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Next Week SEC Will Consider Issuing Guidance on the Use and Responsibilities of Proxy Advisors

Yesterday, the Securities and Exchange Commission (SEC or Commission) announced that the agenda for the Open Meeting, next Wednesday, August 21, 2019 at 10:00 a.m. E.T., will include consideration by the Division of Corporation Finance on whether to publish an interpretation and related guidance regarding the utilization of proxy advice in the proxy voting process.

In addition, the Division of Investment Management will consider whether to publish guidance on the proxy voting responsibilities of investment advisers under Rule 206(4)-6 of the Investment Advisers Act of 1940.  These regulatory responsibilities include advisers’ adopting policies and procedures that are reasonably designed to ensure that the advisers vote client securities in the best interests of their clients and disclosing how advisers resolve conflicts of interest.
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New U.K. Rules for Proxy Advisory Firms

The Proxy Advisors (Shareholders’ Rights) Regulations 2019 (“Regulations”) in the United Kingdom went into effect this past Monday. Proxy advisory services typically include research reports on public companies as well as proxy voting recommendations on how the proxy advisors’ clients, namely shareholders, should vote on all shareholder proposals, including those that are submitted by the public company’s management.

General Overview. The new U.K. regulations are “intended to make sure that proxy advisors’ clients will be able to better understand what standards of conduct the proxy advisor adheres to, how the proxy advisor ensures an adequate standard of quality in its advice and how it manages conflicts of interest, in order to help the market for proxy advisor services to function effectively.”

The Regulations primarily establish a transparency framework rather than a conduct regime or expectation level regarding the controls or quality of proxy advisory services.
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Is an Eventual Negative Say-on-Pay Recommendation Almost Inevitable?

Results of a study published in April 2019 by the executive compensation consulting firm Pearl Meyer suggest that Russell 3000 companies which have not yet received an “Against” Say-on-Pay (SOP) recommendation will likely receive one down the road. The firm states that “it’s reasonable to expect that at some point in the future, more than 80% of companies will have fallen victim to a negative vote recommendation at least once.”

Relevance. Management’s SOP proposals give shareholders a precatory or nonbinding vote on compensation packages for the company’s top executives. While the underlying regulation permits some leeway on the frequency of holding these votes, many companies opt to do so annually.
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A Say-on-Pay Update — Plus Strategies for Responding to a Negative Recommendation by a Proxy Advisory Firm

The proxy season is just around the corner for calendar year public companies. Ahead of the season, two major proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, recently released their 2019 policy updates to provide guidance on how they will make recommendations on companies’ “say-on-pay” vote. Although a non-binding vote, performing poorly on a say-on-pay vote is not only disheartening, but can impact shareholder votes on election of directors (particularly compensation committee members), result in greater scrutiny of CEO performance, and require management and compensation committee members to expend significant time and resources to address concerns reflected by the vote.
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New Glass Lewis Policies Announce Negative Recommendations for Directors in Some Instances When Companies Exclude Special Meeting and Other Shareholder Proposals through SEC Process

Under its 2019 updated guidelines, Glass Lewis will typically recommend against the members of the nominating and governance committee when a company is able to exclude a shareholder proposal on the right to call special meetings by presenting the ratification of an existing provision through a management proposal.  That happened several times last season, with some controversy, when companies asked shareholders to ratify existing special meeting rights that had a higher ownership threshold than the shareholders had proposed.

The updated guidelines also warn that in the event Glass Lewis believes that the exclusion of any shareholder proposal that is permitted by the SEC is “detrimental to shareholders,” it may, “in very limited circumstances,” recommend against the members of a governance committee.  
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In Advance of Roundtable, SEC Withdraws Letters on Investment Advisers’ Reliance on Proxy Advisory Firms for Voting Recommendations

The SEC issued a statement today announcing that its Division of Investment Management has rescinded the letters issued in 2004 to ISS and Egan-Jones, effective immediately.

The letters have been criticized to have unintentionally resulted in the endorsement of investors using proxy advisory firms in making proxy voting recommendations, in order to address potential conflicts of interests by investment advisers exercising their fiduciary obligations when voting proxies.  In them, the SEC staff stated that the recommendations of a third party, independent of an investment adviser, may “cleanse” the adviser’s vote from conflict, as we explained in a post more than five years ago.
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Glass Lewis Reports to Incorporate SASB Standards

Yesterday Glass Lewis announced that its proxy voting reports will include guidance from the standards developed by the Sustainability Accounting Standards Board (SASB).  SASB has ties with the FSB’s Task Force on Climate-Related Financial Disclosure, among other ESG disclosure initiatives, and has been working for years on industry-specific disclosure standards for use in SEC filings.

The reports will “display [SASB] content” and allow investors to “easily identify whether items are aligned with” SASB standards.  The information will be incorporated in advance of the 2019 season after the SASB standards are codified.  The codification is not yet complete.
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Glass Lewis Updates Its Policy Guidelines

The board should take action when director elections or say-on-pay votes receive less than 80% support, according to the Glass Lewis updated policy guidelines:

Board responsiveness.  Glass Lewis believes that boards should respond to any ballot item that receives more than 20% approval or dissent votes by shareholders, including say-on-pay, director elections and shareholder proposals. While the policy covers all three types of matters, the guidelines emphasized that it is particularly applicable for say-on-pay proposals and director elections. We urge Glass Lewis to recognize that it is highly common for shareholder proposals to receive more than 20% support, and taking negative action against all of those boards would cast a very broad and unwieldy net.
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Glass Lewis Will Not Incorporate Pay Ratio Data into Say-On-Pay Analysis in 2018

As year-end companies begin preparing to disclose pay ratio information in their 2018 proxy statements, Glass Lewis announced that it does not intend to make the ratio a part of the proxy advisor’s assessment of how investors should vote on say-on-pay “at this time” because it is not material for the analysis of the structures that companies use to pay their NEOs and the disclosures of those pay decisions.  The information will be included in the Glass Lewis reports as a data point since shareholders may consider it useful insight into a company’s practices.

The firm notes the two sides of the argument on the importance of the pay ratio. 
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Glass Lewis Policy Updates for 2017

Glass Lewis has updated its governance policies for how it evaluates boards and makes recommendations beginning with the 2017 proxy season.

OverboardingIn last year’s update, Glass Lewis deferred until this season its new overboarding policy. Beginning in 2017, Glass Lewis will generally recommend voting against an executive officer of any public company who serves on a total of more than two public company boards, and any other director who serves on a total of more than five public company boards. Note that unlike ISS, the policy applies to all executives, not just a CEO.

In applying the policy, Glass Lewis will consider relevant factors, including the size and location of the other companies where the director serves on the board, the director’s board duties, whether the director serves on the board of any large privately-held companies, the director’s tenure on the boards, and the director’s attendance record at all companies.
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Glass Lewis CEO Responds to Proposed Legislation Governing Proxy Advisors

The prepared statement on the Proxy Advisory Firm Reform Act by the CEO of Glass Lewis, KT Rabin, before the Subcommittee on Capital Markets and Government Sponsored Enterprises, explains why it refuses to share drafts with issuers or talk to companies during the solicitation period, unlike its biggest competitor, and debates the level of influence the firm has on voting outcomes. We previously summarized the bill here.

Glass Lewis is a portfolio company of the Ontario Teachers’ Pension Plan Board and Alberta Investment Management Corp. and has over 350 employees located in San Francisco; New York; Limerick, Ireland; Sydney, Australia; and Karlsruhe, Germany.
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Proposed Legislation on Oversight of Proxy Advisory Firms

The Proxy Advisory Firm Reform Act, introduced by  Congressman Sean Duffy (R-Wisconsin), is on the agenda for a hearing on Tuesday by the House Financial Services Committee.

Under the proposed legislation, proxy advisory firms must register with the SEC and provide information that would be made public about their procedures for advising their clients, including whether and how they consider the size of a company when making decisions. Not surprisingly because it is a constant source of criticism, the application must describe any potential or actual conflicts of interest. This includes whether they engage in consulting services and the amount of those revenues, as well as a list of their 20 largest clients and how they prevent such clients from having “undue influence.”

The registration could be denied if the SEC believes a firm does not have adequate financial or management resources to consistently deliver services “with accuracy and integrity” and to materially comply with their own procedures.
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Companies Can Sign Up for Glass Lewis Data Verification Process

Until January 31 or whenever a specified limit is reached, NYSE and Nasdaq listed issuers can sign up for Glass Lewis’ data verification program, known as the Issuer Data Report (IDR) service, here. The service is available to companies with annual meetings between March 1 and June 30.

IDR is designed to enable public companies to access for free a data-only version of the Glass Lewis proxy report before Glass Lewis completes its analysis and proxy voting recommendations. It is important to note that this is different from the ISS process that allows S&P 500 companies to obtain draft copies of the ISS proxy reports.
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Window Period Opens for Updating ISS and Glass Lewis About Changes to Peer Group Selection

Beginning today, ISS is accepting updates to companies’ self-selected compensation benchmarking peers, if those companies have annual meetings scheduled between February 1, 2016 and September 15, 2016. Submissions are due by 8:00 p.m. EST on Friday, December 11, 2015.

Companies that have made changes to their peer group since the 2015 proxy statement should be aware that ISS uses the disclosed peers as an input into its own peer group selection process. No submissions are needed if there were not any changes to the information in the 2015 proxy statement.

The process requires filling out an online form, as explained here, but also confirming the submission by sending ISS an electronic copy on company letterhead along with your name, email address and company name, to
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Glass Lewis Announces Policy Changes for 2016

Glass Lewis updated its voting guidelines that apply to the 2016 proxy season. There are limited revisions from the prior policies, which include:

Overboarding. Beginning in 2017, Glass Lewis will recommend voting against a director (a) who is the executive officer of a public company and sits on more than two public company boards or (b) who serves on more than five public company boards. In 2016, Glass Lewis will note a concern for these directors, thus providing a transition period before putting the full policy into effect.

Exclusive forum provisions (for IPO companies only). Instead of recommending against the chairman of the nominating and governance committee, for IPO companies that have adopted exclusive forum Glass Lewis will evaluate the provision alongside other bylaw terms, such as supermajority vote requirements and a classified board.
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ISS Issues FAQs on Proxy Access Proposals

In its long-awaited FAQs, ISS indicates that it will generally recommend in favor of management and shareholder proposals for proxy access which allow for nominations to be made by shareholders owning not more than 3% of the voting power for 3 years, with “minimal” or no limits on the number of shareholders permitted to form a nominating group, and allowing nominations for up to 25% of the board. ISS will also review the reasonableness of any other restrictions and may recommend against proposals that are more restrictive than these guidelines.

ISS is tracking 96 shareholder proposals on proxy access. For companies that present both a board and a shareholder proxy access proposal in their proxy statement, ISS will review each proposal separately.
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Glass Lewis Summarizes its Approach to Proxy Access Proposals

According to Glass Lewis, approximately 100 companies will face proxy access shareholder proposals in 2015. In a blog post, Glass Lewis announced that it will continue to review each shareholder proposal, along with the company’s response, on a case-by-case basis. They believe that proxy access rights will be “rarely invoked and even more rarely successful.” 

An alternative management proposal in lieu of, or in addition to, the shareholder proposal, will also be reviewed on a case-by-case basis. If a company makes its own proposal, Glass Lewis will evaluate whether the company’s proposal “varies materially” from the shareholder proposal in terms of minimum ownership threshold, minimum holding period and maximum number of nominees, to determine whether the company’s response is reasonable, and whether the company’s version is “significantly higher/longer” than what was proposed by the shareholder.
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SEC Announces Its Examination Office will Review Proxy Advisory Firm Recommendations and Disclosure

The SEC announced its Office of Compliance Inspections and Examinations’ (OCIE) priorities for 2015, which focus on three areas: protecting retail investors, especially those saving for or in retirement; assessing market-wide risks; and using data analytics to identify signs of potential illegal activity. OCIE’s focus is on issues involving investment advisers, broker-dealers and transfer agents.

In a bit of a surprise, there is also a reference under “Other” initiatives to examining proxy advisory firms and the investors that use their voting recommendations, as follows: “We will examine select proxy advisory service firms, including how they make recommendations on proxy voting and how they disclose and mitigate potential conflicts of interest.
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ISS and Glass Lewis Policy Updates for 2015 Proxy Season

In preparation for the 2015 proxy season, companies should be aware of the updates to the policies that govern how the two influential proxy advisory firms, ISS and Glass Lewis, will be advising shareholders on significant ballot items, including governance, compensation and environmental and social matters. Davis Polk’s memo on the these changes is here.
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Will Congress Act to Rein in Proxy Advisory Firms?

Congressman Patrick McHenry (R-NC) indicated that Congress will step in if the SEC fails to act to curb investors’ reliance on proxy advisory firms, in his keynote speech at a panel discussion hosted by the American Enterprise Institute. He stated that the issue of proxy advisory firms is of significant interest to himself and his colleagues, Representative Jeb Hensarling (R-Texas), House Financial Services Chairman, and Representative Scott Garrett (R-NJ), Chairman of the Subcommittee on Capital Markets and Government Sponsored Enterprises.

According to news reports, both Congressman McHenry and former SEC Commissioner Harvey Pitt, who organized the discussion, blamed two SEC no-action letters that we previously explained for allowing investment advisers to depend on proxy advisory firms in making their voting decisions.
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SEC Announces Agenda and Panelists for Roundtable on Proxy Advisory Services

The SEC has announced its agenda and panelists for the roundtable on proxy advisory services to be held on December 5 at 9:30 a.m. EST. The event will be webcast live as well as archived.

The roundtable will be divided into two sessions, with the first session focused on the current use of proxy advisory services, including the factors that may have contributed to their use, the purposes and effects of using the services, and competition in the marketplace for such services.  In the second session, participants will discuss issues identified in the Commission’s proxy plumbing concept release, including potential conflicts of interest that may exist for proxy advisory firms and users of their services, and the transparency and accuracy of recommendations by proxy advisory firms.
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