Glass Lewis recently released its updated policies for 2019 for the U.S., Canada, Israel, and Shareholder Initiatives (See link below to access). On the compensation front, the changes impacting U.S. companies are:
- Say-on-Pay (SOP) Vote Analysis– GL expanded its discussion of several executive compensation topics and how these factor into its SOP voting recommendations, including excise tax gross-ups, severance and sign-on arrangements, grants of front-loaded awards, clawback provisions, and CD&A disclosure for smaller reporting companies.
- Excise Tax Gross-Up Provisions: GL will now look to see whether the company adopted a new excise tax gross-up in the past year which may factor into a negative SOP vote recommendation. GL may also recommend against board committee members that approved the excise tax gross-up, especially where the company had previously committed to not adopt such provisions.
- Severance and Sign-On Arrangements: GL indicates that in determining whether these to be egregious or excessive (and thus cause for a negative SOP vote recommendation), it will consider general U.S. market practice, as well as the size and design of these entitlements.
- Front-Loaded Awards: GL will take the quantum, design and company’s rationale for granting such awards into consideration.
- Clawback Provisions: GL indicates that it is increasingly focusing on the specific terms of recoupment policies beyond whether a company maintains one that satisfies minimum legal requirements. GL believes clawbacks should be triggered, at a minimum, in the event of a restatement of financial results or similar revision of performance indicators upon which bonuses were paid. GL indicates that where a company maintains only a bare-minimum clawback, the absence of more expansive recoupment tools may inform GL’s view of the compensation program (and lead to a negative SOP vote recommendation).
- CD&A Disclosure for Smaller Reporting Companies: GL will consider the impact of materially decreased CD&A disclosure (as permitted for certain smaller companies when in June 2018 the SEC changed the definition of “smaller reporting company” to pull in companies that previously did not comply), when analyzing the performance of a board’s compensation committee and may recommend against committee members in cases where a reduction in the disclosure substantially impacts shareholders’ ability to make an informed assessment of the company’s executive pay practices.
- Peer Groups-GL added clarifying language regarding its approach to peer groups. GL is looking to see if the peer group is appropriate and of the correct size and that benchmarking is not set above peers.
- Pay-for-Performance-GL added clarifying language regarding its approach to pay-for-performance, including a list of practices that may cause it to find that pay and performance are not aligned and cause it to recommend against a company’s SOP vote.
- Use of Discretion-GL added clarifying language regarding its approach to the use of discretion. GL is looking to see if discretionary bonuses are paid when short- or long-term incentive plan targets are not achieved, which could lead it to recommend against a company’s SOP vote.
- Director Compensation-GL added clarifying language regarding its approach to director compensation. GL believes non-employee director fees should be competitive, but excessive fees represent a financial cost to the company to the company and potentially compromise the objectivity and independence of non-employee directors. GL believes that director equity grants should not be performance-based.
- Bonus Plans-GL added clarifying language regarding its approach to bonus plans. GL believes short-term bonus or incentives should be demonstrably tied to performance. GL believes a mix of corporate and individual performance measures is appropriate.
On the shareholder proposal front, GL has made several updates to its policies on shareholder proposals covering:
- Special Meetings: GL has codified its policy regarding conflicting special meeting shareholder resolutions. Where both shareholders and the company put forward proposals for shareholders to call a special meeting, GL will generally recommend for the proposal with the lower threshold. Where there are conflicting proposals from shareholders and the company, and the company does not currently maintain a special meeting right, GL may recommend for the shareholder proposal. In cases where a company excluded a special meeting shareholder proposal in favor of a management proposal ratifying an existing special meeting right, GL will typically recommend against the ratification proposal as well as members of the nominating and governance committee.
- Diversity Reporting: GL revised its policy regarding shareholder proposal seeking diversity reporting. GL will consider: (1) the industry in which the company operates and the nature of its operations, (2) the company’s current level of disclosure on issues related to workforce diversity, (3) the level of such disclosure at the company’s peers, and (4) any lawsuits or accusations of discrimination within the company.
- Environmental and Social Issues: GL codified its approach to reviewing how boards are overseeing environmental and social issues. For large caps and where GL identifies material oversight issues, GL will review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of environmental and/or social issues. GL will also identify where such oversight has not been clearly defined.
- Materiality: GL formalized its consideration of materiality when reviewing and making voting recommendations on shareholder proposals. GL will place significant emphasis on the financial implications of a company adopting, or not adopting, any proposed shareholder resolution. To aid in determining financial materiality, GL will consider the standards developed by the Sustainability Accounting Standards Board.
- Recoupment Policies: GL revised its policy concerning shareholder proposals requesting companies adopt enhanced recoupment provisions. In cases where a company has not adopted policies that provide sufficient protections for reputational and financial harm, GL may consider supporting well-crafted resolutions seeking to expand the recoupment policy.
- Written Consent Proposals: WHere a company has adopted a special meeting right of 15% or below and has adopted reasonable proxy access provisions, GL will generally recommend against shareholder proposals asking the company to adopt bylaws to provide shareholders with the right to act by written consent.