On December 19, 2023, Institutional Shareholder Services Inc. (“ISS”) released its updates to its Proxy Voting Guidelines. Somewhat unusually, ISS made only one change to its voting recommendation policies for U.S. public companies this year, related to shareholder proposals that would require future executive severance payments to be submitted to shareholders for ratification. ISS says it will evaluate such proposals on a case-by-case basis and will consider certain factors, including the company’s current change-in-control agreements, the existence of problematic compensation features, and recent compensation controversies.
Additionally, Glass, Lewis & Co. LLC (“Glass Lewis”) recently released its 2024 Proxy Voting Policy Guidelines (the “Guidelines”). The Guidelines include several new and revised policies that will be effective for 2024 annual meetings. There are several noteworthy policy changes affecting U.S. public companies, including the following.
Board Oversight of Cyber Risk. In response to the new rules of the Securities and Exchange Commission (the “SEC”), Glass Lewis will “closely evaluate” a company’s response and disclosure when cyberattacks have caused “significant harm to shareholders.” In these instances, Glass Lewis expects periodic disclosure from the company “communicating its ongoing progress towards resolving and remediating the impact of the cyberattack.” Furthermore, Glass Lewis may recommend against directors if the “board’s oversight, response or disclosures” concerning the cyberattack are “insufficient.” Glass Lewis does not elaborate on what level of disclosure would be sufficient.
Board Oversight of Environmental and Social Issues. Glass Lewis now expects a board’s committee charters or other appropriate governing document to codify a “meaningful level of oversight and accountability” for a company’s environmental and social impacts. The Guidelines do not state weather Glass Lewis will recommend against directors if committee charters do not reflect this oversight.
Board Accountability for Climate-Related Issues. Previously, Previously, Glass Lewis’s climate policy applied only to the largest emitting companies in the “Climate Action 100” list. Beginning in 2024, this policy will be expanded to S&P 500 companies, where, according to either the Sustainability Accounting Standards Board or Glass Lewis itself, emissions or climate impacts represent a “financially material risk.” At these companies, Glass Lewis expects (a) disclosure that complies with the recommendations of the Task Force on Climate-related Financial Disclosures (which was an advisory body of G20 countries, the Financial Stability Board, and representatives of companies, including “large banks, insurance companies, asset managers, pension funds, large non-financial companies, accounting and consulting firms, and credit rating agencies”) and (b) “clearly defined board-level oversight” for climate-related issues. If either is “significantly lacking,” Glass Lewis may recommend against responsible directors. While Glass Lewis does not state which directors will be impacted, presumably it will be members of the board committee to which climate oversight is delegated.
Clawbacks. In response to the new rules of the SEC, Glass Lewis now expects companies to have clawback policies “with the power to recoup incentive compensation from an executive when there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure, or a material operational failure.” Glass Lewis does not elaborate on what it would consider material. In situations where a clawback is permissible, Glass Lewis expects disclosure “if the company determines ultimately to refrain from recouping compensation as well as disclosure of alternative measures that are instead pursued.”
Control Shares. Glass Lewis will now recommend in favor of shareholder proposals to opt out of control share statutes. Several states, including Maryland, have enacted control share statutes that may protect against unsolicited changes in control by limiting voting rights of an actual or potential “acquiring person” that acquires ownership of shares above a certain threshold—10% in Maryland. Additionally, if a closed-end fund or business development company “relies” on a control share statute as a defense, Glass Lewis will recommend against the chair of the nominating and governance committee at the next annual meeting. Glass Lewis does not define what it means by “relies”; it could mean that either (1) the acquiring person actually lost voting rights because it exceeded the control share limit or (2) the mere presence of the statute, even though not triggered, was enough to deter the acquiring person from acquiring more shares.
Board Responsiveness. Glass Lewis generally expects shareholder engagement by the board and some level of board responsiveness whenever shareholders holding more than 20% of shares vote against the recommendation of management. Glass Lewis has clarified that (a) this policy applies to director nominees and management proposals, but not to shareholder proposals, and (b) the 20% is calculated using both votes cast against and abstentions. We disagree with the logic behind (b), as abstentions are not votes cast and are not expressions by the shareholder against a matter.
Board Diversity. Glass Lewis has clarified its policy regarding board diversity to emphasize that when a board does not meet Glass Lewis’s diversity requirements, Glass Lewis might not recommend against directors if the company has disclosed a timeline for appointing additional diverse directors. An acceptable timeline for Glass Lewis is generally by the next annual meeting “or as soon as is reasonably practicable.” This appears to be a slight easing of Glass Lewis’s existing policy, as companies previously had to commit to appointing additional diverse directors by the next annual meeting to avoid triggering the policy.
