Glass Lewis and ISS issue new policy guidance on impacts of the coronavirus

In its new guidance, Glass Lewis said it “expects all governance issues and most proposal types to be impacted by the pandemic” and that it will exercise its existing “discretion and pragmatism to prioritize timing, certainty, disclosure, and voting on any affected proposals.” Glass Lewis said it’s likely that this will continue to be the case through 2021.

Among specific governance areas Glass Lewis said its paying attention to include:

Compensation and balance sheets: Glass Lewis said that changes to compensation programs that are likely to receive wide shareholder support will be those that “take a proportional approach to the impacts on shareholders and employees.” It added that “responsible companies hit hard by the crisis have taken early and decisive action to roll back planned salary increases or above-target bonus outcomes, sharing the pain felt by employees and shareholders.”

Glass Lewis also said to “expect a marked increase in shareholder concerns on repricing, dilution, burn rates, hurdle adjustments, changes to vesting periods, caps and cuts on incentives, and the quality of disclosure concerning the limits and exercise of board discretion. Companies with strong pay structures will be challenged to abide by them, and firms with less robust programs will be forced to choose between lying in the bed they’ve made or changing arrangements and all but guaranteeing shareholder ire.”

Glass Lewis added that boards and executives for at least the next 18 months have a “heavy burden of proof” to justify their compensation levels in a drastically different market for talent. “Trying to make executives whole at even further expense to shareholders and other employees is a certainty for proposals to be rejected and boards to get thrown out—and an open invitation for activists and lawsuits onto a company’s back for years to come,” Glass Lewis said. “Even those companies who project a ‘business as usual’ approach to executive pay will face opposition if employees and shareholders see their own ‘paychecks’ cut. Companies would be wise to avoid this.”

Disclosure and explanation: Glass Lewis emphasized that “effective disclosure and rationales provided by companies will be particularly critical to [the] exercise of discretion in making judgements about whether changes made as a result of this crisis are justified and address material shareholder concerns. We will also assess the reasonableness of proposed changes and outcomes by considering if they are consistent and in proportion to the impact on shareholder interests and employees.”

Regarding executive pay, specifically, Glass Lewis said it expects boards “to proactively seek changes that align with employee and shareholder experiences, recognizing that executives might need to take a pay cut. Further, companies that we believe have a good track record on governance, performance, and the use of board discretion prior to the pandemic will be afforded more discretion in our analysis than those that do not.”

Timing and clarity: “In times of crisis, it is particularly important that the timing of decisions is not delayed or postponed significantly on matters that are material to a company’s ability to address risks, manage operations, and maximize shareholder returns,” Glass Lewis said. “Companies that move fast and decisively during a time of crisis, in cooperation with their shareholders, are more likely to contain the damage and identify opportunities for positive outcomes that are in all parties’ interests.”

ISS guidance

ISS released its own guidance on April 8. Regarding compensation matters—the adjustment of performance goals and stock option repricings, specifically—it has emphasized that it will take a case-by-case approach in analyzing company decisions in response to the pandemic.

ISS said, while decisions by directors to make such adjustments to 2020 compensation programs generally will be analyzed and addressed by shareholders in 2021, “boards are encouraged to provide contemporaneous disclosure to shareholders of their rationales for making such changes. Such disclosures will provide shareholders with greater insights now and next year into the board’s rationale and circumstances when the changes are made.”

Regarding long-term compensation plans, ISS reiterated that its benchmark voting policies “generally are not supportive of changes to midstream or in-flight awards, since they cover multi-year periods.” Accordingly, it said it will look at any such in-flight changes made to long-term awards “on a case-by-case basis to determine if directors exercised appropriate discretion and provided adequate explanation to shareholders of the rationale for changes.”

For boards that may be considering altering the structures of their long-term plans taking the new economic environment into consideration, ISS said it will assess such structural changes under its existing benchmark policy frameworks.

Regarding stock option repricing actions, ISS said that where “boards undertake repricing actions without asking shareholders to approve or ratify their actions in a timely fashion, the directors’ actions will remain subject to scrutiny under the U.S. benchmark policy board accountability provisions (and equivalents in other market policies where relevant).” If boards seek shareholder approval/ratification of repricing actions at 2020 meetings, ISS said it will apply its existing case-by-case policy approach for the relevant market.

Under U.S. market policy, for example, ISS said it will “generally recommend opposing any repricing that occurs within one year of a precipitous drop in the company’s stock price.” Among other factors it will examine are whether (1) the design is value-neutral to shareholders, (2) surrendered options are added back to the plan reserve, (3) replacement awards are vested immediately, and (4) where executive officers and directors are excluded. “We consider this approach to continue to be appropriate during the circumstances of the COVID-19 pandemic,” ISS said.

In their guidance documents, both ISS and Glass Lewis address other areas as well, including virtual meetings; poison pills and other defensive measures; and board and management changes.

Industry-specific matters

The Glass Lewis guidance goes a bit further by addressing concerns related to certain industries, particularly oil and gas and the plastics industry. “While many sectors will be hard hit during this time, the unique triple threat to oil and gas companies is worth specific mention,” Glass Lewis said. “The accumulation of high and poorly rated debt, the Saudi-driven plunge in oil prices and shrinking demand due to the pandemic, and social distancing measures threaten the continuing business of many companies in the sector. The threat will be particularly notable for companies involved in fracking, where higher levels of poor debt are now harder to repay or refinance as the price of crude oil falls toward and below the cost of shale oil production.”

Glass Lewis said it will be “closely monitoring how companies respond to protect shareholder value in exceptionally challenging conditions that will likely include many restructures and bankruptcies.” It will also be monitoring “how the closely related plastics industry is impacted given the high level of shareholder concern and proposals related to plastics we expect to see this year.”