11/11/14

Securities Alert: ISS and Glass Lewis Issue 2015 Corporate Governance Policy Updates

Related Practices

Attorneys & Professionals

Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co., LLC (Glass Lewis) recently released updates to their respective proxy voting guidelines for 2015 (2015 Updates).  ISS’s 2015 Updates will be effective for shareholder meetings held on or after February 1, 2015 and Glass Lewis’s 2015 Updates will be effective for shareholder meetings held on or after January 1, 2015.  The key highlights of the 2015 Updates are summarized below. 

2015 Updates to ISS Proxy Voting Guidelines

Adoption of Bylaw or Charter Amendments without Shareholder Approval

ISS will now recommend that shareholders vote against or withhold votes from individual directors, committee members or the entire board if the board amends the company’s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders.  ISS will consider the following factors when evaluating such amendments:

Independent Chair Shareholder Proposals

ISS has added new governance, board leadership and performance factors to its existing policy regarding shareholder proposals that seek an independent chair of the board.  Under the updated policy, ISS will generally recommend that shareholders vote for independent chair proposals, subject to the following considerations:  

ISS expects to support more independent chair shareholder proposals under the updated policy than under its existing policy.

Shareholder Approval of Litigation-Related Bylaws

ISS will assess bylaw amendment proposals that impact the ability of shareholders to bring a suit against a company, including exclusive forum and fee-shifting provisions, on a case-by-case basis.  ISS will consider the following factors in its assessment:

Generally, ISS will recommend that shareholders vote against bylaws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits.

Equity Plan Scorecard

ISS has adopted a new Equity Plan Scorecard model, or EPSC, to evaluate equity incentive plan proposals. The total EPSC score will generally determine whether ISS recommends voting for or against the proposal. The new scorecard system considers a range of positive and negative factors, which fall into three broad categories (the EPSC pillars):

The weightings of the EPSC pillars will be keyed to each index. For S&P 500 and Russell 3000 companies, the EPSC pillars will be weighted as follows to calculate the total EPSC score: 45% plan cost, 35% grant practices and 20% plan features. ISS will then issue a recommendation based on the company’s total EPSC score.

ISS will generally recommend that shareholders vote against a plan proposal if the combination of the factors above indicates that the plan is not in shareholders’ interests, or if any of the following apply:

ISS expects to provide additional information regarding its EPSC model in December.

2015 Updates to Glass Lewis Proxy Voting Guidelines

Board Actions on Bylaws

Glass Lewis may recommend that shareholders vote against the chair of the governance committee, or the entire committee, if the board amends its bylaws for any of the following reasons:

Material Transactions with Directors

Glass Lewis clarified that, with respect to its $120,000 threshold for directors employed by a professional services firm where the company pays the firm, not the individual, for services, it may deem the transaction to be immaterial if the amount represents less than 1% of the firm’s revenues and the board provides a compelling rationale regarding why the director’s independence is not affected by the relationship.

Say-on-Pay

Glass Lewis has expanded its say-on-pay analysis to address additional “one-off” awards. Glass Lewis generally believes that companies should redesign their compensation programs rather than make additional awards if the existing incentive programs fail to provide adequate incentives to executives.  However, Glass Lewis now acknowledges that additional incentives may be appropriate in certain circumstances. In such circumstances, companies should (a) provide a thorough description of the awards, including an explanation of their necessity and why existing awards do not provide sufficient motivation, (b) tie such awards to future service and performance whenever possible and (c) describe if and how the regular compensation arrangements will be affected by the additional awards. In reviewing a company’s use of additional awards, Glass Lewis will review the terms and size of the grants in the context of the company’s overall incentive strategy and granting practices, as well as the current operating environment.

Glass Lewis has also made a change to its pay-for-performance model in instances where a company receives a failing grade under Glass Lewis’s pay-for-performance model. If a company receives a failing grade under its model, Glass Lewis is still likely to recommend that shareholders vote against the say-on-pay proposal. However, other qualitative factors, such as an effective overall incentive structure, the relevance of selected performance metrics, significant forthcoming enhancements or reasonable long-term payout levels, may lead Glass Lewis to issue a positive vote recommendation even when there is a disconnect between pay and performance.

Litigation-Related Bylaws

Glass Lewis will now recommend voting against or withholding votes from members of a company’s governance committee if the company adopts a fee-shifting bylaw without shareholder approval. Glass Lewis also opposes mandatory arbitration bylaws.

Board Leadership Structure

Glass Lewis will now recommend voting against or withholding votes from the chair of a company’s governance committee if the company does not have an independent chair or an independent lead director.