISS already recommends a vote against or withhold from the chair of the nominating committee in instances where there are no women on the board for companies in the Russell 3000 and S&P 1500, considering it mitigating if there was a woman at the previous meeting and the board has made a firm commitment to have a woman on the board within a year. This same policy will apply to all companies, not just in the aforementioned indices, beginning February 1, 2023.
In its policy update last year, ISS indicated that it would recommend a vote against or withhold from the chair of the nominating committee if the board had no apparently racially or ethnically diverse members (with the same exceptions with respect to gender diversity noted above) beginning on February 1, 2022. As such, ISS will now actively begin to issue vote recommendations related to the racial/ethnic diversity of boards.
Shareholder Proposals on Racial Equity and/or Civil Rights Audits
ISS has indicated that it will take a case-by-case approach to shareholder-proposed resolutions on racial equity and/or civil rights audits, in which it will consider: the company’s current process for addressing racial inequity; the company’s racial justice efforts and track record in recent years; the company’s engagement with “impacted communities, stakeholders, and civil rights experts”; whether the company has been the subject of recent controversy, litigation, or regulation related to inequity or discrimination; and whether the company is aligned with market practice on these issues.
For companies that are significant greenhouse gas (GHG) emitters, through operations or value chain, ISS has indicated that it will generally recommend a vote against or withhold from the chair of the responsible committee overseeing GHG emissions if the company has not taken what ISS considers to be the minimum steps toward understanding, assessing, or mitigating emission-related risks. These steps include a detailed disclosure of climate-related risks and appropriate GHG emissions reduction targets.
In 2022, this policy will only apply to the companies appearing on the Climate Action 100+ Focus Group list. ISS states that its expectations for the minimum criteria noted above will increase over time.
This article highlights changes to ISS’ policies and is not intended to be exhaustive. For information related to ISS voting policies, please visit ISS Proxy Voting Guidelines Updates for 2022.
We expect further changes to ISS compensation-related policies when the FAQs are released at the end of this month.
Glass Lewis recently released its 2022 policy guidelines, with new amendments on compensation, board diversity, and environmental and social areas. The key changes for 2022 focus on diversity and SPAC governance. This article discusses key compensation and Environmental, Social and Governance (ESG) updates.
Executive Compensation-Related Updates
Linking Executive Pay to Environmental and Social Criteria
Glass Lewis does not maintain a policy on the inclusion of environmental and social (E&S) metrics in a company’s short- or long-term incentive program. However, if a company includes E&S metrics in its variable incentive program, Glass Lewis expects robust disclosure on the metrics selected, the rigor of performance targets, and the determination of corresponding payout opportunities. For qualitative E&S metrics, it expects the company to provide shareholders with a thorough understanding of how these metrics will be or were assessed.
Short- and Long-Term Incentives
In 2021, Glass Lewis codified additional factors that will be considered when evaluating a company’s short- and long-term incentive plan. These factors included clearly disclosed justifications to accompany any significant changes to a company’s incentive plan and inappropriate performance-based award allocation. For 2022, Glass Lewis reaffirms these expectations with the added clarification that adjustments to GAAP financial results will be considered in its assessment of the incentive’s effectiveness at tying executive pay to performance for both short- and long-term incentives.
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. This year, Glass Lewis specified that it will continue to examine the quantum of the award on an annualized basis for the full vesting period of the awards. It will also consider the impact of the overall size of awards on dilution of shareholder wealth.
Board Gender Diversity
Glass Lewis expanded its policy on board gender diversity. Glass Lewis’ current vote recommendation is based on the requirement of having at least one female board member and it will note as a concern boards with fewer than two female directors. As noted in last year’s update, beginning in 2022, it will generally recommend against the chair of the nominating committee when there are fewer than two gender diverse directors at Russell 3000 companies and the entire nominating committee when there are no gender diverse directors. Companies outside the Russell 3000 index or that have boards with six or fewer total directors will continue to be held to the 2021 policy of one gender diverse director at a minimum.
Beginning in 2023, Glass Lewis will transition from a fixed numerical approach to a percentage-based approach. It will generally recommend against the nominating chair when the board is not at least 30 percent gender diverse at Russell 3000 companies. 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.
Glass Lewis replaced references in its guidelines to female directors with “gender diverse directors”, defined as women and directors who identify with a gender other than male or female.
State Laws on Gender Diversity and Underrepresented Community Diversity
In 2021, Glass Lewis began making recommendations in accordance with board composition requirements set forth in applicable state laws in addition to its standard policy on board diversity. In 2022, Glass Lewis expanded its discussion into two sections covering (i) state laws on gender diversity and (ii) state laws on underrepresented community diversity.
On gender diversity, in addition to its standard policy on board diversity, Glass Lewis will recommend in accordance with applicable state laws mandating board composition requirements. It will generally refrain from recommending against directors when applicable state laws do not mandate board composition requirements, are non-binding, or solely impose disclosure or reporting requirements. On underrepresented community diversity, Glass Lewis recognizes that states have also begun to encourage board diversity beyond gender through legislation. It will generally recommend in line with applicable state laws mandating board composition requirements.
Stock Exchange Diversity Disclosure Requirements
A new section outlines Glass Lewis’ approach to a recent disclosure rule adopted by the Nasdaq stock exchange. Beginning the later of (i) August 8, 2022 or (ii) the date the company files its proxy statement for its 2022 annual meeting, companies listed on the Nasdaq stock exchange will be required to disclose certain board diversity statistics annually in a standardized format in the proxy statement or on the company’s website. Glass Lewis will recommend against the chair of the governance committee when the required disclosure has not been provided.
Disclosure of Director Diversity and Skills
Glass Lewis began assessing the quality of disclosure on the mix of diverse attributes and skills of directors in company proxy statements in 2021. New in 2022, it may recommend against the chair of the nominating and/or governance committee of S&P 500 companies with particularly poor disclosure. Beginning in 2023, it will generally recommend against the chair of the nominating and/or governance committee for companies in the S&P 500 index that have not provided any disclosure of individual or aggregate racial/ethnic minority demographic information.
Environmental, Social and Governance-Related Updates
Overall Approach to Environmental, Social and Governance (ESG)
Glass Lewis has expanded its discussion of ESG initiatives in a new section titled Glass Lewis’ Overall Approach to ESG. Here it provides additional details of considerations when evaluating these topics. To summarize, Glass Lewis evaluates all E&S issues through the lens of long-term shareholder value. It believes that companies should be considering material environmental and social factors in all aspects of their operations and that companies should provide shareholders with disclosures that allow them to understand how these factors are being considered and how attendant risks are being mitigated. Glass Lewis’ comprehensive review of its policies on ESG is additionally published in its Proxy Paper Guidelines for Environmental, Social & Governance Initiatives, available here.
Environmental and Social Risk Oversight
Glass Lewis currently notes as a concern when boards of S&P 500 companies do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. It has reaffirmed that in 2022 it will generally recommend voting against the governance chair of such companies if they fail to provide explicit disclosure concerning the board’s role in overseeing these issues. Additionally, in 2022 Glass Lewis will begin noting as a concern when boards of Russell 1000 companies do not provide clear disclosure concerning the board-level oversight afforded to E&S issues. It continues to believe that while it is important that these issues are overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, companies should determine the best structure for this oversight.
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 2022 US Policy Guidelines.
Institutional Shareholder Services (ISS) released on October 1st the results of its annual Global Benchmark Policy survey and its new climate survey. The surveys are part of ISS’ annual policy development process. ISS will release the final policy updates by the end of the year, to be adopted for shareholder meetings during the 2022 proxy season. This CAP alert examines key findings from the 2021 Global Benchmark Policy Survey that foreshadow shareholder expectations in 2022. Overall, the survey results align with recent trends of increased shareholder interest in environmental, social, and governance (ESG) issues.
Overview of the Survey
The global benchmark policy survey covers a wide array of issues including executive compensation, board meeting practices, and governance provisions. The survey received 409 responses, of which 39% were from investors and investor-affiliated organizations, 60% from companies or corporate-affiliated organizations (“non-investors”), and the remaining 1% from non-profit and academic organizations.
ESG Performance Metrics in Executive Compensation
The significant majority of respondents view the inclusion of ESG metrics as an appropriate way to incentivize executives. Investors and non-investors differ, however, on the necessity of measurable ESG metrics. Most investors maintain that ESG metrics in compensation programs must be specific and measurable, and their associated targets communicated transparently. Among non-investors, the most popular position is that even ESG-related metrics that are non-financially measurable can effectively incentivize positive outcomes that may be important to the company. Investors and non-investors favoring the inclusion of ESG metrics generally agreed that both short-term and long-term incentives can be appropriate depending on the circumstances.
Racial Equity Audits
New in 2021, several companies received shareholder proposals to conduct an independent audit for racial bias both internally within the company and externally through its business practices. Investors are split between those who support an independent racial equity audit for most companies, regardless of the corporate programs the company might have in place to address racial equity and those who favor commissioning an audit on a case-by-case basis. Most non-investors agree with the latter position. Among those respondents, the prevailing factor that would require a company to commission an audit is involvement in significant racial and/or ethnic diversity-related controversies followed by the company’s lack of initiatives at enhancing workforce diversity and inclusion. For investors, the prevailing factor that would require an audit is also the company’s involvement in significant diversity-related controversy, but the second most popular factor is the company’s lack of detailed workforce diversity statistics such as EEO-1 type data.
Long-Term Perspective on Performance
CEO pay quantum has received increased attention over the past decade. One of ISS’ three quantitative pay-for-performance tests evaluates one-year CEO pay quantum in the multiple of the median test. The survey asked respondents whether they would find a long-term perspective (such as a three-year horizon) helpful. The majority of both investors and non-investors view the long-term perspective to be relevant and helpful.
Mid-Cycle Long-Term Incentive Plan (LTIP) Changes
For the 2021 proxy season, ISS viewed mid-cycle changes to long-term incentive awards as a problematic response to the pandemic, given that many investors consider that long-term incentives should not be adjusted based on short-term market disruptions. The survey asked whether mid-cycle changes to long-term incentive programs for companies incurring long-term negative impacts should be considered problematic. Investors were divided on the topic. 53% responded against the adjustment of long-term incentives based on short-term market disruptions while 40% believed adjustments may be reasonable.
Responses from the survey indicates that investors favor more extensive disclosures on ESG issues and measuring compensation against long-term performance. Survey responses typically provide insight into future ISS policy direction. ISS will release its draft policies for public comment later this month, before finalizing them in December for meetings starting on February 1, 2022.
For full detail related to ISS Annual Global Survey results, please visit the complete published report.