The proxy advisory firms Institutional Shareholder Services (“ISS”) and Glass Lewis have revisited aspects of their voting guidelines and policies given circumstances arising from the COVID-19 pandemic, and they have indicated that they will apply their revised approach in formulating voting recommendations for proposals to be considered at upcoming annual meetings.

The ISS Approach to COVID-19

ISS acknowledges that “[t]he COVID-19 pandemic is presenting unprecedented challenges not only to individual health, communities, jobs, businesses and economies, but also specifically to public companies and the shareholders that invest in them.”[1] As a result, ISS recognizes that it needs to apply ISS Benchmark and Specialty Proxy Voting policies during the 2020 annual meeting season with understanding and flexibility. ISS research teams will use the “ability to exercise appropriate discretion and use case-by-case analysis in response to company-specific, sector specific and market-specific facts and circumstances.” In addition, ISS has made a number of adjustments to its approach for 2020.

Meeting Postponements

ISS notes that there have already been widespread meeting postponements in markets such as Asia and Europe. ISS notes that “it will be positively noted when companies and boards use webcasts, conference calls and other mediums of electronic communications to engage with their shareholders and investors, even if meetings have necessarily been postponed.”

Virtual-Only Meetings

In light of the risks created by the pandemic and the need for social distancing, ISS recognizes that “virtual-only” annual meetings “may be both necessary and desirable in the current situation.” ISS does not have a policy to recommend votes against U.S. companies who hold “virtual-only” meetings, and there will be no change in that approach in 2020. ISS notes that if boards decide to hold “virtual-only” meetings, ISS encourages them to disclose clearly the reason for their decision and to strive to provide shareholders with a meaningful opportunity (subject to local laws) to participate as fully as possible, including being able to ask questions of directors and senior management and to engage in dialogue. Boards are also encouraged to commit to return to in-person or “hybrid” meetings (or to put that matter to shareholders to decide) as soon as practicable.

Shareholder Rights Plans and Other Defensive Measures

Many companies are considering adopting shareholder rights plans (also referred to as “poison pills”) or other defensive measures given significantly depressed stock prices. ISS believes that its approach “is already appropriately flexible to take account for the adoption of poison pills in the face of genuine, short-term potential threat situations such as during the current pandemic.” For shareholder rights plans with a duration of less than a year, ISS policy is to consider the situation on a case-by-case basis, taking into account the disclosed rationale for adopting the shareholder rights plan and other relevant factors, such as a commitment to put any future renewal of the pill to a shareholder vote. ISS will therefore continue to take a case-by-case approach, examining whether directors appear to “have sought to appropriately protect shareholders from abusive bidders without inappropriately entrenching the existing board and management team.” ISS will generally consider both the board’s explanation for its adoption of a shareholder rights plan, including any imminent threats, and the specific provisions, such as the triggers, terms, qualified offer provisions and waivers for passive investors. ISS notes that a severe stock price decline as a result of the COVID-19 pandemic “is likely to be considered valid justification in most cases for adopting a pill of less than one year in duration; however, boards should provide detailed disclosure regarding their choice of duration, or on any decisions to delay or avoid putting plans to a shareholder vote beyond that period.” ISS will continue to closely assess the triggers for such plans within the context of the rationale provided and the length of the plan adopted, among other factors.

Director Attendance

ISS notes that many directors may decide to not attend in-person shareholder meetings or board meetings out of concerns for health and safety. ISS acknowledges that in the United States, SEC-imposed disclosure rules about director attendance at meetings counts electronic participation (by telephone or otherwise) as full participation in board and committee meetings. ISS indicates that “[w]hile disclosures related to directors’ attendance records should be sensitive to privacy concerns with respect to an individual director’s health, they should provide shareholders with adequate information to allow them to make informed judgments and considered voting decisions if relevant about directors’ attendances and any absences from board and committee meetings.”

Changes to the Board of Directors or Senior Management

ISS believes that its existing policies provide sufficient discretion and flexibility in applying guidelines related to directors’ independence, potential overboarding, board diversity and other attributes. ISS indicates that “if boards need to fill vacancies due to the disability or incapacity of a director or need to urgently add critical expertise to their ranks to address concerns created by the pandemic, appropriate case-by-case consideration will be given, assessing any explanation provided by the company regarding the changes to the boardroom roster.” ISS indicates that its policies provide flexibility in cases where board members fill senior executive roles on an interim basis, such as due to disability or incapacity. ISS “will adjust the application of our policies as appropriate for the exceptional circumstances of the current pandemic.”

Change in Compensation Metrics and Shifts in Goals or Targets

ISS expects many boards to announce “plans to materially change the performance metrics, goals or targets used in their short-term compensation plans in response to the drop in the markets and the possible recession that many economists now predict in the wake of the pandemic.” While these decisions will be analyzed in 2021, ISS encourages boards “to provide contemporaneous disclosure to shareholders of their rationales for making such changes.” ISS believes such contemporaneous disclosures “will provide shareholders with greater insights now and next year into the board’s rationale and circumstances when the changes are made.”

With respect to long-term compensation plans, ISS voting policies generally do not favor midstream changes to awards that cover multi-year periods. ISS plans to evaluate any “in-flight changes” made to long-term awards on a case-by-case basis “to determine if directors exercised appropriate discretion, and provided adequate explanation to shareholders of the rationale for changes.” ISS also notes that it is possible that some boards “may consider altering the structures of their long-term plans to take the new economic environment into consideration.” ISS indicates that it will assess such structural changes under its existing policy framework.

Option Repricing

Noting that it is possible that some companies may seek to reprice “out-of-the-money” option awards, ISS reminds companies that if repricing actions take place without shareholder approval, ISS will consider such actions under the board accountability provisions of its voting policy. If shareholder approval of repricing actions is sought at 2020 annual meetings, ISS will apply its existing case-by-case policy approach. In this regard, ISS will generally recommend against any repricing that occurs within one year of a precipitous drop in the company’s stock price, as well as whether:

• the design is shareholder value neutral;
• surrendered options are not added back to the plan reserve;
• replacement awards do not vest immediately; and
• executive officers and directors are excluded from the repricing.

Dividends

In light of the impact of COVID-19, ISS “will support broad discretion for boards that seek to set payout ratios that may fall below historic levels or customary market practice.”

Share Repurchases

ISS will, in the absence of barring regulation or serious concerns related to the company, generally continue to recommend in favor of repurchase authorities within customary limits; however, the board’s actions related to repurchases will be reviewed in 2021 “to consider if the directors managed risks in a responsible fashion for any repurchases undertaken under the authority.”

Capital Raising

ISS voting policies generally provide for “case-by-case assessments of requests to increase authorized common or preferred stock, share issuances, private placements and other related proposals, subject only to any market-specific rules or guidance.” The existing policy framework “will be applied to general authorization and share issuance requests, but will also be adapted to take account of any appropriate local market regulatory relaxations or new guidance as a result of the crisis.” ISS policies consider company-specific factors that include:

• disclosure in the proxy statement of the specific purposes for the proposed increase;
• the risks to shareholders of not approving the request; and
• the size and potential dilutive impact of the request combined with any market-specific guidelines on limits and preemptive rights.

In the case of preferred shares requests or issuances, ISS considers whether the shares requested are blank check preferred shares that can be used for antitakeover purposes. ISS notes that “[i]n exceptional circumstances and based on clear and compelling justification by the board of a company's underlying need in the current economic environment, ISS policies can and already do allow for case-by-case analysis and ‘For’ recommendations for proposals that exceed any normal market-specific limits on size and potential dilution,” and ISS believes that the current pandemic clearly constitutes such exceptional circumstances. ISS voting policies also provide for case-by-case analysis of private placement issuances, considering:

• the rationale for the private placement issuance;
• the potential dilution to existing shareholders;
• the discount/premium in issuance price to the unaffected share price before the announcement of the private placement;
• any conflicts of interest;
• consideration of alternatives; and
• the market’s reaction to the proposed private placement since announcement.

ISS will also consider “whether there are such exceptional circumstances as the company being expected to go out of business or file for bankruptcy protection if the transaction is not approved or the company’s auditor/management has indicated that the company has going concern issues.”

The Glass Lewis Approach to COVID-19

Glass Lewis recognizes that the COVID-19 pandemic “has caused significant disruption to people and companies around the world.”[2] Like ISS, Glass Lewis is adapting its policy approach to a world impacted by COVID-19. Glass Lewis indicates that it expects “all governance issues and most proposal types to be impacted by the pandemic and we will exercise our existing discretion and pragmatism to prioritize timing, certainty, disclosure and voting on any affected proposals.” Glass Lewis considers it likely that this situation will continue to prevail through 2021.

Virtual Annual Meetings

Glass Lewis observes that “[i]n order to ensure the health and safety of employees and shareholders, and to comply with government-issued orders and guidelines, a number of North American companies are breaking with convention to hold their shareholder meetings on a virtual-only basis, including when a proxy statement has already been filed.” While Glass Lewis acknowledges concerns regarding virtual-only meetings, it believes “that such meetings provide compelling advantages for both companies and shareholders to preserve the timing, certainty, agendas and voting of shareholder meetings.” As a result, Glass Lewis does not believe that discouraging virtual-only meetings during the pandemic “serves the interests of shareholders or companies.”

For the period March 1, 2020 through June 30, 2020, Glass Lewis will consider the extenuating circumstance of the COVID-19 pandemic when applying its policy on virtual-only shareholder meetings. Glass Lewis will review virtual-only shareholder meetings on a case-by-case basis and “will also note whether companies state their intention to resume holding in-person or hybrid meetings under normal circumstances.” During this period, Glass Lewis “will generally refrain from recommending to vote against members of the governance committee on this basis, provided that the company discloses, at a minimum, its rationale for doing so, including citing COVID-19.” Glass Lewis notes that for all shareholder meetings occurring after June 30, 2020, its standard policy on virtual shareholder meetings will apply, and Glass Lewis expects robust disclosure in the proxy statement concerning shareholder participation. Glass Lewis observes that “even if the pandemic continues well beyond this date, companies have been given sufficient time to address shareholder concerns as outlined in our standard policy.”

The standard policy on virtual shareholder meetings will apply in future years. Glass Lewis is generally neutral on the use of virtual-only meetings, so long as they are structured to ensure meaningful shareholder participation. Glass Lewis’s standard policies provide that it will generally recommend against the chair of the nominating and governance committee if companies do not provide adequate disclosure concerning the protections afforded to shareholders when conducting a virtual-only meeting. Examples of effective disclosure include:

• addressing the ability of shareholders to ask questions during the meeting, including time guidelines for shareholder questions, rules around what types of questions are allowed, and rules for how questions and comments will be recognized and disclosed to meeting participants;
• procedures, if any, for posting appropriate questions received during the meeting and the company’s answers, on the investor page of their website as soon as is practical after the meeting;
• addressing technical and logistical issues related to accessing the virtual meeting platform; and
• procedures for accessing technical support to assist in the event of any difficulties accessing the virtual meeting.

Shareholder Rights Plans

While Glass Lewis acknowledges that it remains generally skeptical of shareholder rights plans, it notes that “current policy is designed to apply a nuanced, contextual assessment of these provisions.”[3] Glass Lewis indicates that, during the COVID-19 pandemic, its contextual approach ensures that the proxy advisory firm “can apply the appropriate discretion and pragmatism to prioritize timing, certainty, disclosure and voting on such proposals.”

Glass Lewis is supportive of shareholder rights plans that meet certain conditions that are limited in scope to accomplish a particular objective, such as closing of an important merger, managing a clear and present hostile takeover threat, or other contextual factors “like a severe drop in stock price due to a widespread industry or market downturn.” Glass Lewis considers companies that are impacted by coronavirus and the related economic crisis as having a reasonable context for adopting a shareholder rights plan under the following conditions:

• the duration of the shareholder rights plan is limited to one year or less; and
• the company discloses a sound rationale for adoption of the shareholder rights plan as a result of coronavirus.

If the shareholder rights plan does not meet these conditions, Glass Lewis will recommend opposing the re-election of all board members who served at the time of adoption. If the company fails to put the shareholder rights plan up for shareholder approval in the future to renew it, Glass Lewis will recommend opposing the re-election of all board members who served at the time of renewal. Glass Lewis notes that companies can provide shareholders “with additional confidence by assuring them at the time of the pill’s adoption that any renewal of the pill will require shareholder approval.”

Other Governance Observations

Glass Lewis also recently shared its perspectives on other governance topics during the time of the COVID-19 pandemic.[4] Glass Lewis expects all governance issues and most proposal types to be impacted by the pandemic and indicates that it “will exercise our existing discretion and pragmatism to prioritize timing, certainty, disclosure and voting on any affected proposals.” Glass Lewis indicates that it is likely that this will continue to be the case through 2021.

Compensation and Balance Sheet Measures

Glass Lewis has observed a variety of approaches to changing compensation programs. Glass Lewis expects to see many amendments to existing plans, “crocodile tears” for maintaining or even increasing executive compensation levels, substantial adjustments to equity compensation plan proposals, and many companies trying to address shareholder concerns in Say on Pay proposals that will be considered in the context of poor pay-for-performance. Glass Lewis also expects to see “a marked increase in shareholder concerns on repricing, dilution, burn rates, hurdle adjustments, changes to vesting periods, caps and cuts on incentives, and the quality of disclosure concerning the limits and exercise of board discretion.”

Glass Lewis expects widespread pausing of stock repurchase programs, the suspension of dividends and an increase in capital raising. Glass Lewis observes that “[d]ogmatic application of pre-existing standards by investors could mean the difference between a company surviving this crisis and shareholders suffering even greater losses.”

Glass Lewis notes that “responsible companies hit hard by the crisis have taken early and decisive action to roll back planned salary increases or above-target bonus outcomes, sharing the pain felt by employees and shareholders.” Glass Lewis believes that “there is a heavy burden of proof for boards and executives to justify their compensation levels in a drastically different market for talent.” Glass Lewis expects that efforts toward making executives “whole” at the expense of shareholders and employees are likely to be rejected, and that even those companies “who project a ‘business as usual’ approach to executive pay will face opposition if employees and shareholders see their own ‘paychecks’ cut.”

Board Composition and Effectiveness

Glass Lewis notes a particular risk for boards as a result of the lack of age and gender diversity among directors (and to a lesser extent management), given that men and those aged 65 and over are much more likely to die or become seriously ill from COVID-19. Further, Glass Lewis notes that reduced attendance rates and changes in committee and board independence are potential consequences of the pandemic, particularly when directors are already overcommitted, which could result in reductions in board seats. Glass Lewis indicates that this “will be an important test of succession planning and board renewal programs.”

Glass Lewis also indicates that there may be a risk to the effectiveness of board meetings and decision-making as companies shift to remote means of communications, especially if companies do not utilize specialized software or establish clear governance procedures. Glass Lewis acknowledges that this risk is preferable to not following social distancing guidelines.

Glass Lewis indicates “in our experience during past crises, well governed companies who made the right decisions during the good times are well prepared and durable during a crisis, and far better positioned to deliver shareholder returns afterwards.”

Activism and M&A

Glass Lewis observes that “during the global financial crisis, poor governance and shareholder returns, particularly when avoidable, inspired a wave of shareholder activism, M&A, lawsuits and consolidation as macro conditions improved.” Glass Lewis expects to see similar activity in the COVID-19 crisis.

While Glass Lewis notes that disruptions arising from COVID-19 could result in delays to existing activist campaigns, new opportunities for activism could arise, particularly in the hardest hit sectors. Glass Lewis expects the ongoing trend for settlements to continue as “boards prefer to maintain management focus on day-to-day business health and stability.” Glass Lewis believes that if conditions begin to stabilize in the second quarter of 2020, the number of contests and deal volume could increase in the second half of 2020 and into 2021.

Oil and Gas Sector

Glass Lewis will be closely monitoring how companies in the oil and gas sector will act “to protect shareholder value in exceptionally challenging conditions that will likely include many restructures and bankruptcies.”

Shareholder Proposals and ESG

Glass Lewis notes that, given the shareholder proposal cycle for the 2020 annual meeting season, the content of most shareholder proposals will likely not include any consideration of the COVID-19 pandemic and the related crisis. As a result, Glass Lewis indicates that “the impact of the pandemic and related crisis may not be immediately obvious by looking at a shareholder proposal or a company’s AGM agenda.” Glass Lewis further notes that “[w]hile the basic calculus for assessing environmental or social shareholder proposals on the basis of materiality to the returns or risk of a business hasn’t changed, the context has, significantly.” Glass Lewis indicates that “[a]pproaching these issues from a long-term perspective is still crucial, but ensuring that companies are able to operate in the short- to medium-term is also a very important consideration.” For this reason, Glass Lewis reminds investors that many of the shareholder proposals this proxy season may not adequately account for companies’ current circumstances or constraints, including proposals asking companies “to undertake resource-intensive actions or reporting that would undermine their ability to respond to more immediate concerns that are also in shareholders’ interests.” At the same time, Glass Lewis indicates that “companies should be mindful not to use the crisis to dismiss or hamper the ability of shareholder proponents to put forward their resolutions, speak at virtual meetings and have shareholders vote on such matters.”

Glass Lewis Policy Approach

Glass Lewis believes that its contextual approach “is already built for extenuating and unusual circumstances such as this pandemic and the many issues discussed above.” Glass Lewis intends to rely on this feature of its guidelines rather than updating the guidelines for new issues or novel approaches that are encountered throughout the season.

Disclosure and Explanation

Glass Lewis emphasizes that “[e]ffective disclosure and rationales provided by companies will be particularly critical to our exercise of discretion in making judgements about whether changes made as a result of this crisis are justified and address material shareholder concerns.” Glass Lewis will also “assess the reasonableness of proposed changes and outcomes by considering if they are consistent and in proportion to the impact on shareholder interests and employees.”

Timing and Certainty

Glass Lewis observes that “[i]n times of crisis, it is particularly important that the timing of decisions is not delayed or postponed significantly on matters that are material to a company’s ability to address risks, manage operations and maximize shareholder returns.” Further, Glass Lewis notes that “when uncertainty abounds, there is material value created by companies that can provide certainty to the market and receive it from their shareholders.” Glass Lewis expects that “those companies that move fast and decisively during a time of crisis, in cooperation with their shareholders, are more likely to contain the damage and identify opportunities for positive outcomes that are in all parties’ interests.” Glass Lewis will exercise discretion when considering governance issues where there is a clear material benefit to shareholders for supporting proposals that are cognizant of these factors.

Voting

Glass Lewis notes that “shareholder voting is a primary tool for shareholders, particularly for passive and index investors, to ensure that the timing, disclosure and certainty of such decisions is prioritized.” Given that many matters require a shareholder vote despite the current crisis, Glass Lewis is supporting virtual annual meetings, which provide “compelling advantages in timing, certainty and preserving the fundamental shareholder right of voting.”

[1] Impacts of the COVID-19 Pandemic: ISS Policy Guidance (April 8, 2020), available at: https://www.issgovernance.com/file/policy/active/americas/ISS-Policy-Guidance-for-Impacts-of-the-Coronavirus-Pandemic.pdf.

[2] Immediate Glass Lewis Guidelines Update on Virtual-Only Meetings due to COVID-19 (Coronavirus), available at https://www.glasslewis.com/immediate-glass-lewis-guidelines-update-on-virtual-only-meetings-due-to-covid-19-coronavirus/.

[3] Poison Pills and Coronavirus: Understanding Glass Lewis’ Contextual Policy Approach (April 8, 2020), available at: https://www.glasslewis.com/poison-pills-and-coronavirus-understanding-glass-lewis-contextual-policy-approach/.

[4] Everything in Governance is Affected by the Coronavirus Pandemic. This is Glass Lewis’ Approach, available at: https://www.glasslewis.com/everything-in-governance-is-affected-by-the-coronavirus-pandemic/.

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