October 26, 2018

Glass Lewis Issues ’19 Voting Guidelines

As noted on their blog, Glass Lewis has posted its 2019 Voting Guidelines. As always, page 1 of the Guidelines summarizes the policy changes – and we will be posting memos in our “Proxy Advisors” Practice Area. Changes include:

Board Gender Diversity: The policy announced last year will take effect in 2019 – Glass Lewis will generally recommend voting against the nominating committee chair of a board that has no female members, but they’ll closely examine the company’s disclosure of its board diversity considerations and other relevant contextual factors.

Conflicting & Excluded Proposals: The policy lays out how Glass Lewis will evaluate conflicting proposals on special meeting rights – for one thing, they’ll typically recommend against members of the nominating & governance committee when a company excludes a shareholder proposal in favor of a management proposal of an existing special meeting right. And in limited circumstances, Glass Lewis may recommend against members of the governance committee if a company excludes any conflicting proposal based on no-action relief, if Glass Lewis believes the exclusion is detrimental to shareholders. See this blog from Davis Polk’s Ning Chiu.

Diversity Reporting: Glass Lewis will now generally recommend in favor of shareholder proposals requesting additional disclosure on employee diversity and those requesting additional disclosure on the steps that companies are taking to promote diversity within their workforces.

Environmental & Social Risk Oversight: Glass Lewis has codified its approach to reviewing how boards are overseeing environmental and social issues – if mismanagement of these risks has threatened or diminished shareholder value, Glass Lewis may recommend against the directors responsible for E&S oversight.

Officer & Director Compensation: In its say-on-pay recommendation, Glass Lewis will consider excise tax gross-ups, severance and sign-on arrangements, grants of front-loaded awards, clawback provisions, and CD&A disclosure for smaller reporting companies. And they’ve clarified their approach to peer groups, pay-for-performance, the use of discretion, director compensation and bonus plans.

Auditor Ratification: Glass Lewis will consider additional factors for auditor ratification proposals, including the auditor’s tenure, a pattern of inaccurate audits, and any ongoing litigation
or significant controversies which call into question an auditor’s effectiveness. In limited cases, these factors may contribute to a recommendation against auditor ratification.

Virtual Shareholder Meetings: The policy announced last year will take effect in 2019. For companies opting to hold their annual meeting by virtual means, and without the option of attending in person, Glass Lewis will examine the company’s disclosure of its virtual meeting procedures and may recommend voting against the members of the governance committee if the disclosure does not ensure that shareholders will be afforded the same rights and opportunities to participate as they would at an in-person meeting.

Written Consent Shareholder Proposals: In instances where companies have adopted proxy access and a special meeting right of 15% or lower, Glass Lewis will generally recommend against shareholder proposals requesting that companies adopt a shareholder right to action by written consent.

Clarifying Updates: No changes here, but Glass Lewis has codified its approach to director and officer indemnification, quorum requirements, director recommendations on the basis of company performance, and OTC-listed companies.

Dual-Class: CII Petitions Exchanges to Require Sunset

On Wednesday, CII announced that it had filed an NYSE petition and a Nasdaq petition to curb listings of dual-class companies. Specifically, the petitions ask the exchanges to amend their listing standards to require that – going forward – companies seeking to list that have multiple share classes with differential voting rights include in their governing documents provisions that convert the share structure within seven years of the IPO to “one, share-one, vote.”

The petitions have support from BlackRock, T. Rowe Price, CalSTRS and CalPERS. CII cites several factors that support the concept of time-based sunsets, and also observes:

The SEC believes it lacks the statutory authority to compel U.S. exchanges to amend their listing rules. Over the past year, providers of benchmark indexes — FTSE Russell, MSCI and S&P Dow Jones — have stepped into the breach, with varying curbs on multi-class companies in indexes that are used widely by institutional investors. A listing standard would put all dual-class companies on the same footing.

Director Survey: Lots of Underperforming Colleagues

Here are the top findings from PwC’s annual survey of 700 directors:

– 45% of directors think that at least one person on their board should be replaced – and only 30% think their board is “very effective” at dealing with underperforming directors

– 94% agree that board diversity brings unique perspectives to the boardroom – and 84% think it enhances board performance. But 52% think board diversity efforts are driven by political correctness – and 48% think shareholders are too preoccupied with the topic

To me, these responses imply that directors do see the value in diversity – but are frustrated about being pushed to refresh their boards (even underperforming directors have staying power) and look for new directors outside of their typical network. Which means they’ll get to it when they’re good & ready, dagnabbit! Also, keep in mind that over 75% of the survey participants aren’t diverse and are likely accustomed to the status quo (the survey details some pretty wide gaps in perspective between female & male directors).

The survey also looks at other “hot topics,” like cybersecurity and the board’s evolving role in overseeing corporate culture. Here’s what directors think about those subjects:

– 87% of directors think that inappropriate tone at the top leads to problems – while 79% also blame middle management and 74% point to “short-termism”

– 71% think that employee engagement surveys are one of the best ways to scope out problems with corporate culture

– The percentage of directors that said company strategy should “very much” take social issues such as health care, resource scarcity and human rights into account increased between 7 to 10 percentage points from last year

– Boards continue to shift responsibility for oversight of cybersecurity – 36% of directors say the job falls to their full board, up from 30% last year – and 21% say their board has moved cybersecurity oversight from one committee to another

Liz Dunshee