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Glass Lewis 2020 Guidelines Include Director Negative Recommendations Depending on SEC Staff’s Response Under Recently Updated Staff Shareholder Proposal No-Action Letter Policy

Glass Lewis (GL) has recently released its 2020 U.S. proxy season voting guidelines, which contain a few notable developments to consider in preparation for the upcoming proxy season.  These updates include changes related to the exclusion of shareholder proposals and company responsiveness to say-on-pay opposition, among other amendments, all of which are described in the sections that follow.

Exclusion of Shareholder Proposals

In September 2019, the SEC staff announced that it may sometimes respond orally, rather than in writing, to company requests to exclude a shareholder proposal from a proxy statement, and may also decline to state a view altogether (discussed in a Davis Polk Client Alert).
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Spencer Stuart Shows How Boards Are Transforming

The 2019 U.S. Spencer Stuart Board Index (Index) reflects the board practices and trends of S&P 500 companies. According to the Index, boards are responding to investors’ increasing calls for greater diversity of “gender, age, race/ethnicity and professional backgrounds.” Spencer Stuart found that “boards are accelerating the addition of women and minority directors,” which in turn is driving notable changes in board composition. Spencer Stuart predicts that the biggest drivers of board refreshment will be replacing retiring directors and adding new skills to the board.

The Index covers public companies in the S&P 500 as of May 15, 2019 and the proxy statements released between May 30, 2018 and May 15, 2019.
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Nasdaq Proposes More Flexible Compensation Committee Independence Standards

NYSE and Nasdaq listing standards governing the independence of compensation committee members, as required under Dodd-Frank, do not go into effect until companies’ first annual meeting after January 15, 2014 or at the latest by October 31, 2014. Currently, the two exchanges diverge in how they treat directors who receive any compensatory fees, including consulting and advisory fees. For Nasdaq-listed companies, a director who receives such payments is prohibited from being considered independent for purposes of the compensation committee. 

Nasdaq has filed a proposed rule change with the SEC to replace this strict prohibition with a requirement that a board of directors instead consider the receipt of such fees when determining eligibility for compensation committee membership, similar to the NYSE standard.
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Compensation Committee Listing Standards: Who is an “Adviser to the Compensation Committee”?

A key question under the new standards taking effect July 1 (described in our client memo here) is whether a particular firm or person should be deemed to be serving as an “adviser to the compensation committee” and therefore subject to the requirement that the committee make a prior determination as to independence. Advisers retained directly by the committee are of course covered by this term, but what about advisers to the company who also provide advice to the committee? We think that a company adviser who regularly presents to the committee should be deemed an adviser to the committee, and therefore should be subject to an independence determination now.
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Glass Lewis Releases 2013 Voting Guidelines

Glass Lewis recently released its 2013 Proxy Season Guidelines for the 2013 proxy season, which will go into effect for shareholder meetings taking place after January 1, 2013, an abridged version of which is publicly available. These updates should be viewed in conjunction with Glass Lewis’s policies on its say-on-pay analysis, which it updated in July, as discussed here

One of the more notable changes is regarding board responsiveness to a “significant” shareholder vote. Glass Lewis’s new policy provides that it will scrutinize board responses to any vote by 25% or more of shareholders (excluding abstentions and broker non-votes) against management’s recommendation on any proposal, including  “against” or “withhold” from a director nominee, “against” a management-sponsored proposal or “for” a shareholder proposal.
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Getting The Deal Through – Corporate Governance 2012

We are pleased to announce the publication of Getting The Deal Through – Corporate Governance 2012. Davis Polk lawyers Arthur Golden, Thomas Reid and Sapna Dutta authored the “Global Overview” chapter. 

We note this year that, as the wave of post-financial crisis corporate governance reform continues across the globe, the impact of the significant burdens on the regulators that are responsible for implementing these reforms is becoming increasingly visible. That said, we are also seeing a subtle divergence in the nature of these regulatory efforts in different parts of the world.  In the United States, regulatory efforts have focused primarily on implementation of the Dodd-Frank Act, which continues to require significant time and has resulted in delays in the rulemaking schedule.
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Delaware Court Applies Entire Fairness Standard to Director Equity Grants

In the midst of the focus on executive compensation litigation, a recent Delaware opinion serves as a reminder that stockholder approval of at least some portion of director compensation may be beneficial in subsequent litigation, particularly if the approval results in the application of the “business judgment rule.” However, as described below, uncertainty remains about the level of detail concerning director compensation that is necessary in a stockholder-approved plan to warrant the application of that rule. Companies and their boards will want to balance the desire to increase the likelihood that compensation decisions will be protected by the business judgment rule with the understandable preference to preserve flexibility in establishing director compensation.
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Timing Implications of the SEC Rules on Compensation Committees and Advisers

Today, the SEC rules on the independence of compensation committees and advisers were published in the Federal Register. As we described in our memo, the listing exchanges have 90 days to propose implementation, and then a year from today to finalize the standards with approval from the SEC.

Since those are the outside dates, the listing exchanges can act much sooner. Depending in part on the comments received on the proposed standards, final standards may be adopted in time to apply to the 2013 annual meeting. We hope that the transition period for compensation committee independence standards will accommodate the fact that many boards evaluate director independence months before proxy statements are issued with related independence disclosure.
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Corporate Governance Twofer

Yesterday marked an active day on the corporate governance front. First, the U.K. Government announced “a far reaching package of reform to strengthen the hand of shareholders to challenge excessive pay.” The hallmark of this package is a binding shareholder vote on prospective compensation and exit payments. Other elements include a continued shareholder advisory say-on-pay vote, as well as enhanced disclosure regarding actual amounts of remuneration paid during the prior year.

Second, the SEC finalized its rule requiring listing standards for compensation committees and their advisers, as required by the Dodd-Frank Act. The final rules largely adopt the SEC’s proposed approach, which in turn closely follows the original statutory language.
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Nasdaq Proposes to Expand Independence Exception for Non-Executive Family Members

The Nasdaq Stock Market has proposed to broaden the exception (in Rules 5605(c)(2)(B), 5605(d)(3) and 5605(e)(3)) that allows one non-independent director to serve on a company’s audit, compensation or nomination committee under “exceptional and limited circumstances” for a maximum of two years if the board determines that it is in the best interests of the company and its shareholders. Under the existing rules, a company may not use the exception if the director is currently an officer or employee of the company or has a family member who is an officer or employee of the company. 

The proposed rules would continue to prohibit the use of the exception for family members of executive employees but would not prohibit the use of the exception if the director is a family member of a non-executive employee. 
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A Win for Disney?

At the Walt Disney Company’s annual meeting of shareholders today, shareholders approved Disney’s controversial executive compensation plan and voted to reelect Disney’s slate of directors, despite negative recommendations by the ISS.  ISS had recommended against voting for the members of Disney’s Governance and Nominating Committee because of the decision to appoint its Chief Executive Officer, Bob Iger, as Chairman of the Board at the annual meeting, thereby reversing “a commitment to independent board leadership without conducting outreach to shareholders beforehand.” Disney had not combined the roles of CEO and Chairman since 2004.   ISS also recommended against Disney’s say-on-pay vote.

Disney had vigorously opposed the negative ISS recommendations.
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Updated Say-on-Pay Scorecard: Reprise

With the vast majority of this year’s annual shareholder meetings for U.S. public companies behind us (at least for those with calendar-year fiscal years), we wanted to update the findings that we shared in our last post on the subject.  As of the end of last week, 1,193 large accelerated filers had reported the voting results from their shareholder meetings.

Regarding approval of “say-on-pay”:

Large Accelerated Filers by
Say-on-Pay Vote
(as of July 1, 2011)
90-100% Approval 791
80-89% Approval 195
70-79% Approval 97
60-69% Approval 55
50-59% Approval 29
40-49% Approval 16
30-39% Approval 9
20-29% Approval 1
0-19% Approval 0
Total 1,193

Generally, approval for say-on-pay votes has remained high as the season has progressed, and the average say-on-pay result for all large accelerated filers is 89%. 
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Perceived Pay-for-Performance Disconnect Brings Say-on-Pay Shareholder Derivative Suits

Some shareholders are using lawsuits as a new tactic to fight what they perceive as an escalation in executive compensation.  Shareholders are likely to find these suits difficult to push through the courts on their merits, but the suits can cost subject companies time and money, not to mention reputational harm brought on by negative media attention.

Last year, we saw shareholder derivative suits filed on behalf of KeyCorp (in Ohio state court) and Occidental Petroleum (in California state court) in connection with failed say-on-pay votes during the 2010 proxy season.  KeyCorp agreed, according to Reuters, to pay $1.75 million in attorneys’ fees and expenses to settle related suits and Occidental Petroleum, faced with three suits, settled one for an undisclosed amount and had two dismissed. 
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Strong Disagreement with SEC Proposed Rules on Compensation Consultant Disclosure and Conflicts

Commenters to the SEC’s proposed rules on listing standards for compensation committees, including issuers, law firms, consultants and organizations like the Society of Corporate Secretaries and Governance Professionals and the Chamber of Commerce, argued vehemently for the SEC to (a) narrow the definition of “advice” given by a consultant and (b) retain existing disclosure exemptions for consultants that work only on broad-based plans and non-customized data. The SEC may be surprised to find such passion surrounding what are merely proposed amendments to existing disclosure obligations.

Disclosure would be required when a compensation committee has retained or obtained the advice of a compensation consultant, a change from the current rule which is triggered when a consultant plays a role in determining executive compensation.
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CII and Other Activists Target Compensation Committees Independence in SEC Proposed Rule

The deadline for comments about the SEC proposed rules regarding compensation committees has passed, with 54 submissions sent.  While many commenters support the approach of directing the listing exchanges to adopt independence standards for compensation committees, taking into account issuer affiliation and source of compensation, several activists advocated for additional standards.  The Council of Institutional Investors (CII), AFSCME, AFL-CIO, among others, argued that independence is also impaired through other relationships, including:  (a) family linkages (employment of a director’s family member by the company); (b) business, financial and personal relationships between directors and executive officers (a director is employed by a firm that advises management or affiliated with a non-profit that receives grants from executive officers); (c) any related person transactions involving directors and (d) relationships amongst directors (one director is instrumental to the nomination of another director).
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SEC Extends Its Comment Period Regarding Compensation Committee and Adviser Independence

The SEC has just extended the deadline for comments in response to its proposed rules directing the national securities exchanges to adopt listing standards regarding the independence of compensation committees and advisers, as required by Dodd-Frank . The original deadline was today, and we had submitted our comments yesterday in anticipation, but commenters now have until May 19, 2011.

Our comments generally applaud the SEC for giving the exchanges the flexibility to develop applicable independence considerations. We’ve also made suggestions for technical changes and clarifications, such as that the independence rules for compensation committee members should not apply to committees that are responsible for broad-based plans (e.g., 401(k) plans), that the independence rules for consultants and advisers should not apply to in-house or outside counsel retained by management and that IPOing companies should be permitted a transition period, as they currently have under existing listing standards.
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SEC Comments Due on Comp. Committee and Adviser Independence

Today is the deadline for comments in response to the SEC’s proposed rules directing the national securities exchanges to adopt listing standards relating to the independence of compensation committees and compensation consultants, as required by Dodd-Frank. We’ve submitted our comments, which generally applaud the SEC for giving the exchanges the flexibility to develop applicable independence considerations. We’ve also made suggestions for technical changes and clarifications, such as that the independence rules for compensation committee members should not apply to committees that are responsible for broad-based plans (e.g., 401(k) plans), that the independence rules for consultants and advisers should not apply to in-house or outside counsel retained by management and that IPOing companies should be permitted a transition period, as they do under existing listing standards.
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Disney Strikes Back on ISS Say-on-Pay Recommendation

While ISS voting recommendation reports for companies are not “public”, sometimes additional soliciting materials filed by a company are informative.  On March 2nd, Disney filed its first communication indicating that the ISS recommendation to vote against its say-on-pay proposal is based on the disclosure of excise tax gross-ups that was granted in January 2010, and the compensation committee has since then adopted a policy that prohibits excise tax gross-ups in any future agreements (including any material amendments).  It’s tough to battle ISS recommendations, as on March 18th, Disney filed another communication indicating that the company has amended four employment agreements to remove excise tax gross-ups entirely.
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