Companies preparing for their annual shareholder meetings will need to consider a variety of factors, including new Securities and Exchange Commission (SEC) requirements, guidance from Institutional Shareholder Services, Inc. (ISS) and Glass, Lewis & Co. (Glass Lewis), and activist shareholder concerns.

A. New Requirements for Proxy Statements and Form 10-Ks

In September 2017, the SEC issued an interpretive release and compliance and disclosure interpretations to assist companies in complying with the new pay ratio disclosure required by the Dodd-Frank Act and Item 402 of Regulation S-K. Under the new Regulation S-K requirements, proxy statements or Form 10-Ks filed in 2018 must generally disclose the following:

• the median of the annual total compensation of all of the company’s employees except for its CEO;
• the annual total compensation of the company’s CEO; and
• the ratio of these two amounts.

The SEC’s guidance provides companies with flexibility in calculating their pay ratios and in determining which workers must be included in the calculation. Among other things, companies may use any method to calculate pay ratios that is reasonable and that relies on reasonable estimates and assumptions, and may use the methods they would typically employ when determining which workers are employees whose pay must be disclosed.¹

B. ISS 2018 Proxy Season Updates

In November 2017, ISS, a proxy advisory firm, released updates to its US Proxy Voting Policies and Procedures for its voting recommendations for annual stockholders meetings occurring on or after February 1, 2018. New recommendations and policy clarifications include:

• Poison Pills: ISS will recommend that shareholders vote against/withhold from all board nominees if a company adopts a poison pill provision with a term over one year that was not adopted by shareholders, or if a board makes a material modification to an existing poison pill provision (such as lowering the trigger) without shareholder approval. Unlike in previous years, companies that adopted poison pill provisions prior to 2009 will no longer be exempt from this recommendation, and the recommendation will apply to both annually elected and classified boards. Note that poison pill provisions with a term of one year or less will be evaluated by ISS on a case-by-case basis.
• Say-on-Pay Frequency: ISS will determine vote recommendations on a case-by-case basis for Compensation Committee members of boards that implement advisory votes on executive compensation on a less frequent basis than shareholders approved.
• Climate Change: ISS will generally recommend that shareholders vote for proposals that would require a company to disclose information on the risks it faces due to climate change and how the company identifies, measures and manages those risks.
• Gender Pay Gap: ISS will evaluate shareholder proposals for a company’s pay data by gender on a case-by-case basis.
• Director Compensation: Beginning in 2019, a pattern of excessive non-employee director compensation lasting two or more consecutive years will trigger adverse voting recommendations on board members’ nominations.

Additional ISS changes for the 2018 proxy season include streamlining the methodology for calculating the Equity Plan Scorecard, highlighting companies that have no female directors, implementing a new step in the Financial Performance Assessment process, and adjusting its total shareholder returns calculation methodology.

C. Glass Lewis 2018 Proxy Season Updates

In December 2017, Glass Lewis, a proxy advisory firm, released updates to its US Policy Guidelines for its voting recommendations for annual stockholders meetings occurring on or after February 1, 2018. New recommendations and policy clarifications include:

• Dual-Class Share Structures: When evaluating a company’s governance structure, Glass Lewis considers dual-class structure as a negative feature. For IPOs and spin-offs, Glass Lewis will now include the presence of a dual-class structure as an additional factor when determining whether shareholder rights are being severely restricted indefinitely.
• Board Responsiveness: A board now generally has to respond when shareholder dissent to a proposal at an annual meeting exceeds 20% of the votes cast, as opposed to 25% in previous years. A board’s failure to respond will be taken into account by Glass Lewis in determining its voting recommendations on issues such as director nominations and say-on-pay proposals.
• Board Diversity: Glass Lewis will consider the gender diversity of a company’s board when evaluating the company’s oversight structures. Beginning in 2019, Glass Lewis will recommend voting against the nominating committee chair (and, in some cases, against other members of the nominating committee) of a board that has no female members.
• Virtual-Only Shareholder Meetings: For the 2018 season, companies holding virtual-only shareholder meetings should include disclosure in their proxy statements assuring shareholders that they will have the same rights and opportunities that would be afforded by an in-person meeting. Beginning in 2019, Glass Lewis will recommend voting against directors who are members of governance committees at companies without this disclosure.

Glass Lewis also clarified its pre-existing policies on directors with outside commitments, the display of CEO pay ratios in Glass Lewis’ “Proxy Papers,” Glass Lewis’ pay-for-performance grading model, and its company performance recommendations.

ISS and Glass Lewis have not changed their policies relating to proposals authorizing business development companies to sell shares of their common stock below net asset value. Both firms will recommend a “for” vote if such proposals meet certain requirements, such as expiring no more than a year after the proposal’s approval.

D. Activist Shareholder Considerations

Shareholder activism is expected to continue to be prevalent, particularly in areas surrounding environmental and social issues. The 2017 proxy season saw an increase in proposals related to climate change, board diversity (including, but not limited to, gender and tenure) and employee pay equity. Companies should expect similar trends in 2018. In addition, activist campaigns have increasingly called for a change in board members or management, with a focus on installing directors with specific sector experience.

In November 2017, the SEC’s Division of Corporation Finance issued Staff Legal Bulletin No. 14I (the Bulletin), providing guidance that may give companies increased flexibility in excluding shareholder proposals. Among other items, the Bulletin addressed Rule 14a-8(i)(7), the “ordinary business” exception, which permits a company to exclude a shareholder proposal that “deals with a matter relating to the company’s ordinary business operations,” and Rule 14a-8(i)(5), the “economic relevance” exception, which permits a company to exclude a shareholder proposal that is not economically significant to the company’s business, as described in the rule. The Bulletin indicates that the SEC may increasingly defer to the judgment of boards of directors in determining whether matters may be excluded under either rule if they provide the SEC with an analysis that is “well-reasoned and well-informed.”

¹ For more on the new pay ratio disclosure requirements and the SEC’s guidance, see Eversheds Sutherland’s legal alert, “Last call! SEC’s pay ratio rule effective for 2018 proxy statements,” published January 31, 2018 (available at https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/208255/Legal-Alert-Last-call-SECs-pay-ratio-rule-effective-for-2018-proxy-statements).

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