Prominent proxy advisers Institutional Shareholder Services and Glass Lewis have updated their voting policies for upcoming shareholder meetings, focusing ondirector overboarding, unilateral board actions, problematic pay practices, and the responsibilities of directors for oversight of environmental and social issues that may affect company performance.
ISS’ updates to its benchmark proxy voting policies will be applied for shareholder meetings held on or after Feb. 1, 2016. Among the changes is a new approach to director overboarding. For most directors, except for standing CEOs, the maximum number of public company boards a director can sit on before being considered “overboarded” is being reduced from six to five. There will be a one-year grace period until 2017. During 2016, ISS research reports will highlight if a director is on more than five public company boards, but adverse voting recommendations will not be issued under this new overboarding policy unless the current maximum of six boards is exceeded. For CEOs, the current overboarding limit will remain at two outside directorships.
Regarding board actions that significantly reduce shareholder rights without approval by shareholders, so-called unilateral board actions, ISS’ U.S. benchmark policy is being updated to distinguish between unilateral board adoptions of bylaw or charter provisions made prior to or in connection with a company's initial public offering, and unilateral board amendments to those documents made after a company's IPO
ISS' U.S. “Problematic Pay Practice” policy will be updated to add “insufficient executive compensation disclosure by externally managed issuers (EMIs)” to the list of practices that may result in an adverse voting recommendation on executive compensation. This will apply when an EMI fails to provide sufficient disclosure to enable shareholders to make a reasonable assessment of compensation arrangements for named executive officers.
Glass Lewis’ 2016 Benchmark Guidelines for U.S. companies clarifies its approach to conflicting management and shareholder proposals. Reviews will focus on: the nature of the underlying issue; the benefit to shareholders from implementation of the proposal; the materiality of the differences between the terms of the shareholder proposal and management proposal; the appropriateness of the provisions in the context of a company’s shareholder base, corporate structure and other relevant circumstances; and a company’s overall governance profile, specifically its responsiveness to shareholders as evidenced by shareholder proposals and its adoption of progressive shareholder rights provisions.
The firm also refined its approach to companies that include exclusive forum provisions in their governing documents in connection with an IPO. It will no longer recommend that shareholders vote against the chairman of the nominating and governance committee in such situations. Instead, it will weigh the presence of an exclusive forum provision in a newly-public company’s bylaws in conjunction with other provisions it “believes will unduly limit shareholder rights such as supermajority vote requirements, a classified board or a fee-shifting bylaw.” The policy to recommend voting against the chairman of the nominating and governance committee when a company adopts an exclusive forum provision without shareholder approval outside of a spin-off, merger, or IPO will not change.
Glass Lewis also clarified its policy regarding the responsibilities of directors for oversight of environmental and social issues and when it may consider recommending that shareholders vote against directors for leadership lapses in in these areas that have a potential effect on shareholder value.
Regarding nominating committee performance, the firm clarified that it may consider recommending that shareholders vote against the chair of the nominating committee when the board’s failure to ensure it has directors with relevant experience, either through periodic director assessment or board refreshment, contributed to a company’s poor performance.
??Glass Lewis “recognizes that the time directors are devoting to their board obligations has increased in recent years” and, coupled with increased investor scrutiny of directors’ commitments, that has resulted in directors serving on fewer boards.
In 2016, it will closely review director board commitments and may note as a concern instances of directors serving on more than five total boards, for directors who are not also executives, and more than two total boards for a director who serves as an executive of a public company. Voting recommendations, however, will be continue to be based on existing thresholds of three total boards for a director who serves as an executive of a public company and six total boards for directors who are not public company executives.
Beginning in 2017, Glass Lewis will generally recommend voting against a director who serves as an executive officer of any public company while serving 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.
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