ISS and Glass Lewis Update Their Proxy Voting Guidelines for 2018

Smith Anderson

Smith Anderson

Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis), two of the leading providers of corporate governance research and proxy voting services, have published their updated proxy voting guidelines for 2018. Both companies focused their updates on governance issues, primarily with respect to corporate governance, board diversity and compensation for both executives and directors.


The ISS proxy voting guidelines updates are effective for annual meetings on or after February 1, 2018. ISS released updates for the United States as well as the Canadian, European and Asian-Pacific markets, but this alert will focus only on the United States updates.

The most significant updates to the ISS proxy voting guidelines relate to:

  • “Excessive” non-employee director compensation;
  • Gender pay gap proposals & board diversity;
  • Pay for performance;
  • Problematic pledging of company stock; and
  • Shareholder rights plans (or “poison pills”).

“Excessive” Non-Employee Director Compensation

ISS has taken note of what it refers to as “excessive” compensation for non-employee directors and now recommends voting “against” or “withhold” for members of the board committee responsible for approving and/or setting non-employee director compensation if there is a “pattern” (i.e. two or more years) of awarding “excessive” non-employee director compensation without disclosing a compelling rationale or other mitigating factors. What constitutes “excessive” compensation has not been defined by ISS, and ISS noted that compensation will vary by industry sector and company size. Nonetheless, in its rationale for the change, ISS explained that it had identified cases of extreme outliers in non-employee director compensation relative to peers and the broader market. Accordingly, companies should continue to compare the compensation of their non-employee directors to that of their peers and the broader industry. Because “excessive” non-employee director compensation would need to be flagged for at least two years under the new policy, the first negative vote recommendations will not be made until 2019.

Gender Pay Gap Proposals & Board Diversity

ISS made two updates related to gender pay gap and board diversity issues. First, ISS has announced that it will begin to highlight companies with zero female directors on their boards. However, at this time, ISS has indicated that it will not make any adverse vote recommendations due to a lack of gender diversity on a company’s board. Second, ISS will evaluate on a case-by-case basis shareholder proposals related to the gender pay gap, including requests for reports on a company’s pay data by gender or a report on a company’s policies and goals to reduce any gender pay gap. ISS indicated that this policy is responding to an increase in shareholder proposals related to gender pay gap issues at technology firms and also at firms in the financial services, insurance, healthcare and telecommunication sectors. In evaluating a shareholder proposal related to gender pay gap issues, ISS will consider whether the company is the subject of recent controversy on gender pay gap issues or if the company is lagging behind its peers on reporting about its gender pay gap policies.

Compensation: Pay-for-Performance

ISS announced that, in addition to other factors, it will now include a new component in its pay-for-performance evaluation methodology called the “Relative Financial Performance Assessment,” which compares the company’s rankings to a peer group with respect to (i) CEO pay and (ii) financial performance in three or four metrics (which will vary depending on industry), in each case measured over three years.

Problematic Pledging of Company Stock

ISS recommends voting “against” members of a committee, or in extreme cases, the full board, that oversees risk related to the pledging of common stock held by executives and directors where a significant level of pledged common stock “raises concerns.” Share pledging is the practice in which an executive or director secures a loan by using the shares of stock as collateral; and ISS has noted that significant levels of pledging of company stock could raise the risk of price volatility or for a violation of insider trading restrictions. Whether the level of pledged stock is “significant” is determined on a case-by-case basis by measuring the aggregate pledged shares in terms of common shares outstanding, market value or trading value. In determining whether the amount of pledged stock “raises concerns,” ISS will consider whether there are sufficient mitigating factors for the level of pledged stock, including whether the company has included disclosure on the issue in its proxy statement and whether the company has made efforts to reduce the amount of pledged stock, such as by implementing an anti-pledging policy that prohibits future pledging activity. 

Shareholder Rights Plan (or “Poison Pills”)

ISS recommends voting “against” all directors of companies with a shareholder rights plan (or “poison pill”) that has been in place for more than one year and that has not been approved by shareholders. For shareholder rights plans with a term of one year or less, ISS recommends voting on a case-by-case basis for directors, taking into account the disclosed rationale for the plan, whether there is a commitment to put any renewal of the plan to a shareholder vote, and other relevant factors. Furthermore, ISS has also revised its guidelines to note that a shareholder vote approving a shareholder rights plan before the company becomes public is insufficient. ISS has indicated that these updates are meant to “simplify” ISS’s approach to shareholder rights plans and to strengthen the ISS principle that such plans should be approved by shareholders in a timely fashion.


Glass Lewis updates are generally effective for annual meetings on or after January 1, 2018, and relate to the following areas:

  • Board gender diversity;
  • Dual-class share structures;
  • Board responsiveness;
  • Virtual-only shareholder meetings;
  • Director commitments; and
  • CEO pay ratio and pay for performance. 

Board Gender Diversity

Glass Lewis announced that, beginning in 2019, it will generally recommend voting “against” the nominating committee chair of a board that has no female members, and depending on the industry, the size of the company and other factors, may recommend voting “against” other members of the nominating committee, unless the company has disclosed that there are mitigating factors to explain the lack of gender diversity or has disclosed a plan for addressing the lack of gender diversity on the board. In 2018, Glass Lewis will not make voting recommendations based solely on the lack of gender diversity on the board, but gender diversity will be one of many factors that Glass Lewis considers in making voting recommendations. 

Dual-Class Share Structures

Glass Lewis does not believe dual-class voting structures are in the best interests of common shareholders. Accordingly, for newly public entities, Glass Lewis will consider dual-class share structures as an additional factor in determining whether shareholder rights are being severely restricted, and will consider recommending that shareholders vote against members of the governance committee or, in some cases, all directors that served at the time of the governing documents’ adoption (depending on the severity of the concern).

Board Responsiveness

Glass Lewis indicated that it now expects a board to show some level of responsiveness to shareholder dissent from a proposal at an annual meeting of more than 20% of votes cast, particularly in the case of a compensation or director election proposal. The prior policy had only expected responsiveness if shareholder dissent was more than 25% of the votes cast. If a board is not adequately responsive, Glass Lewis could issue negative voting recommendations. Accordingly, companies should disclose their shareholder engagement efforts and other efforts to be responsive when shareholder dissent for a proposal is 20% or more of the votes cast. Furthermore, Glass Lewis has also indicated that it will look at the voting results for companies with a dual-class share structure and determine whether a majority of votes cast by unaffiliated shareholders supported a shareholder proposal or opposed a management proposal. Accordingly, companies with dual-class share structures should consider calculating their annual meeting votes broken out by unaffiliated shareholders to determine whether there was sufficient support or dissent among unaffiliated shareholders that would require a response. 

Virtual-Only Shareholder Meetings

Glass Lewis expressed reservations with virtual-only shareholder meetings, noting that virtual-only meetings have the potential to curb the ability of a company’s shareholders to communicate meaningfully with the company’s management. Accordingly, beginning in 2019, Glass Lewis will recommend voting “against” members of the governance committee of a board where a company intends to hold a virtual-only shareholder meeting, but does not include “robust” disclosure in the company’s proxy statement that assures shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting.  In 2018, Glass Lewis will not make voting recommendations solely on the basis that a company is holding a virtual-only meeting, but it will consider whether the company has provided the “robust” disclosure noted above in evaluating the governance profile of a company that holds a virtual-only meeting.

Director Commitments

In its 2017 updates, Glass Lewis announced that it would generally recommend voting “against” or “withhold” for directors who sit on more than five public company boards or for an executive officer of a public company who sits on more than two public company boards besides his or her own. For 2018, Glass Lewis has now clarified that, in considering whether to vote against an executive officer of a public company (other than CEOs) who sits on more than two public company boards besides his or her own, Glass Lewis will be more flexible and will consider the specific duties and responsibilities of their executive role and the company’s disclosure regarding that director’s time commitments (namely, whether the disclosure permits the shareholders to evaluate the scope of the director’s other commitments as well as their contributions to the board, including any specialized knowledge and diversity of skills, perspective and background) before making an adverse voting recommendation for such directors.

CEO Pay Ratio and Pay for Performance

Glass Lewis announced two clarifications regarding its use of CEO pay ratio data and its Pay-for-Performance Analysis. First, Glass Lewis has announced that it will begin displaying the CEO pay ratio, which will be required beginning in 2018, as a data point for companies in its publications for companies required to disclose their CEO pay ratio (although, it will not be a determinative factor in Glass Lewis’s voting recommendations at this point). Smaller reporting companies, emerging growth companies and foreign private issuers are exempt under the rule and are not required to disclose their CEO pay ratios. Second, responding to uncertainty among shareholders and companies, Glass Lewis clarified that a company that receives a “C” in the Glass Lewis grading system for pay-for-performance does not mean that there has been a “significant lapse” in the company’s pay-for-performance practices. Instead, a “C” means that the company’s pay and performance percentile rankings are generally aligned relative to peers.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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