On November 24, 2020, Glass, Lewis & Co., LLC (Glass Lewis) announced that it released its 2021 Proxy Voting Policy Guidelines for the United States, and its 2021 Environmental, Social & Governance (ESG) Policy Guidelines, covering shareholder proposals. These voting policy guidelines will be effective for shareholder meetings held on or after January 1, 2021, unless otherwise noted.
Key updates for the 2021 proxy season include the following:
Board of Director Matters
Board Diversity. Under Glass Lewis's existing guidelines, it will generally recommend against the nominating committee chair of a board that has no female members. This guideline will remain the same for boards that have six or fewer total directors. However, for boards that have more than six directors, 1) beginning with meetings held in 2021, Glass Lewis will note as a concern boards that have fewer than two female directors, and 2) beginning with shareholder meetings held after January 1, 2022, Glass Lewis will generally recommend voting against the nominating committee chair of a board that has fewer than two female directors. If the chair of the nominating committee is not standing for election due to a classified board structure or otherwise, then Glass Lewis may extend this adverse voting recommendation to other members of the nominating committee. Notwithstanding these new guidelines, Glass Lewis may refrain from providing adverse vote recommendations for companies outside of the Russell 3000 index, or when boards have provided a sufficient rationale or a plan to address the lack diversity on the board.
State Laws on Diversity. Glass Lewis added a new guideline relating to state laws on board diversity. It will now make voting recommendations in accordance with board composition requirements set forth in applicable state laws when they come into effect.
Glass Lewis referenced California's Senate Bill 826, which requires publicly held corporations with principal executive offices in California to have 1) at least one female director no later than December 31, 2019, and 2) a minimum of three female directors if they have six or more directors, two female directors if they have five directors, or one female director if they have four or fewer directors, no later than December 31, 2021. The requirements of SB 826 are discussed in greater detail in our prior Alert. In addition, Glass Lewis referenced California's Assembly Bill 979, which requires publicly held corporations with principal executive offices in California to have 1) at least one director from an underrepresented community no later than December 31, 2021, and 2) a minimum of two directors from underrepresented communities if they have more than four but less than nine directors, or three directors from underrepresented communities if they have nine or more directors, no later than December 31, 2022. The requirements of AB 979 are discussed in greater detail in our prior Alert.
Beginning with shareholder meetings held after December 31, 2021, Glass Lewis will generally recommend a vote against the chair of the nominating committee of a California-based company that 1) has not complied with the applicable gender diversity thresholds and/or 2) has not complied with, or has not provided adequate disclosure to make a determination of whether it has complied with, the requirement to have at least one director from an underrepresented community on its board.
Board Diversity Disclosure. Glass Lewis added a new guideline relating to disclosure of director diversity and skills that is applicable to S&P 500 companies. Glass Lewis will now include an assessment of proxy disclosure on board diversity and skills, including consideration of 1) the board's current percentage of racial or ethnic diversity, 2) if the board's definition of diversity includes gender or race/ethnicity, 3) 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, and 4) disclosure of board skills. Glass Lewis will not be making voting recommendations solely based on the foregoing assessment, but such assessment will help inform its evaluation of a company's overall governance and may be a contributing factor in its voting recommendations when additional board-related concerns have been identified.
Board Tenure and Refreshment. Glass Lewis added a new guideline relating to board tenure and refreshment. It will consider recommending that shareholders vote against the nominating chair when, alongside other governance or board performance concerns, the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board in the past five years. Glass Lewis will not make voting recommendations in 2021 solely on the foregoing basis; however, Glass Lewis notes that insufficient board refreshment may be a contributing factor in its voting recommendations when additional board-related concerns have been identified and will be highlighted as a potential area of concern.
Governance Following an IPO or Spin-Off. Under Glass Lewis's existing guidelines, generally it will review the governing documents of companies that completed an initial public offering (IPO) or a spin-off within the past year "in order to determine whether shareholder rights are being severely restricted indefinitely." In its updated guidelines, Glass Lewis has clarified its approach to cases where it determines that the board "has approved overly restrictive governing documents." In those circumstances, Glass Lewis will generally recommend voting against members of the governance committee; however, if the company does not have a standing governance committee, or if any of those committee members are not standing for election due to a classified board structure or otherwise, then Glass Lewis will expand its adverse voting recommendations to additional director nominees, based on who is standing for election.
In addition, Glass Lewis clarified its approach to companies that, pre-IPO, adopt multi-class share structures and anti-takeover provisions, such as a poison pill or classified board. If the board adopts a multi-class share structure where voting rights are not aligned with economic interest, or an anti-takeover provision, then Glass Lewis will generally recommend voting against all members of the board who served at the time of the IPO if the board: 1) did not commit to submitting these provisions to a shareholder vote at the company's first shareholder meeting following the IPO; or 2) did not provide a reasonable sunset for the multi-class share structure (generally seven years or less) or for the classified board or poison pill (generally three to five years). In terms of a multi-class share structure that is put to a shareholder vote, Glass Lewis notes that it will review the level of approval or disapproval attributed to unaffiliated shareholders when determining the vote outcome.
Environmental and Social (E&S) Risk Oversight. Under its existing guidelines, generally Glass Lewis may recommend that shareholders vote against the members of the board who are responsible for oversight of E&S risks where Glass Lewis does not believe that a company has properly managed or mitigated E&S risks to the detriment of shareholder value, or when such mismanagement has threatened shareholder value. Beginning with shareholder meetings held in 2021, Glass Lewis will also note as a concern when boards of companies in the S&P 500 index do not provide clear disclosure concerning the board-level oversight provided to E&S issues. Then, beginning with shareholder meetings held in 2022, Glass Lewis will generally recommend voting against the governance chair of a company in the S&P 500 index that fails to provide explicit disclosure concerning the board's role in oversight of E&S issues. In determining whether appropriate disclosure has been provided, Glass Lewis will review a company's proxy statement and governing documents, including board committee charters.
Nominating and Governance Committee Performance. Glass Lewis will now consider recommending that shareholders vote against the governance committee chair when a detailed record of proxy voting results from the prior annual meeting has not been disclosed. Generally, this disclosure is required under Item 5.07 of Form 8-K but may not be required of all issuers, including foreign private issuers.
Board Responsiveness. Under its existing guidelines, Glass Lewis believes that the board of directors should demonstrate some level of responsiveness to address concerns of shareholders any time 20 percent or more of shareholders vote against the recommendation of management. In its updated guidelines, Glass Lewis clarified that it believes that "clear action is warranted" (versus merely some level of responsiveness) when shareholder proposals receive support of the majority of votes cast.
Virtual Shareholder Meetings. In March 2020, Glass Lewis provided a temporary exception from its guideline on virtual-only shareholder meetings for shareholder meetings held between March 1, 2020 and June 30, 2020, in light of the COVID-19 pandemic. Under that exception, Glass Lewis would generally refrain from recommending a vote against members of the governance committee based on the virtual-only meeting format, provided that the company disclosed, at a minimum, its rationale for holding a virtual-only shareholder meeting, including citing COVID-19
Glass Lewis has confirmed that this temporary exception is no longer applicable, and its existing guidelines on virtual shareholder meetings is in effect for the 2021 proxy season. Under its existing guidelines, for companies holding shareholder meetings in a virtual-only format, Glass Lewis expects robust disclosure in the proxy statement. Some examples of effective disclosure, as provided by Glass Lewis, include: 1) disclosure addressing the ability of shareholders to participate in the meeting, including shareholders' ability to ask questions at the meeting and the rules and procedures related thereto; 2) disclosures relating to procedures, if any, for posting questions received during the meeting and the company's answers on its public website after the meeting; and 3) disclosure addressing technical and logistical details for meeting access and technical support. Where such disclosure is not provided, Glass Lewis will generally recommend voting against members of the governance committee where the board is planning to hold a virtual-only shareholder meeting.
SPACs. Glass Lewis added new guidelines relating to special purpose acquisition companies (SPACs). In cases where the SPAC holds a special shareholder meeting to ask shareholders to extend the business combination deadline (in particular, where an acquisition may have been identified, but additional time is required to allow management to finalize the deal terms), Glass Lewis will generally defer to the recommendation of management and support reasonable extension requests.
In addition, post-acquisition and absent any evidence of an employment relationship or continuing material financial interest in the combined entity, Glass Lewis will consider directors who are former SPAC executives to be independent.
Some of the key updates to Glass Lewis's compensation-related voting guidelines include the following:
- Short-Term Incentives. Glass Lewis clarified that it expects clear justification not just for any increases in the potential target and maximum award but also for any decreases in target and maximum performance levels from the previous year, as well any significant changes to the company's short-term incentive program structure. In addition, Glass Lewis expanded its description of circumstances where a company has applied upward discretion (for which Glass Lewis expects discussion of why this discretion was necessary), to include instances of retroactively prorated performance periods.
- Long-Term Incentives. In assessing whether a company's long-term incentive plan is well-structured, Glass Lewis added clearly disclosed equity granting practices as another factor to be considered. In addition, Glass Lewis clarified that while it will consistently raise concern with long-term incentive programs that are not significantly performance-based, it may refrain from a negative voting recommendation if there are no other significant issues with the program's design or operations. However, in circumstances where performance-based awards are significantly rolled back or eliminated from the company's long-term incentive plan, Glass Lewis will generally view these decisions negatively outside of exceptional circumstances, which may lead to recommendations against the applicable proposal. In addition, Glass Lewis clarified that, like short-term incentives, it expects clear justification for any use of upward discretion and any significant changes to the long-term incentive program structure.
- Excise Tax Gross-Ups. Generally, Glass Lewis is strongly opposed to excise tax gross-up. In its updated guidelines, Glass Lewis clarified that in situations where the addition of new excise tax gross ups will be provided in connection with a specific change-in-control transactions, it may lead to adverse voting recommendations on the say-on-pay proposal, the golden parachute proposal and recommendations related to the compensation committee for all involved corporate parties, as appropriate.
- Option Exchanges and Repricing. Generally, Glass Lewis is opposed to the repricing of employee and director options, except where macroeconomic or industry trends (rather than specific company issues) cause the stock's value to decline dramatically and the repricing is necessary to motivate and retain employees. In its updated guidelines, Glass Lewis clarifies its approach to evaluating these proposals, including emphasizing the importance of excluding officers and directors from the program, as well as the program being value-neutral or value-creative, as considerations to be taken into account for any exceptions to a negative vote recommendation.
ESG Initiatives / Shareholder Proposals
Glass Lewis will generally support shareholder resolutions that seek to enhance companies' governance structures, and with respect to shareholder resolutions related to E&S issues, Glass Lewis will evaluate each such resolution on a case-by-case basis and in the context of financial materiality. In its 2021 voting guidelines relating to shareholder proposals, Glass Lewis included the following key updates:
- Diversity Reporting. Glass Lewis will now generally support shareholder proposals requesting that companies disclose EEO-1 reports, and will also generally support proposals requesting that companies provide other types of disclosure concerning their workforce diversity or details about how companies are promoting diversity within their workforce. When considering voting recommendations on the foregoing matters, Glass Lewis will evaluate whether the requested disclosure would meaningfully benefit shareholders' understanding of the company's diversity considerations, the company's current level of disclosure on these issues and the disclosure of the company's peers, and any lawsuits or accusations of discrimination within the company.
- Management-Proposed ESG Resolutions. While Glass Lewis notes that these are infrequent, it will, at this time, take a case-by-case approach to management-sponsored proposals on ESG issues, taking into consideration several factors, including the following: "(i) the request of the resolution and whether it would materially impact shareholders; (ii) whether there is a competing or corresponding shareholder proposal on the topic; (iii) the company's general responsiveness to shareholders and to emerging environmental and social issues; (iv) whether the proposal is binding or advisory; and (v) management's recommendation on how shareholders should vote on the proposal."
- Climate Change. Glass Lewis removed consideration of a company's industry when assessing climate reporting resolutions. Thus, Glass Lewis will generally recommend in favor of shareholder resolutions requesting that companies provide enhanced disclosure on climate-related issues, regardless of industry. Notwithstanding the foregoing, Glass Lewis will evaluate each proposal in the context of a company's unique circumstances and will evaluate a variety of enumerated factors when making vote recommendations. Glass Lewis may, however, recommend against these proposals if it believes that a company's existing climate policies or reporting sufficiently address the request of the applicable shareholder resolutions or if Glass Lewis does not believe that adoption of the shareholder resolution is consistent with long-term shareholder value creation.
In addition, Glass Lewis also codified its approach to shareholder proposals on climate-related lobbying, and will generally recommend in favor of proposals requesting more information on a company's climate-related lobbying, evaluating these proposals based on several enumerated factors. Glass Lewis will, however, generally recommend against any proposals that would require the company to suspend its memberships in or otherwise limit a company's ability to participate in trade associations of which it is a member.