On November 24, 2020, Glass Lewis (GL) released its 2021 Proxy Voting Policy Guidelines for the United States and its 2021 “Environmental, Social and Governance (‘ESG’) Initiatives,” which outlines the firm’s approach to ESG shareholder proposals. The policies are effective for shareholder meetings held after January 1, 2021. Feedback on GL’s policies may be submitted using the link at the top of GL’s voting policy guidelines page.
I. EXECUTIVE SUMMARY
Many of the 2021 updates address the quality of disclosure and codify GL’s existing approaches. Nonetheless, there are a number of noteworthy changes.
- Board Diversity
- Gender. Starting in 2021, GL will note as a concern boards consisting of fewer than two female directors. Starting in 2022, the minimum number of female directors GL expects to serve on a board will depend on the board size. Boards with six or more members will have to consist of at least two female directors.
- Race/Ethnicity. In addition, with an increased focus on gender and racial/ethnic board diversity, GL intends to make recommendations in accordance with state law board composition requirements as they become effective in some states.
- Director Independence.
- SPACs. GL has added a new provision relating to director independence in connection with SPACs. GL will generally consider a former SPAC executive who serves as a director on the combined entity’s board to be independent absent any evidence of an employment relationship or continuing material financial interest in the combined entity.
- Board Composition. The updates provide GL’s view that refreshment is needed when the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board in the last 5 years.
- Classified Boards, Poison Pills and Multi-Class Structures. Classified boards and poison pills generally should have sunsets with 3 to 5 year durations and the sunsets for multi-class share structures should not exceed 7 years.
- Executive Compensation. GL’s amendments to its executive compensation policies clarify the need for a clear and robust discussion, with appropriate justifications, of changes to short- and long-term incentive plan structures.
- Virtual-Only Meetings. GL reinstates for 2021 its pre-COVID-19 policy of recommending against the governance committee chair at companies that hold virtual-only shareholder meetings unless the company provides “robust” proxy disclosure addressing shareholder ability to participate in meetings. These must include shareholder ability to ask questions, procedures to post questions and the company’s answers on its website and logistical details for meeting access and technical support.
- ESG Proposals. GL’s ESG Initiatives guidelines outline the advisor’s approach to management-sponsored and shareholder ESG proposals. For E&S management proposals, GL will take a case-by-case approach, considering factors such as
- whether the proposal would materially impact shareholders,
- if there is a competing shareholder proposal,
- how responsive the company is to shareholders and emerging E&S issues and
- whether the proposal is binding or advisory.
- GL will generally support shareholder proposals on diversity reporting and climate-related disclosure. On climate-related lobbying, GL will evaluate the proposal in light of the company’s industry, level of disclosure, relevant controversies and the proposal’s potential benefits to shareholders. Finally, GL will generally recommend against proposals requesting a company limit its participation in trade associations.
II. 2021 PROXY VOTING POLICY GUIDELINES – KEY CHANGES
- Board Diversity and Refreshment.
- Board Gender Diversity. Starting in 2021, GL will note as a concern boards consisting of fewer than two female directors. Beginning with shareholder meetings held after January 1, 2022, GL will generally recommend voting against the nominating committee chair of a board with six or more directors, but with fewer than two female directors. The minimum of one female director standard will still apply to smaller boards with fewer than six directors.
- State Laws on Board Diversity. GL plans to make recommendations in accordance with applicable state law board composition requirements. For example, California law requires a company headquartered in the state to have at least one director from an underrepresented community on its board or sufficient disclosure to determine the company’s compliance by December 31, 2021. GL will generally recommend against the nominating committee chair at a California-headquartered company that fails to comply with this board diversity law. Persons from “underrepresented communities” means an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who self-identifies as gay, lesbian, bisexual or transgender.
- Disclosure of Director Diversity and Skills. Beginning with the 2021 proxy season, the GL report for each S&P 500 company will include GL’s assessment of the company’s proxy statement disclosure of: (i) the current percentage of racial/ethnic board diversity; (ii) whether the board’s definition of diversity explicitly includes gender and/or race/ethnicity; (iii) whether a board policy requires that women and minorities be included in the initial director candidate pool (a.k.a. the “Rooney Rule”); and (iv) board skills. While GL will not be making voting recommendations in 2021 solely on this basis, the firm may consider these factors when determining the company’s overall governance or its recommendation on another proxy voting policy where GL is concerned about the board’s actions, omissions or position.
- Board Refreshment. Beginning in 2021, GL will note as a potential concern instances where the average tenure of non-executive directors is 10 years or more and no new independent directors joined the board in the past 5 years. This is another policy where GL does not intend to make voting recommendations in 2021 solely based on insufficient compliance with the policy, but may factor such lack of compliance when determining its recommendation on other board-related matters where GL also has a concern. This is because GL makes it clear that age or term limits can be arbitrary, with board composition best set based on an analysis of skills and experience necessary for the company.
- Environmental and Social Risk Oversight. GL has updated its policy on board oversight of E&S issues. Beginning in 2021, GL will note as a concern when S&P 500 company boards fail to provide clear disclosure regarding board-level oversight of E&S issues. In 2022, GL will begin generally recommending against the governance committee chair of S&P 500 companies for inadequate disclosure of board oversight of E&S issues. GL recognizes that companies are in the best position to determine the structure of the oversight, including whether it is the entire board, a specific committee or designated directors that oversee these risks.
- SPACs. GL has added a new section detailing its approach to common SPACs-related issues. GL takes a generally favorable view of proposals seeking to extend business combination deadlines and GL will defer to the board and management’s decision on the extensions because GL believes that these teams are best positioned to make this determination. In addition, absent any evidence of an employment relationship or continuing material financial interest in the combined entity, GL will generally consider a former SPAC executive to be independent when sitting on the combined entity’s board. GL appreciates the fundamental differences between the role of SPAC executives from those of a typical operating company executive where SPAC executives’ responsibilities are primarily limited to identification of a target and execution of the acquisition.
- Executive Compensation.
- Short-Term Incentives. GL has codified that it expects a company to provide clear disclosure of its justification of any significant changes to the company’s short-term incentive plan structure, and any instance where target and maximum performance levels (and corresponding payout levels) were lowered from the previous year. The updated policy further expands GL’s description of the application of upward discretion expressly to include instances of retroactively prorated performance periods. In contrast, the 2020 policy expressly includes only the lowering of goals mid-year and increasing calculated payouts.
- Long-Term Incentives. GL has codified that the firm believes inappropriate performance-based award allocation is a criterion which may, in the presence of other major concerns, contribute to a negative recommendation. In addition, GL may issue a negative recommendation when a company significantly decreases a performance-based award allocation in the absence of exceptional circumstances and the decrease is contrary to best practices. Nonetheless, the firm adds that it may not issue a negative recommendation when there are no other significant program issues despite a significant portion of the grant failing to consist of performance-based awards. In addition, the amended policy expands the list of common elements of well-structured long-term incentive plans to include clearly disclosed reasons for equity-granting practices. Lastly, clear justifications should also accompany any significant structural program changes or any use of upward discretion of performance metrics.
- Vote Results Disclosure. Starting in 2021, GL expects that companies will disclose detailed vote results from their last annual shareholder meetings. This is likely more of an issue for companies incorporated in foreign jurisdictions that do not legally require this disclosure. When companies fail to disclose voting results, GL will consider holding the governance committee chair accountable.
III. 2021 PROXY VOTING POLICY GUIDELINES – CLARIFYING CHANGES
- Virtual-Only Shareholder Meetings—Reversion to Standard Policy. This is more of a reminder than a clarification. GL has reinstated its standard policy on virtual-only shareholder meetings. Earlier in the year, GL made a temporary exception noting that the COVID-19 pandemic presented extenuating circumstances. GL’s standard policy acknowledges that virtual-only meetings may be appropriate provided that shareholder participation is protected and robustly explained in the proxy statement. GL’s Summary of Changes states that GL will generally hold the governance committee chair accountable when a company plans to hold a virtual-only meeting without adhering to these conditions.
- Board Responsiveness. GL has clarified how it views levels of support for nonbinding shareholder resolutions. GL makes note of management proposals that received over 20% opposition at the prior year’s meeting and may opine on the board’s response to such opposition. In addition, GL clarified that it looks for whether the board significantly responded to the concerns underlying the majority support of shareholder proposals.
- Post-IPO or Spin-Off—Multi-Class Structures and Poison Pills. GL has clarified its approach to director recommendations on the basis of post-IPO corporate governance concerns. GL generally targets governance committee members for such concerns; however, if there is no governance committee, or if a portion of such committee members are up for reelection, GL will apply its recommendations to director nominees standing for election. Regarding companies that, prior to their IPOs, adopt multi-class share structures with disproportionate voting rights or other anti-takeover mechanisms, such as a poison pill or classified board, GL will generally recommend voting against all directors serving at the time of the IPO if the board: (i) lacked a commitment to submit these provisions to a shareholder vote at the next shareholder meeting following the IPO; or (ii) failed to include reasonable sunset provisions (generally three to five years in connection with a classified board or poison pill; or seven or fewer years for a multi-class share structure). If the multi-class share structure is put to a shareholder vote, GL will focus on the level of support of unaffiliated shareholders when determining the vote results.
- Executive Compensation.
- Excise Tax Gross-Ups and Votes on Golden Parachute Payments. GL has clarified that it will evaluate the addition of new excise tax gross-ups to specific change-in-control transactions. In such scenarios, in addition to generally issuing a negative recommendation against a say-on-golden-parachute proposal relating to the gross-up entitlements, GL may also make subsequent recommendations against the compensation committee members and say-on-pay proposals.
- Option Exchanges and Repricing. GL’s updated policy states that the firm will be generally opposed to the repricing of employee and director options unless the need is driven by a dramatic stock value decline resulting from macroeconomic or industry trends, as distinguished from company-specific issues. GL’s amended policy emphasizes that this exception generally will require that officers and board members be excluded from the repricing or option exchange program and the exchange be value-neutral or value-creative to shareholders using very conservative assumptions. The proxy advisor will continue to evaluate the appropriateness of the program’s design by considering factors such as whether the vesting requirements are extended beyond a year.
- Peer Group Methodology. GL clarified that the firm utilizes its proprietary methodology to determine the peer group for each reviewed company. The peer groups are used in connection with GL’s A-F pay-for-performance letter grading system, referred to as the P4P Methodology, which in turn helps inform GL’s voting decisions on say-on-pay proposals. When determining the GL-designated peer group, GL considers the company’s country-based peers, sector-based peers and self-disclosed peers. Each component is considered on a weighted basis and is subject to size-based ranking and screening. GL hires CGLytics to determine the peer groups using GL’s methodology and CGLytics data. For comparative purposes, a GL report includes both the company’s self-selected peer group and GL’s configured peer group for that company.
IV. 2021 ESG SHAREHOLDER PROPOSAL GUIDELINES
GL’s guidelines, formerly titled “Shareholder Initiatives,” provide additional insight on key shareholder proposals for 2021 and reflect the firm’s increased focus on ESG-related matters. While GL generally maintains that it evaluates shareholder proposals on a case-by-case basis, there are instances where the firm will generally favor a particular position.
Key changes are summarized below:
- Diversity Reporting. GL will continue to generally support shareholder proposals seeking disclosure on workforce diversity, and the amended guidelines expressly include the disclosure of EEO-1 reports.
- Management-Proposed ESG Resolutions. GL has codified its case-by-case approach to management-sponsored E&S-related proposals, and will consider factors including: (i) the nature of the proposal and whether it would materially affect shareholders; (ii) the existence of a competing or corresponding shareholder proposal on the topic; (iii) the company’s general responsiveness to shareholders and to emerging E&S matters; (iv) whether the proposal is binding or advisory; and (v) whether management recommends that shareholders support the proposal.
- Climate Change-Related Disclosure and Lobbying.
- Climate Change-Related Disclosure. GL will generally recommend in favor of shareholder resolutions seeking enhanced disclosure on climate-related issues, such as requesting that the company conduct a scenario analysis or create a report that aligns with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). GL will closely evaluate the proposal in the context of a company’s unique circumstances, taking into consideration: (i) how operations could be affected by climate-related issues; (ii) the company’s policies and related disclosures; (iii) the existence of board-level oversight of climate-related risks; (iv) the level of climate change-related disclosure and oversight at peer companies; and (v) the extent that comparable companies in the same market and/or industry have provided TCFD-aligned disclosures.
- Climate Change-Related Lobbying. GL has also codified its approach to proposals on climate-related lobbying and will evaluate: (i) its benefit to shareholders’ understanding of the company’s policies and positions; (ii) the company’s industry; (iii) the company’s current level of disclosure regarding its direct and indirect lobbying on climate change-related issues; and (iv) any significant controversies related to the company’s management of climate change or its trade association memberships. GL will generally recommend against proposals that request a company limit its participation in trade associations.