Glass Lewis 2018 Proxy Voting Guidelines Updates - New and Updated Policies: Minor Impact in 2018Morrow Sodali
Glass Lewis has released 2018 updates to its Proxy Paper Guidelines for both management and shareholder proposals. Glass Lewis has added several new guidelines and updated or codified others. Of note, Glass Lewis has lowered the threshold of votes cast against the board’s recommendation that will trigger extra scrutiny by Glass Lewis on the board’s response to the vote. The threshold has been lowered from 25% to 20% of votes cast. Glass Lewis has also added guidelines on gender diversity regarding boards with no female representation, and virtual shareholder meetings. Overall, we expect relatively minor impact in 2018, with a greater impact in 2019 when certain guidelines could result in increased votes against boards.
NEW - Board Gender Diversity. A Factor in 2018, Possible Against Recommendations in 2019. Glass Lewis (GL) has added a new guideline regarding gender diversity on boards. The basis of the guideline is a March 2017 GL report on the impact that a lack of gender diversity can have on companies and shareholder value. In its March report, GL stated that some investors “believe [gender diversity] can lead to a more diverse workforce, better corporate governance practices and improved stakeholder relations, which, in turn, will result in better financial performance.” In 2018, for boards that have no female directors, GL will not issue an against recommendation “solely” on that basis, rather it will be “one of many considerations.” However, in 2019, no female directors on a board will result in GL “generally” recommending against the nominating committee chair and possibly other members of the nominating committee. In making its recommendation, GL will “carefully review” the company’s disclosure on its diversity considerations, its rationale and any disclosed plan to address the lack of diversity on the board.
NEW - Virtual Shareholder Meetings. Hybrid is the Way. GL notes that a relatively small but growing number of companies are holding meetings by virtual means only. As a result, GL has a new, bifurcated guideline on virtual meetings. While GL believes virtual meeting technology can complement a traditional, in-person meeting by increasing participation, it is concerned that a virtual-only meeting could stifle meaningful communication with management and the board. Therefore, in 2018 for companies that hold a virtual-only meeting, GL will look for “robust” disclosure in the proxy to assure shareholders will have the same “rights and opportunities to participate” as they would at an in-person meeting. In 2019, GL will “generally” (read most likely) recommend against members of the governance committee at companies that hold virtual-only meetings and do not provide such disclosure.
NEW - CEO Pay Ratio. No Impact on Vote Recommendations. GL has added a new guideline to address CEO pay ratio disclosure that is mandated by Dodd-Frank. For 2018 at least, GL will display the pay ratio as a data point in its reports, but it will not be a determinative factor in its voting recommendations. We suspect this will be a factor in the future.
NEW - Dual-Class Structures. No Surprise - GL is Opposed. GL states that it “believes dual-class voting structures are typically not in the best interests of common shareholders” and that it is in the best interest of common shareholders to have one vote per share. As a result, GL has added new guidelines on dual-class structures. Not surprisingly, GL will recommend a vote for recapitalization proposals to eliminate dual-class structures and against proposals to adopt a dual-class structure.
In addition, for companies that already have a dual-class structure, GL will analyze the voting by unaffiliated shareholders to determine if a majority of these holders supported a shareholder proposal or opposed a management proposal. In such a case, GL will make a determination as to whether the board has demonstrated an appropriate level of response.
Mirroring its guidelines on management proposals on this topic, GL will generally recommend in favor of shareholder proposals to eliminate the dual-class structure. In addition, it is expanding its considerations of the voting results of minority shareholders and will closely scrutinize votes cast by shareholders unaffiliated with a controlling entity. The voting results by minority shareholders could influence GL’s recommendation on resubmitted shareholder proposals.
Board Responsiveness - A New Bright Line on Votes Against Board Recommendations. GL has clarified its guidelines on board responsiveness and raised the bar by lowering the threshold. GL will now consider a 20% (down from 25%) vote against the recommendation of the board to be a bright line that will cause GL to undertake a “close examination” of the underlying issues and the boards response, particularly in the case of compensation and director election proposals. While a 20% against vote will not result in an automatic against vote on future proposals (e.g., say on pay, or directors), we suspect it will be a significant factor in the GL analysis.
Pay for Performance - When a “C” is OK. GL goes to great lengths in its amended pay-for-performance guideline to explain why a “C” grade from GL is not the same as the “C” you might have received in school. GL clarifies that a “C” does not signify a significant lapse, rather it is an indication that pay and performance rankings relative to peers is generally aligned. GL is saying don’t worry, a “C” is OK. GL goes on to clarify that a “B” indicates lower compensation relative to the market and to company performance and that an “A” indicates that the company is paying significantly less than peers while outperforming peers.
Director Commitments - A Clarification on Overboarding. GL has not changed, just clarified its policy on overboarding as it pertains to directors who serve in executive roles other than CEO (e.g., executive chair). Under current guidelines, GL will generally recommend against a director who serves as an executive officer of a public company while serving on more than two public company boards. In making its decision, GL considers a number of factors in determining whether such a director has sufficient time to devote to board duties. GL will now evaluate the specific duties and responsibilities of their executive role in addition the company’s disclosure on the director’s time commitment in determining whether an exemption to the GL policy is warranted.
Shareholder Proposal - Climate Change. Looking at TCFD Compliance. GL has expanded and codified its policy on climate change-related shareholder proposals. Similar to a recent change by ISS, GL is generally supportive of disclosure recommendations by the Task Force on Climate-related Financial Disclosure (TCFD), but will review proposals on a case-by-case basis taking into account multiple factors including the industry in which the company operates, the company’s current level of disclosure and that of its peers, oversight afforded to issues related to climate change, and whether companies in the industry have provided any disclosure aligned with TCFD.
Shareholder Proposal - Proxy Access. Updated Policy on “Fix It” Proposals. In response to an increase in the number of shareholder proposals requesting that companies amend existing proxy access proposals (commonly called “fix it” proposals), GL has elaborated on its policy. These proposals seek, for example, to allow for a larger number of shareholders in the nominating group, or an increase in the percentage of proxy access nominees that can be submitted. GL will review these proposals on a case-by-case basis. If the company’s existing proxy access provisions “reasonably conform with broad market practice”, GL is likely to recommend against the shareholder proposal. However, if GL finds the company’s proxy access provisions to be “unnecessarily restrictive”, GL is likely to support a “well-crafted” fix it proposal. ______________________
We will monitor how the new GL guidelines impact voting in 2018 and update clients to any significant developments.
In the meantime, please contact your Morrow Sodali representative if you have any questions or visit us at www.morrowsodali.com.