|
Advantages of a Majority Vote Standard
|
25
|
|
Conflicting and Excluded Proposals
|
26
|
|
TRANSPARENCY AND INTEGRITY IN FINANCIAL REPORTING
|
28
|
|
Auditor Ratification
|
28
|
|
Voting Recommendations on Auditor Ratification
|
29
|
|
Pension Accounting Issues
|
29
|
|
THE LINK BETWEEN COMPENSATION AND PERFORMANCE
|
30
|
|
Advisory Vote on Executive Compensation (“Say-on-Pay”)
|
30
|
|
Say-on-Pay Voting Recommendations
|
31
|
|
Company Responsiveness
|
32
|
|
Pay for Performance
|
32
|
|
Short-Term Incentives
|
33
|
|
Long-Term Incentives
|
34
|
|
Grants of Front-Loaded Awards
|
35
|
|
One-Time Awards
|
35
|
|
Contractual Payments and Awards
|
36
|
|
Sign-on Awards and Severance Benefits
|
36
|
|
Change in Control
|
36
|
|
Excise Tax Gross-Ups
|
37
|
|
Amended Employment Agreements
|
37
|
|
Recoupment Provisions (“Clawbacks”)
|
37
|
|
Hedging of Stock
|
37
|
|
Pledging of Stock
|
37
|
|
Compensation Consultant Independence
|
38
|
|
CEO Pay Ratio
|
39
|
|
Frequency of Say-on-Pay
|
39
|
|
Vote on Golden Parachute Arrangements
|
39
|
|
Equity-Based Compensation Plan Proposals
|
39
|
|
Option Exchanges and Repricing
|
41
|
|
Option Backdating, Spring-Loading and Bullet-Dodging
|
41
|
|
Director Compensation Plans
|
42
|
|
Employee Stock Purchase Plans
|
43
|
|
Executive Compensation Tax Deductibility — Amendment to
IRS 162(m)
|
43
|
|
|
|
|
GOVERNANCE STRUCTURE AND THE SHAREHOLDER FRANCHISE
|
44
|
|
Anti-Takeover Measures
|
44
|
|
Poison Pills (Shareholder Rights Plans)
|
44
|
|
NOL Poison Pills
|
44
|
|
Fair Price Provisions
|
45
|
|
Quorum Requirements
|
46
|
|
Director and Officer Indemnification
|
46
|
|
Reincorporation
|
46
|
|
Exclusive Forum and Fee-Shifting Bylaw Provisions
|
47
|
|
Authorized Shares
|
47
|
|
Advance Notice Requirements
|
48
|
|
Virtual Shareholder Meetings
|
48
|
|
Voting Structure
|
49
|
|
Dual-Class Share Structures
|
49
|
|
Cumulative Voting
|
49
|
|
Supermajority Vote Requirements
|
50
|
|
Transaction of Other Business
|
50
|
|
Anti-Greenmail Proposals
|
50
|
|
Mutual Funds: Investment Policies and Advisory Agreements
|
50
|
|
Real Estate Investment Trusts
|
51
|
|
Preferred Stock Issuances at REITs
|
51
|
|
Business Development Companies
|
52
|
|
Authorization to Sell Shares at a Price Below Net Asset Value
|
52
|
|
Auditor Ratification and Below-NAV Issuances
|
52
|
|
SHAREHOLDER INITIATIVES
|
53
|
|
Environmental, Social & Governance Initiatives
|
53
|
Guidelines Introduction
SUMMARY OF
CHANGES FOR THE 2020 UNITED STATES POLICY GUIDELINES
Glass
Lewis evaluates these guidelines on an ongoing basis and formally updates them on an annual basis. This year we’ve made
noteworthy revisions in the following areas, which are summarized below but discussed in greater detail in the relevant section
of this document:
STANDARDS FOR
ASSESSING THE AUDIT COMMITTEE
We have
codified additional factors we will consider when evaluating the performance of audit committee members. Specifically, Glass Lewis
will generally recommend voting against the audit committee chair when fees paid to the company’s external auditor are not
disclosed. Glass Lewis believes that when considering a proposal to ratify the board’s choice of auditor, the balance of
fees paid to the auditor for audit-related and non-audit services is crucial information. Without this basic disclosure, we do
not believe shareholders are able to make an informed judgement on the independence of the company’s external auditor and
we believe it is the duty of the audit committee to provide this information to shareholders.
NOMINATING
AND GOVERNANCE COMMITTEE PERFORMANCE
We
have codified additional factors we will consider when evaluating the performance of governance committee members.
Specifically, Glass Lewis will generally recommend voting against the governance committee chair when: (i) directors’
records for board and committee meeting attendance are not disclosed; or (ii) when it is indicated that a director attended
less than 75% of board and committee meetings but disclosure is sufficiently vague that it is not possible to determine which
specific director’s attendance was lacking. We believe that attendance at board and committee meetings is one of
the most basic ways for directors to fulfill their responsibilities to shareholders and that disclosure of attendance records
is a critical element in evaluating the performance of directors more generally.
Additionally,
in September 2019, the SEC announced guidance stating that in cases where a company seeks to exclude a shareholder proposal, the
staff will inform the proponent and the company of its position, which may be that the staff concurs, disagrees or declines to
state a view, with respect to the company’s asserted basis for exclusion. We believe that companies should only omit proposals
in instances where the SEC has explicitly concurred with a company’s argument that a proposal should be excluded. In instances
where the SEC has declined to state a view on whether a shareholder resolution should be excluded, we believe that such proposals
should be included in a company’s proxy filings. A failure to do so will likely lead Glass Lewis to recommend that shareholders
vote against the members of the governance committee.
The SEC
also stated that beginning with the 2019-2020 shareholder proposal season, the staff may respond orally, instead of in writing,
to some no-action requests. In instances where the SEC has verbally permitted a company to exclude a shareholder proposal and
there is no written record provided by the SEC about such determination, we expect the company to provide some disclosure concerning
this no-action relief. In cases where a company has failed to include a proposal on its ballot without such disclosure, we will
generally recommend shareholders vote against the members of the governance committee of the board.
COMPENSATION
COMMITTEE PERFORMANCE
We
have codified additional factors we will consider when evaluating the performance of compensation committee members.
Specifically, Glass Lewis will generally recommend against all members of the compensation committee when the board adopts
a frequency for its advisory vote on executive compensation other than the frequency approved by a plurality of shareholders.
Although frequency proposals are advisory in nature, we generally believe such cases are an example of the board ignoring the
clear will of shareholders, for which all members of the compensation committee should be held responsible.
CONTRACTUAL
PAYMENTS AND ARRANGEMENTS
We have
clarified our approach to analyzing both ongoing and new contractual payments and executive entitlements. In general, we disfavor
contractual agreements that are excessively restrictive in favor of the executive, including excessive severance payments, new
or renewed single-trigger change-in-control arrangements, excise tax gross ups and multi-year guaranteed awards. Further, we
believe that the extension of such entitlements through renewed or revised employment agreements represent a missed opportunity
to remedy shareholder un-friendly provisions.
COMPANY RESPONSIVENESS
We have
expanded our discussion of what we consider to be an appropriate response following low shareholder support for the say-on-pay
proposal at the previous annual meeting, including differing levels of responsiveness depending on the severity and persistence
of shareholder opposition. We expect a robust disclosure of engagement activities and specific changes made in response to shareholder
feedback. Absent such disclosure, we may consider recommending against the upcoming say-on-pay proposal.
CLARIFYING
AMENDMENTS
In addition
to the above, we have clarified and formalized certain aspects of our current approach, including our assessment of situations
where the board adopts an exclusive forum provision without shareholder approval. While Glass Lewis ordinarily recommends against
the governance committee chair in such cases, we believe additional factors merit consideration. Specifically, we have added a
footnote (p. 15) clarifying that we may make exceptions to this policy where it can be reasonably determined that the provisions
of a forum selection clause are narrowly crafted to suit the unique circumstances facing the company.
With
respect to compensation, these clarifications include defining situations where we report on post-fiscal year end compensation
decisions (p. 31), setting expectations for disclosure of mid-year adjustments to STI plans (p. 33-34) and enhancing our discussion
of excessively broad definitions of “change in control” in employment agreements (p. 36).
Lastly, we
have made several minor edits of a housekeeping nature, including the removal of several outdated references, in order to enhance
clarity and readability.
A Board
of Directors that Serves the Interests of Shareholders
ELECTION OF
DIRECTORS
The
purpose of Glass Lewis’ proxy research and advice is to facilitate shareholder voting in favor of governance structures
that will drive performance, create shareholder value and maintain a proper tone at the top. Glass Lewis looks for talented boards
with a record of protecting shareholders and delivering value over the medium- and long-term. We believe that a board can best
protect and enhance the interests of shareholders if it is sufficiently independent, has a record of positive performance, and
consists of individuals with diverse backgrounds and a breadth and depth of relevant experience.
INDEPENDENCE
The
independence of directors, or lack thereof, is ultimately demonstrated through the decisions they make. In assessing the independence
of directors, we will take into consideration, when appropriate, whether a director has a track record indicative of making
objective decisions. Likewise, when assessing the independence of directors we will also examine when a director’s track
record on multiple boards indicates a lack of objective decision-making. Ultimately, we believe the determination of whether a
director is independent or not must take into consideration both compliance with the applicable independence listing requirements
as well as judgments made by the director.
We
look at each director nominee to examine the director’s relationships with the company, the company’s executives,
and other directors. We do this to evaluate whether personal, familial, or financial relationships (not including director compensation)
may impact the director’s decisions. We believe that such relationships make it difficult for a director to put shareholders’
interests above the director’s or the related party’s interests. We also believe that a director who owns more than
20% of a company can exert disproportionate influence on the board, and therefore believe such a director’s independence
may be hampered, in particular when serving on the audit committee.
Thus,
we put directors into three categories based on an examination of the type of relationship they have with the company:
Independent
Director — An independent director has no material financial, familial or other current
relationships with the company, its executives, or other board members, except for board service and standard fees paid for that
service. Relationships that existed within three to five years1 before the inquiry
are usually considered “current” for purposes of this test.
Affiliated
Director — An affiliated director has, (or within the past three years, had) a material
financial, familial or other relationship with the company or its executives, but is not an employee of the company.2
This includes directors whose employers have a material financial relationship with the
|
|
1
|
NASDAQ originally proposed
a five-year look-back period but both it and the NYSE ultimately settled on a three-year look-back prior to finalizing their rules.
A five-year standard is more appropriate, in our view, because we believe that the unwinding of conflicting relationships between
former management and board members is more likely to be complete and final after five years. However, Glass Lewis does not apply
the five-year look-back period to directors who have previously served as executives of the company on an interim basis for less
than one year.
|
|
|
2
|
If a company does not consider
a non-employee director to be independent, Glass Lewis will classify that director as an affiliate.
|
company.3
In addition, we view a director who either owns or controls 20% or more of the company’s voting stock, or is
an employee or affiliate of an entity that controls such amount, as an affiliate.4
We
view 20% shareholders as affiliates because they typically have access to and involvement with the management of a company that
is fundamentally different from that of ordinary shareholders. More importantly, 20% holders may have interests that diverge from
those of ordinary holders, for reasons such as the liquidity (or lack thereof) of their holdings, personal tax issues, etc.
Glass
Lewis applies a three-year look back period to all directors who have an affiliation with the company other than former employment,
for which we apply a five-year look back.
Definition
of “Material”: A material relationship is one
in which the dollar value exceeds:
|
|
•
|
$50,000
(or where no amount is disclosed) for directors who are paid for a service they have
agreed to perform for the company, outside of their service as a director, including
professional or other services; or
|
|
|
•
|
$120,000
(or where no amount is disclosed) for those directors employed by a professional services
firm such as a law firm, investment bank, or consulting firm and the company pays the
firm, not the individual, for services.5 This dollar limit would also apply
to charitable contributions to schools where a board member is a professor; or charities
where a director serves on the board or is an executive;6 and any aircraft
and real estate dealings between the company and the director’s firm; or
|
|
|
•
|
1%
of either company’s consolidated gross revenue for other business relationships
(e.g., where the director is an executive officer of a company that provides services
or products to or receives services or products from the company).7
|
Definition
of “Familial” — Familial relationships
include a person’s spouse, parents, children, siblings, grandparents, uncles, aunts, cousins, nieces, nephews, in-laws,
and anyone (other than domestic employees) who shares such person’s home. A director is an affiliate if: i) he or she has
a family member who is employed by the company and receives more than $120,000 in annual compensation; or, ii) he or she has a
family member who is employed by the company and the company does not disclose this individual’s compensation.
Definition
of “Company” — A company includes any
parent or subsidiary in a group with the company or any entity that merged with, was acquired by, or acquired the company.
Inside
Director — An inside director simultaneously serves as a director and as an employee
of the company. This category may include a board chair who acts as an employee of the company or is paid as an employee of the
company. In our view, an inside director who derives a greater amount of income as a result of affiliated transactions with the
company rather than through compensation paid by the company (i.e., salary, bonus, etc. as a company employee) faces a conflict
between making decisions that are in the best interests of the company versus those in the director’s own best interests.
Therefore, we will recommend voting against such a director.
|
|
3
|
We allow a five-year grace
period for former executives of the company or merged companies who have consulting agreements with the surviving company. (We
do not automatically recommend voting against directors in such cases for the first five years.) If the consulting agreement persists
after this five-year grace period, we apply the materiality thresholds outlined in the definition of “material.”
|
|
|
4
|
This includes a director who
serves on a board as a representative (as part of his or her basic responsibilities) of an investment firm with greater than 20%
ownership. However, while we will generally consider him/her to be affiliated, we will not recommend voting against unless (i)
the investment firm has disproportionate board representation or (ii) the director serves on the audit committee.
|
|
|
5
|
We may deem such a transaction
to be immaterial where the amount represents less than 1% of the firm’s annual revenues and the board provides a compelling
rationale as to why the director’s independence is not affected by the relationship.
|
|
|
6
|
We will generally take into
consideration the size and nature of such charitable entities in relation to the company’s size and industry along with
any other relevant factors such as the director’s role at the charity. However, unlike for other types of related party
transactions, Glass Lewis generally does not apply a look-back period to affiliated relationships involving charitable contributions;
if the relationship between the director and the school or charity ceases, or if the company discontinues its donations to the
entity, we will consider the director to be independent.
|
|
|
7
|
This includes cases where
a director is employed by, or closely affiliated with, a private equity firm that profits from an acquisition made by the company.
Unless disclosure suggests otherwise, we presume the director is affiliated.
|
Additionally,
we believe a director who is currently serving in an interim management position should be considered an insider, while a director
who previously served in an interim management position for less than one year and is no longer serving in such capacity is considered
independent. Moreover, a director who previously served in an interim management position for over one year and is no longer
serving in such capacity is considered an affiliate for five years following the date of his/her resignation or departure from
the interim management position.
VOTING
RECOMMENDATIONS ON THE BASIS OF BOARD INDEPENDENCE
Glass
Lewis believes a board will be most effective in protecting shareholders’ interests if it is at least two- thirds independent.
We note that each of the Business Roundtable, the Conference Board, and the Council of Institutional Investors advocates that
two-thirds of the board be independent. Where more than one-third of the members are affiliated or inside directors, we typically8
recommend voting against some of the inside and/ or affiliated directors in order to satisfy the two-thirds threshold.
In
the case of a less than two-thirds independent board, Glass Lewis strongly supports the existence of a presiding or lead director
with authority to set the meeting agendas and to lead sessions outside the insider chair’s presence.
In
addition, we scrutinize avowedly “independent” chairs and lead directors. We believe that they should be unquestionably
independent or the company should not tout them as such.
COMMITTEE
INDEPENDENCE
We
believe that only independent directors should serve on a company’s audit, compensation, nominating, and governance committees.9
We typically recommend that shareholders vote against any affiliated or inside director seeking appointment to an
audit, compensation, nominating, or governance committee, or who has served in that capacity in the past year.
Pursuant
to Section 952 of the Dodd-Frank Act, as of January 11, 2013, the SEC approved new listing requirements for both the NYSE and
NASDAQ which require that boards apply enhanced standards of independence when making an affirmative determination of the independence
of compensation committee members. Specifically, when making this determination, in addition to the factors considered when
assessing general director independence, the board’s considerations must include: (i) the source of compensation of the
director, including any consulting, advisory or other compensatory fee paid by the listed company to the director (the “Fees
Factor”); and (ii) whether the director is affiliated with the listing company, its subsidiaries, or affiliates of its subsidiaries
(the “Affiliation Factor”).
Glass
Lewis believes it is important for boards to consider these enhanced independence factors when assessing compensation committee
members. However, as discussed above in the section titled Independence, we apply our own standards when assessing the independence
of directors, and these standards also take into account consulting and advisory fees paid to the director, as well as the director’s
affiliations with the company and its subsidiaries and affiliates. We may recommend voting against compensation committee members
who are not independent based on our standards.
|
|
8
|
With a staggered board, if
the affiliates or insiders that we believe should not be on the board are not up for election, we will express our concern regarding
those directors, but we will not recommend voting against the other affiliates or insiders who are up for election just to achieve
two-thirds independence. However, we will consider recommending voting against the directors subject to our concern at their next
election if the issue giving rise to the concern is not resolved.
|
|
|
9
|
We will recommend voting against
an audit committee member who owns 20% or more of the company’s stock, and we believe that there should be a maximum of
one director (or no directors if the committee is comprised of less than three directors) who owns 20% or more of the company’s
stock on the compensation, nominating, and governance committees.
|
INDEPENDENT
CHAIR
Glass
Lewis believes that separating the roles of CEO (or, more rarely, another executive position) and chair creates a better governance
structure than a combined CEO/chair position. An executive manages the business according to a course the board charts. Executives
should report to the board regarding their performance in achieving goals set by the board. This is needlessly complicated when
a CEO chairs the board, since a CEO/chair presumably will have a significant influence over the board.
While
many companies have an independent lead or presiding director who performs many of the same functions of an independent chair
(e.g., setting the board meeting agenda), we do not believe this alternate form of independent board leadership provides as robust
protection for shareholders as an independent chair.
It
can become difficult for a board to fulfill its role of overseer and policy setter when a CEO/chair controls the agenda and the
boardroom discussion. Such control can allow a CEO to have an entrenched position, leading to longer-than-optimal terms, fewer
checks on management, less scrutiny of the business operation, and limitations on independent, shareholder-focused goal-setting
by the board.
A
CEO should set the strategic course for the company, with the board’s approval, and the board should enable the CEO to carry
out the CEO’s vision for accomplishing the board’s objectives. Failure to achieve the board’s objectives should
lead the board to replace that CEO with someone in whom the board has confidence.
Likewise,
an independent chair can better oversee executives and set a pro-shareholder agenda without the management conflicts that a CEO
and other executive insiders often face. Such oversight and concern for shareholders allows for a more proactive and effective
board of directors that is better able to look out for the interests of shareholders.
Further,
it is the board’s responsibility to select a chief executive who can best serve a company and its shareholders and to
replace this person when his or her duties have not been appropriately fulfilled. Such a replacement becomes more difficult
and happens less frequently when the chief executive is also in the position of overseeing the board.
Glass
Lewis believes that the installation of an independent chair is almost always a positive step from a corporate governance perspective
and promotes the best interests of shareholders. Further, the presence of an independent chair fosters the creation of a thoughtful
and dynamic board, not dominated by the views of senior management. Encouragingly, many companies appear to be moving in this
direction — one study indicates that only 10 percent of incoming CEOs in 2014 were awarded the chair title, versus 48 percent
in 2002.10 Another study finds that
50 percent of S&P 500 boards now separate the CEO and chair roles, up from 37 percent in 2009, although the same study found
that only 30 percent of S&P 500 boards have truly independent chairs.11
We
do not recommend that shareholders vote against CEOs who chair the board. However, we typically recommend that our clients support
separating the roles of chair and CEO whenever that question is posed in a proxy (typically in the form of a shareholder proposal),
as we believe that it is in the long-term best interests of the company and its shareholders.
Further,
where the company has neither an independent chair nor independent lead director, we will recommend voting against the chair
of the governance committee.
|
|
10
|
Ken Favaro, Per-Ola Karlsson
and Gary L. Nelson. “The $112 Billion CEO Succession Problem.” (Strategy+Business, Issue 79, Summer 2015).
|
|
|
11
|
Spencer Stuart Board Index,
2018, p. 21.
|
PERFORMANCE
The
most crucial test of a board’s commitment to the company and its shareholders lies in the actions of the board and its members.
We look at the performance of these individuals as directors and executives of the company and of other companies where they have
served.
We
find that a director’s past conduct is often indicative of future conduct and performance. We often find directors with
a history of overpaying executives or of serving on boards where avoidable disasters have occurred serving on the boards of
companies with similar problems. Glass Lewis has a proprietary database of directors serving at over 8,000 of the most widely
held U.S. companies. We use this database to track the performance of directors across companies.
VOTING RECOMMENDATIONS
ON THE BASIS OF PERFORMANCE
We
typically recommend that shareholders vote against directors who have served on boards or as executives of companies with records
of poor performance, inadequate risk oversight, excessive compensation, audit- or accounting-related issues, and/or other indicators
of mismanagement or actions against the interests of shareholders. We will reevaluate such directors based on, among other factors,
the length of time passed since the incident giving rise to the concern, shareholder support for the director, the severity of
the issue, the director’s role (e.g., committee membership), director tenure at the subject company, whether ethical lapses
accompanied the oversight lapse, and evidence of strong oversight at other companies.
Likewise,
we examine the backgrounds of those who serve on key board committees to ensure that they have the required skills and diverse
backgrounds to make informed judgments about the subject matter for which the committee is responsible.
We
believe shareholders should avoid electing directors who have a record of not fulfilling their responsibilities to shareholders
at any company where they have held a board or executive position. We typically recommend voting against:
|
|
1.
|
A
director who fails to attend a minimum of 75% of board and applicable committee meetings,
calculated in the aggregate.12
|
|
|
2.
|
A
director who belatedly filed a significant form(s) 4 or 5, or who has a pattern of late
filings if the late filing was the director’s fault (we look at these late filing
situations on a case-by-case basis).
|
|
|
3.
|
A
director who is also the CEO of a company where a serious and material restatement has
occurred after the CEO had previously certified the pre-restatement financial statements.
|
|
|
4.
|
A
director who has received two against recommendations from Glass Lewis for identical
reasons within the prior year at different companies (the same situation must also apply
at the company being analyzed).
|
Furthermore,
with consideration given to the company’s overall corporate governance, pay-for-performance alignment and board responsiveness
to shareholders, we may recommend voting against directors who served throughout a period in which the company performed significantly
worse than peers and the directors have not taken reasonable steps to address the poor performance.
|
|
12
|
However, where a director
has served for less than one full year, we will typically not recommend voting against for failure to attend 75% of meetings.
Rather, we will note the poor attendance with a recommendation to track this issue going forward. We will also refrain from recommending
to vote against directors when the proxy discloses that the director missed the meetings due to serious illness or other extenuating
circumstances.
|
BOARD
RESPONSIVENESS
Glass
Lewis believes that any time 20% or more of shareholders vote contrary to the recommendation of management, the board should,
depending on the issue, demonstrate some level of responsiveness to address the concerns of shareholders. These include instances
when 20% or more of shareholders (excluding abstentions and broker non-votes): WITHHOLD votes from (or vote AGAINST) a director
nominee, vote AGAINST a management-sponsored proposal, or vote FOR a shareholder proposal. In our view, a 20% threshold is significant enough to warrant a close examination of the underlying issues and an evaluation of whether or not a board response was
warranted and, if so, whether the board responded appropriately following the vote, particularly in the case of a compensation
or director election proposal. While the 20% threshold alone will not automatically generate a negative vote recommendation from
Glass Lewis on a future proposal (e.g., to recommend against a director nominee, against a say-on-pay proposal, etc.), it may
be a contributing factor to our recommendation to vote against management’s recommendation in the event we determine that
the board did not respond appropriately.
With
regards to companies where voting control is held through a dual-class share structure with disproportionate voting and economic
rights, we will carefully examine the level of approval or disapproval attributed to unaffiliated shareholders when determining
whether board responsiveness is warranted. Where vote results indicate that a majority of unaffiliated shareholders supported
a shareholder proposal or opposed a management proposal, we believe the board should demonstrate an appropriate level of responsiveness.
As
a general framework, our evaluation of board responsiveness involves a review of publicly available disclosures (e.g., the proxy
statement, annual report, 8-Ks, company website, etc.) released following the date of the company’s last annual meeting
up through the publication date of our most current Proxy Paper. Depending on the specific issue, our focus typically includes,
but is not limited to, the following:
|
|
•
|
At
the board level, any changes in directorships, committee memberships, disclosure of related
party transactions, meeting attendance, or other responsibilities;
|
|
|
•
|
Any
revisions made to the company’s articles of incorporation, bylaws or other governance
documents;
|
|
|
•
|
Any
press or news releases indicating changes in, or the adoption of, new company policies,
business practices or special reports; and
|
|
|
•
|
Any
modifications made to the design and structure of the company’s compensation program,
as well as an assessment of the company’s engagement with shareholders on compensation
issues as discussed in the CD&A, particularly following a material vote against a
company’s say-on-pay.
|
Our
Proxy Paper analysis will include a case-by-case assessment of the specific elements of board responsiveness that we examined
along with an explanation of how that assessment impacts our current voting recommendations.
THE
ROLE OF A COMMITTEE CHAIR
Glass
Lewis believes that a designated committee chair maintains primary responsibility for the actions of his or her respective committee.
As such, many of our committee-specific voting recommendations are against the applicable committee chair rather than the entire
committee (depending on the seriousness of the issue). However, in cases where we would ordinarily recommend voting against a
committee chair but the chair is not specified, we apply the following general rules, which apply throughout our guidelines:
|
|
•
|
If
there is no committee chair, we recommend voting against the longest-serving committee
member or, if the longest-serving committee member cannot be determined, the longest-serving
board member serving on the committee (i.e., in either case, the “senior director”);
and
|
|
|
•
|
If
there is no committee chair, but multiple senior directors serving on the committee,
we recommend voting against both (or all) such senior directors.
|
In
our view, companies should provide clear disclosure of which director is charged with overseeing each committee. In cases where
that simple framework is ignored and a reasonable analysis cannot determine which committee member is the designated leader, we
believe shareholder action against the longest serving committee member(s) is warranted. Again, this only applies if we would
ordinarily recommend voting against the committee chair but there is either no such position or no designated director in such
role.
On
the contrary, in cases where there is a designated committee chair and the recommendation is to vote against the committee chair,
but the chair is not up for election because the board is staggered, we do not recommend voting against any members of the committee
who are up for election; rather, we will note the concern with regard to the committee chair.
AUDIT
COMMITTEES AND PERFORMANCE
Audit
committees play an integral role in overseeing the financial reporting process because stable capital markets depend on reliable,
transparent, and objective financial information to support an efficient and effective capital market process. Audit committees
play a vital role in providing this disclosure to shareholders.
When
assessing an audit committee’s performance, we are aware that an audit committee does not prepare financial statements,
is not responsible for making the key judgments and assumptions that affect the financial statements, and does not audit the numbers
or the disclosures provided to investors. Rather, an audit committee member monitors and oversees the process and procedures
that management and auditors perform. The 1999 Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness
of Corporate Audit Committees stated it best:
A
proper and well-functioning system exists, therefore, when the three main groups responsible for financial reporting — the
full board including the audit committee, financial management including the internal auditors, and the outside auditors —
form a ‘three legged stool’ that supports responsible financial disclosure and active participatory oversight. However,
in the view of the Committee, the audit committee must be ‘first among equals’ in this process, since the audit committee
is an extension of the full board and hence the ultimate monitor of the process.
STANDARDS
FOR ASSESSING THE AUDIT COMMITTEE
For
an audit committee to function effectively on investors’ behalf, it must include members with sufficient knowledge to diligently
carry out their responsibilities. In its audit and accounting recommendations, the Conference Board Commission on Public Trust
and Private Enterprise said “members of the audit committee must be independent and have both knowledge and experience in
auditing financial matters.”13
We
are skeptical of audit committees where there are members that lack expertise as a Certified Public Accountant (CPA), Chief
Financial Officer (CFO) or corporate controller, or similar experience. While we will not necessarily recommend voting against
members of an audit committee when such expertise is lacking, we are more likely to recommend voting against committee members
when a problem such as a restatement occurs and such expertise is lacking.
Glass
Lewis generally assesses audit committees against the decisions they make with respect to their oversight and monitoring role.
The quality and integrity of the financial statements and earnings reports, the completeness of disclosures necessary for investors
to make informed decisions, and the effectiveness of the internal controls should provide reasonable assurance that the financial
statements are materially free from errors. The independence of the external auditors and the results of their work all provide
useful information by which to assess the audit committee.
|
|
13
|
Commission on Public Trust
and Private Enterprise. The Conference Board. 2003.
|
When
assessing the decisions and actions of the audit committee, we typically defer to its judgment and generally recommend voting
in favor of its members. However, we will consider recommending that shareholders vote against the following:14
|
|
1.
|
All
members of the audit committee when options were backdated, there is a lack of adequate
controls in place, there was a resulting restatement, and disclosures indicate there
was a lack of documentation with respect to the option grants.
|
|
|
2.
|
The
audit committee chair, if the audit committee does not have a financial expert or the
committee’s financial expert does not have a demonstrable financial background
sufficient to understand the financial issues unique to public companies.
|
|
|
3.
|
The audit committee chair, if the audit
committee did not meet at least four times during the year.
|
|
|
4.
|
The audit committee chair, if the committee
has less than three members.
|
|
|
5.
|
Any
audit committee member who sits on more than three public company audit committees, unless
the audit committee member is a retired CPA, CFO, controller or has similar experience,
in which case the limit shall be four committees, taking time and availability into consideration
including a review of the audit committee member’s attendance at all board and
committee meetings.15
|
|
|
6.
|
All
members of an audit committee who are up for election and who served on the committee
at the time of the audit, if audit and audit-related fees total one-third or less of
the total fees billed by the auditor.
|
|
|
7.
|
The
audit committee chair when tax and/or other fees are greater than audit and audit-related
fees paid to the auditor for more than one year in a row (in which case we also recommend
against ratification of the auditor).
|
|
|
8.
|
The audit committee chair when fees
paid to the auditor are not disclosed.
|
|
|
9.
|
All
members of an audit committee where non-audit fees include fees for tax services (including,
but not limited to, such things as tax avoidance or shelter schemes) for senior executives
of the company. Such services are prohibited by the Public Company Accounting Oversight
Board (“PCAOB”).
|
|
|
10.
|
All
members of an audit committee that reappointed an auditor that we no longer consider
to be independent for reasons unrelated to fee proportions.
|
|
|
11.
|
All
members of an audit committee when audit fees are excessively low, especially when compared
with other companies in the same industry.
|
|
|
12.
|
The
audit committee chair16 if the committee failed to put auditor ratification
on the ballot for shareholder approval. However, if the non-audit fees or tax fees exceed
audit plus audit-related fees in either the current or the prior year, then Glass Lewis
will recommend voting against the entire audit committee.
|
|
|
14
|
As discussed under the section
labeled “Committee Chair,” where the recommendation is to vote against the committee chair but the chair is not up
for election because the board is staggered, we do not recommend voting against the members of the committee who are up for election;
rather, we will note the concern with regard to the committee chair.
|
|
|
15
|
Glass Lewis may exempt certain
audit committee members from the above threshold if, upon further analysis of relevant factors such as the director’s experience,
the size, industry-mix and location of the companies involved and the director’s attendance at all the companies, we can
reasonably determine that the audit committee member is likely not hindered by multiple audit committee commitments.
|
|
|
16
|
As discussed under the section
labeled “Committee Chair,” in all cases, if the chair of the committee is not specified, we recommend voting against
the director who has been on the committee the longest.
|
|
|
13.
|
All
members of an audit committee where the auditor has resigned and reported that a section
10A17 letter has been issued.
|
|
|
14.
|
All
members of an audit committee at a time when material accounting fraud occurred at the
company.18
|
|
|
15.
|
All
members of an audit committee at a time when annual and/or multiple quarterly financial
statements had to be restated, and any of the following factors apply:
|
|
|
•
|
The restatement involves fraud
or manipulation by insiders;
|
|
|
•
|
The restatement is accompanied
by an SEC inquiry or investigation;
|
|
|
•
|
The restatement involves revenue
recognition;
|
|
|
•
|
The
restatement results in a greater than 5% adjustment to costs of goods sold, operating
expense, or operating cash flows; or
|
|
|
•
|
The
restatement results in a greater than 5% adjustment to net income, 10% adjustment to
assets or shareholders equity, or cash flows from financing or investing activities.
|
|
|
16.
|
All
members of an audit committee if the company repeatedly fails to file its financial reports
in a timely fashion. For example, the company has filed two or more quarterly or annual
financial statements late within the last five quarters.
|
|
|
17.
|
All
members of an audit committee when it has been disclosed that a law enforcement agency
has charged the company and/or its employees with a violation of the Foreign Corrupt
Practices Act (FCPA).
|
|
|
18.
|
All
members of an audit committee when the company has aggressive accounting policies and/or
poor disclosure or lack of sufficient transparency in its financial statements.
|
|
|
19.
|
All
members of the audit committee when there is a disagreement with the auditor and the
auditor resigns or is dismissed (e.g., the company receives an adverse opinion on its
financial statements from the auditor).
|
|
|
20.
|
All
members of the audit committee if the contract with the auditor specifically limits the
auditor’s liability to the company for damages.19
|
|
|
21.
|
All
members of the audit committee who served since the date of the company’s last
annual meeting, and when, since the last annual meeting, the company has reported a
material weakness that has not yet been corrected, or, when the company has an ongoing
material weakness from a prior year that has not yet been corrected.
|
We
also take a dim view of audit committee reports that are boilerplate, and which provide little or no information or transparency
to investors. When a problem such as a material weakness, restatement or late filings occurs, we take into consideration, in forming
our judgment with respect to the audit committee, the transparency of the audit committee report.
|
|
17
|
Auditors are required to report
all potential illegal acts to management and the audit committee unless they are clearly inconsequential in nature. If the audit
committee or the board fails to take appropriate action on an act that has been determined to be a violation of the law, the independent
auditor is required to send a section 10A letter to the SEC. Such letters are rare and therefore we believe should be taken seriously.
|
|
|
18
|
Research indicates that revenue
fraud now accounts for over 60% of SEC fraud cases, and that companies that engage in fraud experience significant negative abnormal
stock price declines—facing bankruptcy, delisting, and material asset sales at much higher rates than do non-fraud firms
(Committee of Sponsoring Organizations of the Treadway Commission. “Fraudulent Financial Reporting: 1998-2007.” May
2010).
|
|
|
19
|
The Council of Institutional
Investors. “Corporate Governance Policies,” p. 4, April 5, 2006; and “Letter from Council of Institutional Investors
to the AICPA,” November 8, 2006.
|
COMPENSATION
COMMITTEE PERFORMANCE
Compensation
committees have a critical role in determining the compensation of executives. This includes deciding the basis on which compensation
is determined, as well as the amounts and types of compensation
to
be paid. This process begins with the hiring and initial establishment of employment agreements, including the terms for such
items as pay, pensions and severance arrangements. It is important in establishing compensation arrangements that compensation
be consistent with, and based on the long-term economic performance of, the business’s long-term shareholders returns.
Compensation
committees are also responsible for the oversight of the transparency of compensation. This oversight includes disclosure of compensation
arrangements, the matrix used in assessing pay for performance, and the use of compensation consultants. In order to ensure the
independence of the board’s compensation consultant, we believe the compensation committee should only engage a compensation
consultant that is not also providing any services to the company or management apart from their contract with the compensation
committee. It is important to investors that they have clear and complete disclosure of all the significant terms of compensation
arrangements in order to make informed decisions with respect to the oversight and decisions of the compensation committee.
Finally,
compensation committees are responsible for oversight of internal controls over the executive compensation process. This includes
controls over gathering information used to determine compensation, establishment of equity award plans, and granting of equity
awards. For example, the use of a compensation consultant who maintains a business relationship with company management may
cause the committee to make decisions based on information that is compromised by the consultant’s conflict of interests.
Lax controls can also contribute to improper awards of compensation such as through granting of backdated or spring-loaded options,
or granting of bonuses when triggers for bonus payments have not been met.
Central
to understanding the actions of a compensation committee is a careful review of the Compensation Discussion and Analysis (“CD&A”)
report included in each company’s proxy. We review the CD&A in our evaluation of the overall compensation practices
of a company, as overseen by the compensation committee. The CD&A is also integral to the evaluation of compensation proposals
at companies, such as advisory votes on executive compensation, which allow shareholders to vote on the compensation paid to a
company’s top executives.
When
assessing the performance of compensation committees, we will consider recommending that shareholders vote against the following:20
|
|
1.
|
All
members of a compensation committee during whose tenure the committee failed to address
shareholder concerns following majority shareholder rejection of the say-on-pay proposal
in the previous year. Where the proposal was approved but there was a significant shareholder
vote (i.e., greater than 20% of votes cast) against the say-on-pay proposal in the prior
year, if the board did not respond sufficiently to the vote including actively engaging
shareholders on this issue, we will also consider recommending voting against the chair
of the compensation committee or all members of the compensation committee, depending
on the severity and history of the compensation problems and the level of shareholder
opposition.
|
|
|
2.
|
All
members of the compensation committee who are up for election and served when the company
failed to align pay with performance if shareholders are not provided with an advisory
vote on execu
|
|
|
20
|
As discussed under the section
labeled “Committee Chair,” where the recommendation is to vote against the committee chair and the chair is not up
for election because the board is staggered, we do not recommend voting against any members of the committee who are up for election;
rather, we will note the concern with regard to the committee chair.
|
tive compensation
at the annual meeting.21
|
|
3.
|
Any
member of the compensation committee who has served on the compensation committee of
at least two other public companies that have consistently failed to align pay with performance
and whose oversight of compensation at the company in question is suspect.
|
|
|
4.
|
All
members of the compensation committee (during the relevant time period) if the company
entered into excessive employment agreements and/or severance agreements.
|
|
|
5.
|
All
members of the compensation committee when performance goals were changed (i.e., lowered)
when employees failed or were unlikely to meet original goals, or performance-based compensation
was paid despite goals not being attained.
|
|
|
6.
|
All
members of the compensation committee if excessive employee perquisites and benefits
were allowed.
|
|
|
7.
|
The compensation committee chair if
the compensation committee did not meet during the year.
|
|
|
8.
|
All
members of the compensation committee when the company repriced options or completed
a “self tender offer” without shareholder approval within the past two years.
|
|
|
9.
|
All members of the compensation committee
when vesting of in-the-money options is accelerated.
|
|
|
10.
|
All
members of the compensation committee when option exercise prices were backdated. Glass
Lewis will recommend voting against an executive director who played a role in and participated
in option backdating.
|
|
|
11.
|
All
members of the compensation committee when option exercise prices were spring-loaded
or otherwise timed around the release of material information.
|
|
|
12.
|
All
members of the compensation committee when a new employment contract is given to an executive that does not include a clawback provision and the company had a material restatement,
especially if the restatement was due to fraud.
|
|
|
13.
|
The
chair of the compensation committee where the CD&A provides insufficient or unclear
information about performance metrics and goals, where the CD&A indicates that
pay is not tied to performance, or where the compensation committee or management has
excessive discretion to alter performance terms or increase amounts of awards in contravention
of previously defined targets.
|
|
|
14.
|
All
members of the compensation committee during whose tenure the committee failed to implement
a shareholder proposal regarding a compensation-related issue, where the proposal received
the affirmative vote of a majority of the voting shares at a shareholder meeting, and
when a reasonable analysis suggests that the compensation committee (rather than the
governance committee) should have taken steps to implement the request.22
|
|
|
15.
|
All
members of the compensation committee when the board has materially decreased proxy statement disclosure regarding executive compensation policies and procedures in a manner
which substantially impacts shareholders’ ability to make an informed assessment
of the company’s executive pay practices.
|
|
|
21
|
If a company provides shareholders
with a say-on-pay proposal, we will initially only recommend voting against the company’s say-on-pay proposal and will not
recommend voting against the members of the compensation committee unless there is a pattern of failing to align pay and performance
and/or the company exhibits egregious compensation practices. However, if the company repeatedly fails to align pay and performance,
we will then recommend against the members of the compensation committee in addition to recommending voting against the say-on-pay
proposal. For cases in which the disconnect between pay and performance is marginal and the company has outperformed its peers,
we will consider not recommending against compensation committee members. In addition, if a company provides shareholders with
a say-on-pay proposal, we will initially only recommend voting against the company’s say-on-pay proposal and will not recommend
voting against the members of the compensation committee unless there is a pattern of failing to align pay and performance and/or
the company exhibits egregious compensation practices. However, if the company repeatedly fails to align pay and performance,
we will then recommend against the members of the compensation committee in addition to recommending voting against the say- on-pay
proposal.
|
|
|
22
|
In all other instances (i.e.,
a non-compensation-related shareholder proposal should have been implemented) we recommend that shareholders vote against the
members of the governance committee.
|
|
|
16.
|
All
members of the compensation committee when new excise tax gross-up provisions are adopted
in employment agreements with executives, particularly in cases where the company previously
committed not to provide any such entitlements in the future.
|
|
|
17.
|
All
members of the compensation committee when the board adopts a frequency for future advisory
votes on executive compensation that differs from the frequency approved by shareholders.
|
NOMINATING
AND GOVERNANCE COMMITTEE PERFORMANCE
The
nominating and governance committee, as an agent for the shareholders, is responsible for the governance by the board of the
company and its executives. In performing this role, the committee is responsible and accountable for selection of objective and
competent board members. It is also responsible for providing leadership on governance policies adopted by the company, such
as decisions to implement shareholder proposals that have received a majority vote. (At most companies, a single committee is
charged with these oversight functions; at others, the governance and nominating responsibilities are apportioned among two separate
committees.)
Consistent
with Glass Lewis’ philosophy that boards should have diverse backgrounds and members with a breadth and depth of relevant
experience, we believe that nominating and governance committees should consider diversity when making director nominations within
the context of each specific company and its industry. In our view, shareholders are best served when boards make an effort to
ensure a constituency that is not only reasonably diverse on the basis of age, race, gender and ethnicity, but also on the basis
of geographic knowledge, industry experience, board tenure and culture.
Regarding
the committee responsible for governance, we will consider recommending that shareholders vote against the following:23
|
|
1.
|
All
members of the governance committee24 during whose tenure a shareholder proposal
relating to important shareholder rights received support from a majority of the votes
cast (excluding abstentions and broker non-votes) and the board has not begun to implement
or enact the proposal’s subject matter.25 Examples of such shareholder
proposals include those seeking a declassified board structure, a majority vote standard
for director elections, or a right to call a special meeting. In determining whether
a board has sufficiently implemented such a proposal, we will examine the quality of
the right enacted or proffered by the board for any conditions that may unreasonably
interfere with the shareholders’ ability to exercise the right (e.g., overly restrictive
procedural requirements for calling a special meeting).
|
|
|
2.
|
All
members of the governance committee when a shareholder resolution is excluded from the
meeting agenda but the SEC has declined to state a view on whether such resolution
should be excluded, or when the SEC has verbally permitted a company to exclude a shareholder
proposal but there is no written record provided by the SEC about such determination
and the Company has not provided any disclosure concerning this no-action relief.
|
|
|
3.
|
The
governance committee chair,26 when the chair is not independent and an independent
lead or
|
|
|
23
|
As discussed in the guidelines
section labeled “Committee Chair,” where we would recommend to vote against the committee chair but the chair is not
up for election because the board is staggered, we do not recommend voting against any members of the committee who are up for
election; rather, we will note the concern with regard to the committee chair.
|
|
|
24
|
If the board does not have
a committee responsible for governance oversight and the board did not implement a shareholder proposal that received the requisite
support, we will recommend voting against the entire board. If the shareholder proposal at issue requested that the board adopt
a declassified structure, we will recommend voting against all director nominees up for election.
|
|
|
25
|
Where a compensation-related
shareholder proposal should have been implemented, and when a reasonable analysis suggests that the members of the compensation
committee (rather than the governance committee) bear the responsibility for failing to implement the request, we recommend that
shareholders only vote against members of the compensation committee.
|
|
|
26
|
As discussed in the guidelines
section labeled “Committee Chair,” if the committee chair is not specified, we recommend voting against the director
who has been on the committee the longest. If the longest-serving committee member cannot be determined, we will recommend voting
against the longest-serving board member serving on the committee.
|
presiding director
has not been appointed.27
|
|
4.
|
In
the absence of a nominating committee, the governance committee chair when there are
less than five or the whole nominating committee when there are more than 20 members
on the boardThe governance committee chair, when the committee fails to meet at all during
the year.
|
|
|
5.
|
The
governance committee chair, when for two consecutive years the company provides what
we consider to be “inadequate” related party transaction disclosure (i.e.,
the nature of such transactions and/or the monetary amounts involved are unclear or excessively
vague, thereby preventing a share- holder from being able to reasonably interpret the
independence status of multiple directors above and beyond what the company maintains
is compliant with SEC or applicable stock exchange listing requirements).
|
|
|
6.
|
The
governance committee chair, when during the past year the board adopted a forum selection
clause (i.e., an exclusive forum provision)28 without shareholder approval29,
or if the board is currently seeking shareholder approval of a forum selection clause
pursuant to a bundled bylaw amendment rather than as a separate proposal.
|
|
|
7.
|
All
members of the governance committee during whose tenure the board adopted, without shareholder approval, provisions in its charter or bylaws that, through rules on director
compensation, may inhibit the ability of shareholders to nominate directors.
|
|
|
8.
|
The
governance committee chair when the board takes actions to limit shareholders’
ability to vote on matters material to shareholder rights (e.g., through the practice
of excluding a shareholder proposal by means of ratifying a management proposal that
is materially different from the shareholder proposal).
|
|
|
9.
|
The
governance committee chair when directors’ records for board and committee meeting
attendance are not disclosed, or when it is indicated that a director attended less
than 75% of board and committee meetings but disclosure is sufficiently vague that it
is not possible to determine which specific director’s attendance was lacking.
|
In
addition, we may recommend that shareholders vote against the chair of the governance committee, or the entire committee, where
the board has amended the company’s governing documents to reduce or remove important shareholder rights, or to otherwise
impede the ability of shareholders to exercise such right, and has done so without seeking shareholder approval. Examples of board
actions that may cause such a recommendation include: the elimination of the ability of shareholders to call a special meeting
or to act by written consent; an increase to the ownership threshold required for shareholders to call a special meeting; an increase to vote requirements for charter or bylaw amendments; the adoption of provisions that limit the ability of shareholders
to pursue full legal recourse — such as bylaws that require arbitration of shareholder claims or that require shareholder
plaintiffs to pay the company’s legal expenses in the absence of a court victory (i.e., “fee-shifting” or “loser
pays” bylaws); the adoption of a classified board structure; and the elimination of the ability of shareholders to remove
a director without cause.
Regarding
the nominating committee, we will consider recommending that shareholders vote against the following:30
|
|
27
|
We believe that one independent
individual should be appointed to serve as the lead or presiding director. When such a position is rotated among directors from
meeting to meeting, we will recommend voting against the governance committee chair as we believe the lack of fixed lead or presiding
director means that, effectively, the board does not have an independent board leader.
|
|
|
28
|
A forum selection clause is
a bylaw provision stipulating that a certain state, typically where the company is incorporated, which is most often Delaware,
shall be the exclusive forum for all intra-corporate disputes (e.g., shareholder derivative actions, assertions of claims of a
breach of fiduciary duty, etc.). Such a clause effectively limits a shareholder’s legal remedy regarding appropriate choice
of venue and related relief offered under that state’s laws and rulings.
|
|
|
29
|
Glass Lewis will evaluate
the circumstances surrounding the adoption of any forum selection clause as well as the general provisions contained therein.
Where it can be reasonably determined that a forum selection clause is narrowly crafted to suit the particular circumstances facing
the company and/or a reasonable sunset provision is included, we may make an exception to this policy.
|
|
|
30
|
As discussed in the guidelines
section labeled “Committee Chair,” where we would recommend to vote against the committee chair but the chair is not
up for election because the board is staggered, we do not recommend voting against any members of the committee who are up for
election; rather, we will note the concern with regard to the committee chair.
|
|
|
1.
|
All
members of the nominating committee, when the committee nominated or renominated an individual
who had a significant conflict of interest or whose past actions demonstrated a lack
of integrity or inability to represent shareholder interests.
|
|
|
2.
|
The nominating committee chair, if
the nominating committee did not meet during the year.
|
|
|
3.
|
In
the absence of a governance committee, the nominating committee chair31 when
the chair is not independent, and an independent lead or presiding director has not been
appointed.32
|
|
|
4.
|
The
nominating committee chair, when there are less than five or the whole nominating committee
when there are more than 20 members on the board.33
|
|
|
5.
|
The
nominating committee chair, when a director received a greater than 50% against vote
the prior year and not only was the director not removed, but the issues that raised
shareholder concern were not corrected.34
|
|
|
6.
|
The
nominating committee chair when the board has no female directors and has not provided
sufficient rationale or disclosed a plan to address the lack of diversity on the board.
|
In
addition, we may consider recommending shareholders vote against the chair of the nominating committee where the board’s
failure to ensure the board has directors with relevant experience, either through periodic director assessment or board refreshment,
has contributed to a company’s poor performance.
BOARD-LEVEL
RISK MANAGEMENT OVERSIGHT
Glass
Lewis evaluates the risk management function of a public company board on a strictly case-by-case basis. Sound risk management,
while necessary at all companies, is particularly important at financial firms which inherently maintain significant exposure
to financial risk. We believe such financial firms should have a chief risk officer reporting directly to the board and a dedicated
risk committee or a committee of the board charged with risk oversight. Moreover, many non-financial firms maintain strategies
which involve a high level of exposure to financial risk. Similarly, since many non-financial firms have complex hedging or trading
strategies, those firms should also have a chief risk officer and a risk committee.
Our
views on risk oversight are consistent with those expressed by various regulatory bodies. In its December 2009 Final Rule release
on Proxy Disclosure Enhancements, the SEC noted that risk oversight is a key competence of the board and that additional disclosures
would improve investor and shareholder understanding of the role of the board in the organization’s risk management practices.
The final rules, which became effective on February 28, 2010, now explicitly require companies and mutual funds to describe (while
allowing for some degree of flexibility) the board’s role in the oversight of risk.
When
analyzing the risk management practices of public companies, we take note of any significant losses or writedowns on financial
assets and/or structured transactions. In cases where a company has disclosed a sizable loss or writedown, and where we find that
the company’s board-level risk committee’s poor oversight contributed to the loss, we will recommend that shareholders
vote against such committee members on that basis. In addition, in cases where a company maintains a significant level of financial
risk exposure but fails to
|
|
31
|
As discussed under the section
labeled “Committee Chair,” if the committee chair is not specified, we will recommend voting against the director
who has been on the committee the longest. If the longest-serving committee member cannot be determined, we will recommend voting
against the longest- serving board member on the committee.
|
|
|
32
|
In the absence of both a governance
and a nominating committee, we will recommend voting against the board chair on this basis, unless if the chair also serves as
the CEO, in which case we will recommend voting against the longest-serving director.
|
|
|
33
|
In the absence of both a governance
and a nominating committee, we will recommend voting against the board chair on this basis, unless if the chair also serves as
the CEO, in which case we will recommend voting against the the longest-serving director.
|
|
|
34
|
Considering that shareholder
discontent clearly relates to the director who received a greater than 50% against vote rather than the nominating chair, we review
the severity of the issue(s) that initially raised shareholder concern as well as company responsiveness to such matters, and
will only recommend voting against the nominating chair if a reasonable analysis suggests that it would be most appropriate. In
rare cases, we will consider recommending against the nominating chair when a director receives a substantial (i.e., 20% or more)
vote against based on the same analysis.
|
disclose
any explicit form of board-level risk oversight (committee or otherwise)35,
we will consider recommending to vote against the board chair on that basis. However, we generally would not recommend voting
against a combined chair/CEO, except in egregious cases.
ENVIRONMENTAL
AND SOCIAL RISK OVERSIGHT
Glass
Lewis understands the importance of ensuring the sustainability of companies’ operations. We believe that an inattention
to material environmental and social issues can present direct legal, financial, regulatory and reputational risks that could
serve to harm shareholder interests. Therefore, we believe that these issues should be carefully monitored and managed by companies,
and that companies should have an appropriate oversight structure in place to ensure that they are mitigating attendant risks
and capitalizing on related opportunities to the best extent possible.
Glass
Lewis believes that companies should ensure appropriate board-level oversight of material risks to their operations, including
those that are environmental and social in nature. Accordingly, for large cap companies and in instances where we identify material
oversight issues, Glass Lewis 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. Glass Lewis will also note instances where
such oversight has not been clearly defined by companies in their governance documents.
Where
it is clear that a company has not properly managed or mitigated environmental or social risks to the detriment of shareholder
value, or when such mismanagement has threatened shareholder value, Glass Lewis may consider recommending that shareholders vote
against members of the board who are responsible for oversight of environmental and social risks. In the absence of explicit board
oversight of environmental and social issues, Glass Lewis may recommend that shareholders vote against members of the audit committee.
In making these determinations, Glass Lewis will carefully review the situation, its effect on shareholder value, as well as any
corrective action or other response made by the company.
DIRECTOR
COMMITMENTS
We
believe that directors should have the necessary time to fulfill their duties to shareholders. In our view, an overcommitted director
can pose a material risk to a company’s shareholders, particularly during periods of crisis. In addition, recent research
indicates that the time commitment associated with being a director has been on a significant upward trend in the past decade.36
As a result, we generally recommend that shareholders vote against a director who serves as an executive officer
of any public company while serving on more than two public company boards and any other director who serves on more than five
public company boards.
Because
we believe that executives will primarily devote their attention to executive duties, we generally will not recommend that shareholders
vote against overcommitted directors at the companies where they serve as an executive.
When
determining whether a director’s service on an excessive number of boards may limit the ability of the director to devote
sufficient time to board duties, we may consider relevant factors such as the size and location of the other companies where
the director serves on the board, the director’s board roles at the companies in question, whether the director serves
on the board of any large privately-held companies, the director’s tenure on the boards in question, and the director’s
attendance record at all companies. In the case of directors who serve in executive roles other than CEO (e.g., executive chair),
we will evaluate the specific duties and responsibilities of that role in determining whether an exception is warranted.
We may also refrain from recommending against certain directors
if the company provides sufficient rationale
|
|
35
|
A committee responsible for
risk management could be a dedicated risk committee, the audit committee, or the finance committee, depending on a given company’s
board structure and method of disclosure. At some companies, the entire board is charged with risk management.
|
|
|
36
|
For example, the 2015-2016
NACD Public Company Governance Survey states that, on average, directors spent a total of 248.2 hours annual on board-related
matters during the past year, which it describes as a “historically high level” that is significantly above the average
hours recorded in 2006. Additionally, the 2015 Spencer Stuart Board Index indicates that the average number of outside board seats
held by CEOs of S&P 500 companies is 0.6, down from 0.7 in 2009 and 0.9 in 2004.
|
for
their continued board service. The rationale should allow shareholders to evaluate the scope of the directors’ other commitments,
as well as their contributions to the board including specialized knowledge of the company’s industry, strategy or key markets,
the diversity of skills, perspective and background they provide, and other relevant factors. We will also generally refrain from
recommending to vote against a director who serves on an excessive number of boards within a consolidated group of companies or
a director that represents a firm whose sole purpose is to manage a portfolio of investments which include the company.
OTHER
CONSIDERATIONS
In
addition to the three key characteristics — independence, performance, experience — that we use to evaluate board
members, we consider conflict-of-interest issues as well as the size of the board of directors when making voting recommendations.
Conflicts
of Interest
We
believe board members should be wholly free of identifiable and substantial conflicts of interest, regardless of the overall
level of independent directors on the board. Accordingly, we recommend that shareholders vote against the following types of directors:
|
|
1.
|
A
CFO who is on the board: In our view, the CFO holds a unique position relative to financial
reporting and disclosure to shareholders. Due to the critical importance of financial
disclosure and reporting, we believe the CFO should report to the board and not be
a member of it.
|
|
|
2.
|
A
director who provides — or a director who has an immediate family member who provides
— material consulting or other material professional services to the company. These
services may include legal, consulting,37 or financial services. We question
the need for the company to have consulting relationships with its directors. We view
such relationships as creating conflicts for directors, since they may be forced to weigh
their own interests against shareholder interests when making board decisions. In addition,
a company’s decisions regarding where to turn for the best professional services
may be compromised when doing business with the professional services firm of one of
the company’s directors.
|
|
|
3.
|
A
director, or a director who has an immediate family member, engaging in airplane, real
estate, or similar deals, including perquisite-type grants from the company, amounting
to more than $50,000. Directors who receive these sorts of payments from the company
will have to make unnecessarily complicated decisions that may pit their interests against
shareholder interests.
|
|
|
4.
|
Interlocking
directorships: CEOs or other top executives who serve on each other’s boards create
an interlock that poses conflicts that should be avoided to ensure the promotion of shareholder
interests above all else.38
|
|
|
5.
|
All
board members who served at a time when a poison pill with a term of longer than one
year was adopted without shareholder approval within the prior twelve months.39
In the event a board is classified and shareholders are therefore unable to vote
against all directors, we will recommend voting against the remaining directors the next
year they are up for a shareholder vote. If a poison pill with a term of one year or
less was adopted without shareholder approval, and without adequate justification,
we will consider recommending that shareholders vote against all members of the governance
committee. If the board has, without seeking shareholder approval, and without adequate
justification, extended the term of a poison pill by one year or less in two consecutive
years, we will consider recommending that shareholders vote against the entire board.
|
|
|
37
|
We will generally refrain
from recommending against a director who provides consulting services for the company if the director is excluded from membership
on the board’s key committees and we have not identified significant governance concerns with the board.
|
|
|
38
|
We do not apply a look-back
period for this situation. The interlock policy applies to both public and private companies. We will also evaluate multiple board
interlocks among non-insiders (i.e., multiple directors serving on the same boards at other companies), for evidence of a pattern
of poor oversight.
|
|
|
39
|
Refer to Section V. Governance
Structure and the Shareholder Franchise for further discussion of our policies regarding anti-takeover measures, including poison
pills.
|
Size
of the Board of Directors
While
we do not believe there is a universally applicable optimum board size, we do believe boards should have at least five directors
to ensure sufficient diversity in decision-making and to enable the formation of key board committees with independent directors.
Conversely, we believe that boards with more than 20 members will typically suffer under the weight of “too many cooks in
the kitchen” and have difficulty reaching consensus and making timely decisions. Sometimes the presence of too many voices
can make it difficult to draw on the wisdom and experience in the room by virtue of the need to limit the discussion so that
each voice may be heard.
To
that end, we typically recommend voting against the chair of the nominating committee (or the governance committee, in the absence
of a nominating committee) at a board with fewer than five directors or more than 20 directors.
CONTROLLED
COMPANIES
We
believe controlled companies warrant certain exceptions to our independence standards. The board’s function is to protect
shareholder interests; however, when an individual, entity (or group of shareholders party to a formal agreement) owns more than
50% of the voting shares, the interests of the majority of shareholders are the interests of that entity or individual. Consequently,
Glass Lewis does not apply our usual two-thirds board independence rule and therefore we will not recommend voting against boards
whose composition reflects the makeup of the shareholder population.
Independence
Exceptions
The
independence exceptions that we make for controlled companies are as follows:
|
|
1.
|
We
do not require that controlled companies have boards that are at least two-thirds independent.
So long as the insiders and/or affiliates are connected with the controlling entity,
we accept the presence of non-independent board members.
|
|
|
2.
|
The
compensation committee and nominating and governance committees do not need to consist
solely of independent directors.
|
|
|
•
|
We
believe that standing nominating and corporate governance committees at controlled companies are unnecessary. Although having a committee charged with the duties of searching
for, selecting, and nominating independent directors can be beneficial, the unique composition
of a controlled company’s shareholder base makes such committees weak and irrelevant.
|
|
|
•
|
Likewise,
we believe that independent compensation committees at controlled companies are unnecessary.
Although independent directors are the best choice for approving and monitoring senior
executives’ pay, controlled companies serve a unique shareholder population whose
voting power ensures the protection of its interests. As such, we believe that having
affiliated directors on a controlled company’s compensation committee is acceptable.
However, given that a controlled company has certain obligations to minority shareholders
we feel that an insider should not serve on the compensation committee. Therefore, Glass
Lewis will recommend voting against any insider (the CEO or otherwise) serving on the
compensation committee.
|
|
|
3.
|
Controlled
companies do not need an independent chair or an independent lead or presiding director.
Although an independent director in a position of authority on the board — such
as chair or presiding director — can best carry out the board’s duties, controlled
companies serve a unique shareholder population whose voting power ensures the protection
of its interests.
|
Size of
the Board of Directors
We
have no board size requirements for controlled companies.
Audit
Committee Independence
Despite
a controlled company’s status, unlike for the other key committees, we nevertheless believe that audit committees should
consist solely of independent directors. Regardless of a company’s controlled status, the interests of all shareholders
must be protected by ensuring the integrity and accuracy of the company’s financial statements. Allowing affiliated directors
to oversee the preparation of financial reports could create an insurmountable conflict of interest.
Board
Responsiveness at Dual-Class Companies
With
regards to companies where voting control is held through a dual-class share structure with disproportionate voting and economic
rights, we will carefully examine the level of approval or disapproval attributed to unaffiliated shareholders when determining
whether board responsiveness is warranted. Where vote results indicate that a majority of unaffiliated shareholders supported
a shareholder proposal or opposed a management proposal, we believe the board should demonstrate an appropriate level of responsiveness.
SIGNIFICANT
SHAREHOLDERS
Where
an individual or entity holds between 20-50% of a company’s voting power, we believe it is reasonable to allow proportional
representation on the board and committees (excluding the audit committee) based on the individual or entity’s percentage
of ownership.
GOVERNANCE
FOLLOWING AN IPO OR SPIN-OFF
We
believe companies that have recently completed an initial public offering (“IPO”) or spin-off should be allowed adequate
time to fully comply with marketplace listing requirements and meet basic corporate governance standards. Generally speaking,
Glass Lewis refrains from making recommendations on the basis of governance standards (e.g., board independence, committee membership
and structure, meeting attendance, etc.) during the one-year period following an IPO.
However,
some cases warrant shareholder action against the board of a company that have completed an IPO or spin-off within the past year.
When evaluating companies that have recently gone public, Glass Lewis will review the terms of the applicable governing documents
in order to determine whether shareholder rights are being severely restricted indefinitely. We believe boards that approve highly
restrictive governing documents have demonstrated that they may subvert shareholder interests following the IPO. In conducting
this evaluation, Glass Lewis will consider:
|
|
1.
|
The adoption of anti-takeover provisions
such as a poison pill or classified board
|
|
|
2.
|
Supermajority vote requirements to
amend governing documents
|
|
|
3.
|
The presence of exclusive forum or
fee-shifting provisions
|
|
|
4.
|
Whether shareholders can call special
meetings or act by written consent
|
|
|
5.
|
The voting standard provided for the
election of directors
|
|
|
6.
|
The ability of shareholders to remove
directors without cause
|
|
|
7.
|
The presence of evergreen provisions
in the Company’s equity compensation arrangements
|
|
|
8.
|
The presence
of a dual-class share structure which does not afford common shareholders voting power
that is aligned with their economic interest
|
In
cases where a board adopts an anti-takeover provision preceding an IPO, we will consider recommending to vote against the members
of the board who served when it was adopted if the board: (i) did not also commit to submit the anti-takeover provision to a
shareholder vote at the company’s first shareholder meeting following the IPO; or (ii) did not provide a sound rationale
or sunset provision for adopting the anti-takeover provision in question.
In
our view, adopting an anti-takeover device unfairly penalizes future shareholders who (except for electing to buy or sell the
stock) are unable to weigh in on a matter that could potentially negatively impact their ownership interest. This notion is
strengthened when a board adopts a classified board with an infinite duration or a poison pill with a five- to ten-year term immediately
prior to going public, thereby insulated management for a substantial amount of time.
In
addition, shareholders should also be wary of companies that adopt supermajority voting requirements before their IPO. Absent
explicit provisions in the articles or bylaws stipulating that certain policies will be phased out over a certain period of time,
long-term shareholders could find themselves in the predicament of having to attain a supermajority vote to approve future proposals
seeking to eliminate such policies.
DUAL-LISTED
OR FOREIGN-INCORPORATED COMPANIES
For
companies that trade on multiple exchanges or are incorporated in foreign jurisdictions but trade only in the U.S., we will apply
the governance standard most relevant in each situation. We will consider a number of factors in determining which Glass Lewis
country-specific policy to apply, including but not limited to: (i) the corporate governance structure and features of the company
including whether the board structure is unique to a particular market; (ii) the nature of the proposals; (iii) the location of
the company’s primary listing, if one can be determined; (iv) the regulatory/governance regime that the board is reporting
against; and (v) the availability and completeness of the company’s SEC filings.
OTC-LISTED
COMPANIES
Companies
trading on the OTC Bulletin Board are not considered “listed companies” under SEC rules and therefore not subject
to the same governance standards as listed companies. However, we believe that more stringent corporate governance standards should
be applied to these companies given that their shares are still publicly traded.
When
reviewing OTC companies, Glass Lewis will review the available disclosure relating to the shareholder meeting to determine
whether shareholders are able to evaluate several key pieces of information, including: (i) the composition of the
board’s key committees, if any; (ii) the level of share ownership of company insiders or directors; (iii) the board
meeting attendance record of directors; (iv) executive and non-employee director compensation; (v) related-party transactions
conducted during the past year; and (vi) the board’s leadership structure and determinations regarding director
independence.
We
are particularly concerned when company disclosure lacks any information regarding the board’s key committees. We
believe that committees of the board are an essential tool for clarifying how the responsibilities of the board are being
delegated, and specifically for indicating which directors are accountable for ensuring: (i) the independence and quality of
directors, and the transparency and integrity of the nominating process;
(ii)
compensation programs that are fair and appropriate; (iii) proper oversight of the company’s accounting, financial
reporting, and internal and external audits; and (iv) general adherence to principles of good corpo
rate governance.
In
cases where shareholders are unable to identify which board members are responsible for ensuring oversight of the above-mentioned
responsibilities, we may consider recommending against certain members of the board. Ordinarily, we believe it is the responsibility
of the corporate governance committee to provide thorough disclosure of the board’s governance practices. In the absence
of such a committee, we believe it is appropriate to hold the board’s chair or, if such individual is an executive of the
company, the longest-serving non-executive board member accountable.
MUTUAL
FUND BOARDS
Mutual
funds, or investment companies, are structured differently from regular public companies (i.e., operating companies). Typically,
members of a fund’s advisor are on the board and management takes on a different role from that of regular public companies.
Thus, we focus on a short list of requirements, although many of our guidelines remain the same.
The following
mutual fund policies are similar to the policies for regular public companies:
|
|
1.
|
Size
of the board of directors — The board should
be made up of between five and twenty directors.
|
|
|
2.
|
The
CFO on the board — Neither the CFO of the
fund nor the CFO of the fund’s registered investment advisor should serve on
the board.
|
|
|
3.
|
Independence
of the audit committee — The audit committee
should consist solely of independent directors.
|
|
|
4.
|
Audit
committee financial expert — At least one
member of the audit committee should be designated as the audit committee financial
expert.
|
The following
differences from regular public companies apply at mutual funds:
|
|
1.
|
Independence
of the board — We believe that three-fourths
of an investment company’s board should be made up of independent directors. This
is consistent with a proposed SEC rule on investment company boards. The Investment
Company Act requires 40% of the board to be independent, but in 2001, the SEC amended
the Exemptive Rules to require that a majority of a mutual fund board be independent.
In 2005, the SEC proposed increasing the independence threshold to 75%. In 2006, a federal
appeals court ordered that this rule amendment be put back out for public comment, putting it back into “proposed rule” status. Since mutual fund boards play a
vital role in overseeing the relationship between the fund and its investment manager,
there is greater need for independent oversight than there is for an operating company
board.
|
|
|
2.
|
When
the auditor is not up for ratification — We
do not recommend voting against the audit committee if the auditor is not up for ratification.
Due to the different legal structure of an investment company compared to an operating
company, the auditor for the investment company (i.e., mutual fund) does not conduct
the same level of financial review for each investment company as for an operating company.
|
|
|
3.
|
Non-independent
chair — The SEC has proposed that the chair
of the fund board be independent. We agree that the roles of a mutual fund’s chair
and CEO should be separate. Although we believe this would be best at all companies,
we recommend voting against the chair of an investment company’s nominating committee
as well as the board chair if the chair and CEO of a mutual fund are the same person
and the fund does not have an independent lead or presiding director. Seven former SEC
commissioners support the appointment of an independent chair and we agree with them
that “an independent board chair would be better able to create conditions favoring
the long-term interests of fund shareholders than would a chair who is an executive
of the advisor.” (See the comment
|
letter sent to the SEC
in support of the proposed rule at http://www.sec.gov/news/studies/indchair. pdf.)
|
|
4.
|
Multiple
funds overseen by the same director — Unlike
service on a public company board, mutual fund boards require much less of a time commitment.
Mutual fund directors typically serve on dozens of other mutual fund boards, often within
the same fund complex. The Investment Company Institute’s (“ICI”)
Overview of Fund Governance Practices, 1994-2012, indicates that the average number of
funds served by an independent director in 2012 was 53. Absent evidence that a specific
director is hindered from being an effective board member at a fund due to service on
other funds’ boards, we refrain from maintaining a cap on the number of outside
mutual fund boards that we believe a director can serve on.
|
DECLASSIFIED
BOARDS
Glass
Lewis favors the repeal of staggered boards and the annual election of directors. We believe staggered boards are less accountable
to shareholders than boards that are elected annually. Furthermore, we feel the annual election of directors encourages board
members to focus on shareholder interests.
Empirical
studies have shown: (i) staggered boards are associated with a reduction in a firm’s valuation; and
(ii) in the
context of hostile takeovers, staggered boards operate as a takeover defense, which entrenches management, discourages potential
acquirers, and delivers a lower return to target shareholders.
In
our view, there is no evidence to demonstrate that staggered boards improve shareholder returns in a takeover context. Some
research has indicated that shareholders are worse off when a staggered board blocks a transaction; further, when a staggered
board negotiates a friendly transaction, no statistically significant difference in premium occurs.40
Additional research found that charter-based staggered boards “reduce the market value of a firm by 4% to 6%
of its market capitalization” and that “staggered boards bring about and not merely reflect this reduction in market
value.”41 A subsequent study reaffirmed that classified boards reduce
shareholder value, finding “that the ongoing process of dismantling staggered boards, encouraged by institutional investors,
could well contribute to increasing shareholder wealth.”42
Shareholders
have increasingly come to agree with this view. In 2016, 92% of S&P 500 companies had declassified boards, up from approximately
40% a decade ago.43 Management proposals to declassify boards are approved with
near unanimity and shareholder proposals on the topic also receive strong shareholder support; in 2014, shareholder proposals
requesting that companies declassify their boards received average support of 84% (excluding abstentions and broker non-votes),
whereas in 1987, only 16.4% of votes cast favored board declassification.44 Further,
a growing number of companies, nearly half of all those targeted by shareholder proposals requesting that all directors stand
for election annually, either recommended shareholders support the proposal or made no recommendation, a departure from the more
traditional management recommendation to vote against shareholder proposals.
Given
our belief that declassified boards promote director accountability, the empirical evidence suggesting staggered boards reduce
a company’s value and the established shareholder opposition to such a structure, Glass Lewis supports the declassification
of boards and the annual election of directors.
BOARD
COMPOSITION AND REFRESHMENT
Glass
Lewis strongly supports routine director evaluation, including independent external reviews, and periodic board refreshment to
foster the sharing of diverse perspectives in the boardroom and the generation of new ideas and business strategies. Further,
we believe the board should evaluate the need for changes to board
|
|
40
|
Lucian Bebchuk, John Coates
IV, Guhan Subramanian, “The Powerful Antitakeover Force of Staggered Boards: Further Findings and a Reply to Symposium Participants,”
55 Stanford Law Review 885-917 (2002).
|
|
|
41
|
Lucian Bebchuk, Alma Cohen,
“The Costs of Entrenched Boards” (2004).
|
|
|
42
|
Lucian Bebchuk, Alma Cohen
and Charles C.Y. Wang, “Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment,” SSRN:
http://ssrn.com/abstract=1706806 (2010), p. 26.
|
|
|
43
|
Spencer Stuart Board Index,
2016, p. 14.
|
|
|
44
|
Lucian Bebchuk, John Coates
IV and Guhan Subramanian, “The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy”.
|
composition
based on an analysis of skills and experience necessary for the company, as well as the results of
the
director evaluations, as opposed to relying solely on age or tenure limits. When necessary, shareholders can address concerns
regarding proper board composition through director elections.
In
our view, a director’s experience can be a valuable asset to shareholders because of the complex, critical issues that
boards face. This said, we recognize that in rare circumstances, a lack of refreshment can contribute to a lack of board responsiveness
to poor company performance.
On
occasion, age or term limits can be used as a means to remove a director for boards that are unwilling to police their membership
and enforce turnover. Some shareholders support term limits as a way to force change in such circumstances.
While
we understand that age limits can aid board succession planning, the long-term impact of age limits restricts experienced and
potentially valuable board members from service through an arbitrary means. We believe that shareholders are better off monitoring
the board’s overall composition, including the diversity of its members, the alignment of the board’s areas of expertise
with a company’s strategy, the board’s approach to corporate governance, and its stewardship of company performance,
rather than imposing inflexible rules that don’t necessarily correlate with returns or benefits for shareholders.
However,
if a board adopts term/age limits, it should follow through and not waive such limits. If the board waives its term/age limits,
Glass Lewis will consider recommending shareholders vote against the nominating and/or governance committees, unless the rule
was waived with sufficient explanation, such as consummation of a corporate transaction like a merger.
BOARD
DIVERSITY
Glass
Lewis recognizes the importance of ensuring that the board is comprised of directors who have a diversity of skills, thought and
experience, as such diversity benefits companies by providing a broad range of perspectives and insights.45
Glass Lewis closely reviews the composition of the board for representation of diverse director candidates and will
generally recommend against the nominating committee chair of a board that has no female members.
Depending
on other factors, including the size of the company, the industry in which the company operates, the state in which the company
is headquartered, and the governance profile of the company, we may extend this recommendation to vote against other nominating
committee members. When making these voting recommendations, we will carefully review a company’s disclosure of its diversity
considerations and may refrain from recommending shareholders vote against directors of companies outside the Russell 3000 index,
or when boards have provided a sufficient rationale for not having any female board members. Such rationale may include, but is
not limited to, a disclosed timetable for addressing the lack of diversity on the board and any notable restrictions in place
regarding the board’s composition, such as director nomination agreements with significant investors.
In
September 2018, California Governor Jerry Brown signed into law Senate Bill 826, which requires all companies headquartered
in the state to have one woman on their board by the end of 2019. In addition, by the end of 2021, companies must have at least
two women on boards of five members and at least three women on boards with six or more directors. Accordingly, during the 2020
proxy season, if a company headquartered in California does not have at least one woman on its board, we will generally recommend
voting against the chair of the nominating committee unless the company has disclosed a clear plan for how they intend to address this issue.
PROXY
ACCESS
|
|
45
|
http://www.glasslewis.com/wp-content/uploads/2017/03/2017-In-Depth-Report-Gender-Diversity.pdf.
|
In
lieu of running their own contested election, proxy access would not only allow certain shareholders to nominate directors to
company boards but the shareholder nominees would be included on the company’s ballot, significantly enhancing the ability
of shareholders to play a meaningful role in selecting their representatives. Glass Lewis generally supports affording shareholders
the right to nominate director candidates to management’s proxy as a means to ensure that significant, long-term shareholders
have an ability to nominate candidates to the board.
Companies
generally seek shareholder approval to amend company bylaws to adopt proxy access in response to shareholder engagement or pressure,
usually in the form of a shareholder proposal requesting proxy access, although some companies may adopt some elements of proxy
access without prompting. Glass Lewis considers several factors when evaluating whether to support proposals for companies to
adopt proxy access including the specified minimum ownership and holding requirement for shareholders to nominate one or more
directors, as well as company size, performance and responsiveness to shareholders.
For
a discussion of recent regulatory events in this area, along with a detailed overview of the Glass Lewis approach to Shareholder
Proposals regarding Proxy Access, refer to Glass Lewis’ Proxy Paper Guidelines for Shareholder Initiatives, available
at www.glasslewis.com.
MAJORITY VOTE
FOR THE ELECTION OF DIRECTORS
Majority
voting for the election of directors is fast becoming the de facto standard in corporate board elections. In our view, the majority
voting proposals are an effort to make the case for shareholder impact on director elections on a company-specific basis.
While
this proposal would not give shareholders the opportunity to nominate directors or lead to elections where shareholders have a
choice among director candidates, if implemented, the proposal would allow shareholders to have a voice in determining whether
the nominees proposed by the board should actually serve as the overseer-representatives of shareholders in the boardroom. We
believe this would be a favorable outcome for shareholders.
The
number of shareholder proposals requesting that companies adopt a majority voting standard has declined significantly during the
past decade, largely as a result of widespread adoption of majority voting or director resignation policies at U.S. companies.
In 2017, 89% of the S&P 500 Index had implemented a resignation policy for directors failing to receive majority shareholder
support, compared to 56% in 2008.46
THE PLURALITY
VOTE STANDARD
Today,
most US companies still elect directors by a plurality vote standard. Under that standard, if one shareholder holding only one
share votes in favor of a nominee (including that director, if the director is a shareholder), that nominee “wins”
the election and assumes a seat on the board. The common concern among companies with a plurality voting standard is the possibility
that one or more directors would not receive a majority of votes, resulting in “failed elections.”
ADVANTAGES
OF A MAJORITY VOTE STANDARD
If
a majority vote standard were implemented, a nominee would have to receive the support of a majority of the shares voted in order
to be elected. Thus, shareholders could collectively vote to reject a director they believe will not pursue their best interests.
Given that so few directors (less than 100 a year) do not receive majority support from shareholders, we think that a majority
vote standard is reasonable since it will neither result in many failed director elections nor reduce the willingness of qualified,
shareholder-focused directors to serve in the future. Further, most directors who fail to receive a majority shareholder vote
in favor of their election do not step down, underscoring the need for true majority voting.
We
believe that a majority vote standard will likely lead to more attentive directors. Although shareholders
|
|
46
|
Spencer Stuart Board Index,
2018, p. 15.
|
only
rarely fail to support directors, the occasional majority vote against a director’s election will likely deter the election
of directors with a record of ignoring shareholder interests. Glass Lewis will therefore generally support proposals calling for
the election of directors by a majority vote, excepting contested director elections.
In
response to the high level of support majority voting has garnered, many companies have voluntarily taken steps to implement majority
voting or modified approaches to majority voting. These steps range from a modified approach requiring directors that receive
a majority of withheld votes to resign (i.e., a resignation policy) to actually requiring a majority vote of outstanding shares
to elect directors.
We
feel that the modified approach does not go far enough because requiring a director to resign is not the same as requiring a majority
vote to elect a director and does not allow shareholders a definitive voice in the election process. Further, under the modified
approach, the corporate governance committee could reject a resignation and, even if it accepts the resignation, the corporate
governance committee decides on the director’s replacement. And since the modified approach is usually adopted as a policy
by the board or a board committee, it could be altered by the same board or committee at any time.
CONFLICTING
AND EXCLUDED PROPOSALS
SEC
Rule 14a-8(i)(9) allows companies to exclude shareholder proposals “if the proposal directly conflicts with one of the company’s
own proposals to be submitted to shareholders at the same meeting.” On October 22, 2015, the SEC issued Staff Legal Bulletin
No. 14H (“SLB 14H”) clarifying its rule concerning the exclusion of certain shareholder proposals when similar items
are also on the ballot. SLB 14H increased the burden on companies to prove to SEC staff that a conflict exists; therefore, many
companies still chose to place management proposals alongside similar shareholder proposals in many cases.
During
the 2018 proxy season, a new trend in the SEC’s interpretation of this rule emerged. Upon submission of shareholder proposals
requesting that companies adopt a lower special meeting threshold, several companies petitioned the SEC for no-action relief
under the premise that the shareholder proposals conflicted with management’s own special meeting proposals, even though
the management proposals set a higher threshold than those requested by the proponent. No-action relief was granted to these companies;
however, the SEC stipulated that the companies must state in the rationale for the management proposals that a vote in favor of
management’s proposal was tantamount to a vote against the adoption of a lower special meeting threshold. In certain instances,
shareholder proposals to lower an existing special meeting right threshold were excluded on the basis that they conflicted with
management proposals seeking to ratify the existing special meeting rights. We find the exclusion of these shareholder proposals
to be especially problematic as, in these instances, shareholders are not offered any enhanced shareholder right, nor would the
approval (or rejection) of the ratification proposal initiate any type of meaningful change to shareholders’ rights.
In
instances where companies have excluded shareholder proposals, such as those instances where special meeting shareholder proposals
are excluded as a result of “conflicting” management proposals, Glass Lewis will take a case-by-case approach, taking
into account the following issues:
|
|
•
|
The threshold proposed by the shareholder
resolution;
|
|
|
•
|
The
threshold proposed or established by management and the attendant rationale for the threshold;
|
|
|
•
|
Whether
management’s proposal is seeking to ratify an existing special meeting right or
adopt a bylaw that would establish a special meeting right; and
|
|
|
•
|
The
company’s overall governance profile, including its overall responsiveness to and
engagement with shareholders.
|
Glass
Lewis generally favors a 10-15% special meeting right. Accordingly, Glass Lewis will generally recommend voting for management
or shareholder proposals that fall within this range. When faced with conflicting proposals, Glass Lewis will generally recommend
in favor of the lower special meeting right and will recommend voting against the proposal with the higher threshold. However,
in instances where there are conflicting management and shareholder proposals and a company has not established a special meeting
right, Glass Lewis may recommend that shareholders vote in favor of the shareholder proposal and that they abstain from a management-proposed
bylaw amendment seeking to establish a special meeting right. We believe that an abstention is appropriate in this instance in
order to ensure that shareholders are sending a clear signal regarding their preference for the appropriate threshold for a
special meeting right, while not directly opposing the establishment of such a right.
In
cases where the company excludes a shareholder proposal seeking a reduced special meeting right by means of ratifying a management
proposal that is materially different from the shareholder proposal, we will generally recommend voting against the chair or members
of the governance committee.
In
other instances of conflicting management and shareholder proposals, Glass Lewis will consider the following:
|
|
•
|
The nature of the underlying issue;
|
|
|
•
|
The benefit to shareholders of
implementing the proposal;
|
|
|
•
|
The
materiality of the differences between the terms of the shareholder proposal and management
proposal;
|
|
|
•
|
The
context of a company’s shareholder base, corporate structure and other relevant
circumstances; and
|
|
|
•
|
A
company’s overall governance profile and, specifically, its responsiveness to shareholders
as evidenced by a company’s response to previous shareholder proposals and its
adoption of progressive shareholder rights provisions.
|
In
recent years, we have seen the dynamic nature of the considerations given by the SEC when determining whether companies may exclude
certain shareholder proposals. We understand that not all shareholder proposals serve the long-term interests of shareholders,
and value and respect the limitations placed on shareholder proponents, as certain shareholder proposals can unduly burden companies.
However, Glass Lewis believes that shareholders should be able to vote on issues of material importance.
We
view the shareholder proposal process as an important part of advancing shareholder rights and encouraging responsible and financially
sustainable business practices. While recognizing that certain proposals cross the line between the purview of shareholders and
that of the board, we generally believe that companies should not limit investors’ ability to vote on shareholder proposals
that advance certain rights or promote beneficial disclosure. Accordingly, Glass Lewis will make note of instances where a company
has successfully petitioned the SEC to exclude shareholder proposals. If after review we believe that the exclusion of a shareholder proposal is detrimental to shareholders, we may, in certain very limited circumstances, recommend against members of the
governance committee.
Transparency
and Integrity in Financial Reporting
AUDITOR
RATIFICATION
The
auditor’s role as gatekeeper is crucial in ensuring the integrity and transparency of the financial information necessary
for protecting shareholder value. Shareholders rely on the auditor to ask tough questions and to do a thorough analysis of a company’s
books to ensure that the information provided to shareholders is complete, accurate, fair, and that it is a reasonable representation
of a company’s financial position. The only way shareholders can make rational investment decisions is if the market is
equipped with accurate information about a company’s fiscal health. As stated in the October 6, 2008 Final Report of the
Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury:
“The
auditor is expected to offer critical and objective judgment on the financial matters under consideration, and actual and perceived
absence of conflicts is critical to that expectation. The Committee believes that auditors, investors, public companies, and other
market participants must understand the independence requirements and their objectives, and that auditors must adopt a mindset
of skepticism when facing situations that may compromise their independence.”
As
such, shareholders should demand an objective, competent and diligent auditor who performs at or above professional standards
at every company in which the investors hold an interest. Like directors, auditors should be free from conflicts of interest and
should avoid situations requiring a choice between the auditor’s interests and the public’s interests. Almost without
exception, shareholders should be able to annually review an auditor’s performance and to annually ratify a board’s
auditor selection. Moreover, in October 2008, the Advisory Committee on the Auditing Profession went even further, and recommended
that “to further enhance audit committee oversight and auditor accountability ... disclosure in the company proxy statement
regarding shareholder ratification [should] include the name(s) of the senior auditing partner(s) staffed on the engagement.”47
On
August 16, 2011, the PCAOB issued a Concept Release seeking public comment on ways that auditor independence, objectivity and
professional skepticism could be enhanced, with a specific emphasis on mandatory audit firm rotation. The PCAOB convened several
public roundtable meetings during 2012 to further discuss such matters. Glass Lewis believes auditor rotation can ensure both
the independence of the auditor and the integrity of the audit; we will typically recommend supporting proposals to require auditor
rotation when the proposal uses a reasonable period of time (usually not less than 5-7 years), particularly at companies with
a history of accounting problems.
On
June 1, 2017, the PCAOB adopted new standards to enhance auditor reports by providing additional important information to investors.
For companies with fiscal year end dates on or after December 15, 2017, reports were required to include the year in which the
auditor began serving consecutively as the company’s auditor. For large accelerated filers with fiscal year ends of June
30, 2019 or later, and for all other companies with fiscal year ends of December 15, 2020 or later, communication of critical
audit matters (“CAMs”) will also be required. CAMs are matters that have been communicated to the audit committee,
are related to accounts or disclosures that are material to the financial statements, and involve especially challenging, subjective,
or complex auditor judgment.
Glass Lewis believes the additional reporting requirements are
beneficial for investors. The additional disclosures can provide investors with information that is critical to making an informed
judgment about an auditor’s
|
|
47
|
“Final Report of the
Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury.” p. VIII:20, October 6, 2008.
|
independence
and performance. Furthermore, we believe the additional requirements are an important step toward enhancing the relevance and
usefulness of auditor reports, which too often are seen as boilerplate compliance documents that lack the relevant details to
provide meaningful insight into a particular audit.
VOTING
RECOMMENDATIONS ON AUDITOR RATIFICATION
We
generally support management’s choice of auditor except when we believe the auditor’s independence or audit integrity
has been compromised. Where a board has not allowed shareholders to review and ratify an auditor, we typically recommend voting
against the audit committee chair. When there have been material restatements of annual financial statements or material weaknesses
in internal controls, we usually recommend voting against the entire audit committee.
Reasons
why we may not recommend ratification of an auditor include:
|
|
1.
|
When audit fees plus audit-related
fees total less than the tax fees and/or other non-audit fees.
|
|
|
2.
|
Recent
material restatements of annual financial statements, including those resulting in the
reporting of material weaknesses in internal controls and including late filings by the
company where the auditor bears some responsibility for the restatement or late filing.48
|
|
|
3.
|
When
the auditor performs prohibited services such as tax-shelter work, tax services for the
CEO or CFO, or contingent-fee work, such as a fee based on a percentage of economic benefit
to the company.
|
|
|
4.
|
When
audit fees are excessively low, especially when compared with other companies in the
same industry.
|
|
|
5.
|
When the company has aggressive accounting
policies.
|
|
|
6.
|
When the company has poor disclosure
or lack of transparency in its financial statements.
|
|
|
7.
|
Where
the auditor limited its liability through its contract with the company or the audit
contract requires the corporation to use alternative dispute resolution procedures without
adequate justification.
|
|
|
8.
|
We
also look for other relationships or concerns with the auditor that might suggest a conflict
between the auditor’s interests and shareholder interests.
|
|
|
9.
|
In
determining whether shareholders would benefit from rotating the company’s auditor,
where relevant we will consider factors that may call into question an auditor’s
effectiveness, including auditor tenure, a pattern of inaccurate audits, and any ongoing
litigation or significant controversies.
|
PENSION
ACCOUNTING ISSUES
A
pension accounting question occasionally raised in proxy proposals is what effect, if any, projected returns on employee pension
assets should have on a company’s net income. This issue often arises in the executive- compensation context in a discussion
of the extent to which pension accounting should be reflected in business performance for purposes of calculating payments to
executives.
Glass Lewis believes that pension credits should not be included
in measuring income that is used to award performance-based compensation. Because many of the assumptions used in accounting for
retirement plans are subject to the company’s discretion, management would have an obvious conflict of interest if pay were
tied to pension income. In our view, projected income from pensions does not truly reflect a company’s performance.
|
|
48
|
An auditor does not audit
interim financial statements. Thus, we generally do not believe that an auditor should be opposed due to a restatement of interim
financial statements unless the nature of the misstatement is clear from a reading of the incorrect financial statements.
|
The
Link Between Compensation and Performance
Glass
Lewis carefully reviews the compensation awarded to senior executives, as we believe that this is an important area in which
the board’s priorities are revealed. Glass Lewis strongly believes executive compensation should be linked directly with
the performance of the business the executive is charged with managing. We believe the most effective compensation arrangements
provide for an appropriate mix of performance-based short- and long-term incentives in addition to fixed pay elements while promoting
a prudent and sustainable level of risk-taking.
Glass
Lewis believes that comprehensive, timely and transparent disclosure of executive pay is critical to allowing shareholders to
evaluate the extent to which pay is aligned with company performance. When reviewing proxy materials, Glass Lewis examines whether
the company discloses the performance metrics used to determine executive compensation. We recognize performance metrics must
necessarily vary depending on the company and industry, among other factors, and may include a wide variety of financial measures
as well as industry-specific performance indicators. However, we believe companies should disclose why the specific performance
metrics were selected and how the actions they are designed to incentivize will lead to better corporate performance.
Moreover,
it is rarely in shareholders’ interests to disclose competitive data about individual salaries below the senior executive
level. Such disclosure could create internal personnel discord that would be counterproductive for the company and its shareholders.
While we favor full disclosure for senior executives and we view pay disclosure at the aggregate level (e.g., the number of employees
being paid over a certain amount or in certain categories) as potentially useful, we do not believe shareholders need or will
benefit from detailed reports about individual management employees other than the most senior executives.
ADVISORY
VOTE ON EXECUTIVE COMPENSATION (“SAY-ON-PAY”)
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) required companies to hold an advisory
vote on executive compensation at the first shareholder meeting that occurs six months after enactment of the bill (January 21,
2011).
This
practice of allowing shareholders a non-binding vote on a company’s compensation report is standard practice in many non-US
countries, and has been a requirement for most companies in the United Kingdom since 2003 and in Australia since 2005. Although
say-on-pay proposals are non-binding, a high level of “against” or “abstain” votes indicates substantial
shareholder concern about a company’s compensation policies and procedures.
Given
the complexity of most companies’ compensation programs, Glass Lewis applies a highly nuanced approach when analyzing
advisory votes on executive compensation. We review each company’s compensation on a case-by-case basis, recognizing that
each company must be examined in the context of industry, size, maturity, performance, financial condition, its historic pay for
performance practices, and any other relevant internal or external factors.
We
believe that each company should design and apply specific compensation policies and practices that are appropriate to the circumstances
of the company and, in particular, will attract and retain competent executives and other staff, while motivating them to grow
the company’s long-term shareholder value.
Where
we find those specific policies and practices serve to reasonably align compensation with performance, and such practices are
adequately disclosed, Glass Lewis will recommend supporting the company’s approach. If, however, those specific policies
and practices fail to demonstrably link compensation with performance, Glass Lewis will generally recommend voting against the
say-on-pay proposal.
Glass
Lewis reviews say-on-pay proposals on both a qualitative basis and a quantitative basis, with a focus on several main areas:
|
|
•
|
The
overall design and structure of the company’s executive compensation programs including
selection and challenging nature of performance metrics;
|
|
|
•
|
The
implementation and effectiveness of the company’s executive compensation programs
including pay mix and use of performance metrics in determining pay levels;
|
|
|
•
|
The quality and content of
the company’s disclosure;
|
|
|
•
|
The quantum paid to executives;
and
|
|
|
•
|
The
link between compensation and performance as indicated by the company’s current
and past pay-for-performance grades.
|
We
also review any significant changes or modifications, including post fiscal year end changes and one-time awards, particularly
where the changes touch upon issues that are material to Glass Lewis recommendations.
SAY-ON-PAY
VOTING RECOMMENDATIONS
In
cases where we find deficiencies in a company’s compensation program’s design, implementation or management, we
will recommend that shareholders vote against the say-on-pay proposal. Generally such instances include evidence of a pattern
of poor pay-for-performance practices (i.e., deficient or failing pay-for- performance grades), unclear or questionable disclosure
regarding the overall compensation structure (e.g., limited information regarding benchmarking processes, limited rationale for
bonus performance metrics and targets, etc.), questionable adjustments to certain aspects of the overall compensation structure
(e.g., limited rationale for significant changes to performance targets or metrics, the payout of guaranteed bonuses or sizable
retention grants, etc.), and/or other egregious compensation practices.
Although
not an exhaustive list, the following issues when weighed together may cause Glass Lewis to recommend voting against a say-on-pay
vote:
|
|
•
|
Inappropriate
or outsized peer groups and/or benchmarking issues such as compensation targets set well
above peers;
|
|
|
•
|
Egregious
or excessive bonuses, equity awards or severance payments, including golden handshakes
and golden parachutes;
|
|
|
•
|
Insufficient response to
low shareholder support;
|
|
|
•
|
Problematic contractual payments,
such as guaranteed bonuses;
|
|
|
•
|
Targeting overall levels
of compensation at higher than median without adequate justification;
|
|
|
•
|
Performance targets not sufficiently
challenging, and/or providing for high potential payouts;
|
|
|
•
|
Performance targets lowered
without justification;
|
|
|
•
|
Discretionary bonuses paid when
short- or long-term incentive plan targets were not met;
|
|
|
•
|
Executive pay high relative to
peers not justified by outstanding company performance; and
|
|
|
•
|
The terms of the long-term incentive
plans are inappropriate (please see “Long-Term Incentives”).
|
The
aforementioned issues may also influence Glass Lewis’ assessment of the structure of a company’s compensation program.
We evaluate structure on a “Good, Fair, Poor” rating scale whereby a “Good” rating represents a compensation
program with little to no concerns, a “Fair” rating represents a compensation program with some concerns and a “Poor”
rating represents a compensation program that deviates significantly from best practice or contains one or more egregious compensation
practices.
We
believe that it is important for companies to provide investors with clear and complete disclosure of all the significant terms
of compensation arrangements. Similar to structure, we evaluate disclosure on a “Good, Fair, Poor” rating scale whereby
a “Good” rating represents a thorough discussion of all elements of compensation, a “Fair” rating represents
an adequate discussion of all or most elements of compensation and a “Poor” rating represents an incomplete or absent
discussion of compensation. In instances where a company has simply failed to provide sufficient disclosure of its policies, we
may recommend shareholders vote against this proposal solely on this basis, regardless of the appropriateness of compensation
levels.
In
general, most companies will fall within the “Fair” range for both structure and disclosure, and Glass Lewis largely
uses the “Good” and “Poor” ratings to highlight outliers.
Where
we identify egregious compensation practices, we may also recommend voting against the compensation committee based on the practices
or actions of its members during the year. Such practices may include: approving large one-off payments, the inappropriate, unjustified
use of discretion, or sustained poor pay for performance practices.
COMPANY
RESPONSIVENESS
For
companies that receive a significant level of shareholder opposition (20% or greater) to the say-on-pay proposal at the previous
annual meeting, we believe the board should demonstrate some level of engagement and responsiveness to the shareholder concerns
behind the discontent, particularly in response to shareholder feedback.
While
we recognize that sweeping changes cannot be made to a compensation program without due consideration, and that often a majority
of shareholders may have voted in favor of the proposal, given that the average approval rate for say-on-pay proposals is about
90%, we believe the compensation committee should provide some level of response to a significant vote against. In general, our
expectations regarding the minimum appropriate levels of responsiveness will correspond with the level of shareholder opposition,
as expressed both through the magnitude of opposition in a single year, and through the persistence of shareholder discontent
over time.
Responses
we consider appropriate include engaging with large shareholders to identify their concerns, and, where reasonable, implementing
changes that directly address those concerns within the company’s compensation program. In the absence of any evidence
that the board is actively engaging shareholders on these issues and responding accordingly, we may recommend holding compensation
committee members accountable for failing to adequately respond to shareholder opposition. Regarding such recommendations, careful
consideration will be given to the level of shareholder protest and the severity and history of compensation.
PAY
FOR PERFORMANCE
Glass
Lewis believes an integral part of a well-structured compensation package is a successful link between pay and performance. Our
proprietary pay-for-performance model was developed to better evaluate the link between pay and performance. Generally, compensation
and performance are measured against a peer group
of
appropriate companies that may overlap, to a certain extent, with a company’s self-disclosed peers. This quantitative analysis
provides a consistent framework and historical context for our clients to determine how well companies link executive compensation
to relative performance. Companies that demonstrate a weaker link are more likely to receive a negative recommendation; however,
other qualitative factors such as overall incentive structure, significant forthcoming changes to the compensation program or
reasonable long-term payout levels may mitigate our concerns to a certain extent.
While
we assign companies a letter grade of A, B, C, D or F based on the alignment between pay and performance, the grades derived from
the Glass Lewis pay-for-performance analysis do not follow the traditional U.S. school letter grade system. Rather, the grades
are generally interpreted as follows:
|
|
A.
|
The company’s percentile
rank for pay is significantly less than its percentile rank for performance
|
|
|
B.
|
The company’s percentile
rank for pay is moderately less than its percentile rank for performance
|
|
|
C.
|
The company’s percentile
rank for pay is approximately aligned with its percentile rank for performance
|
|
|
D.
|
The company’s percentile
rank for pay is higher than its percentile rank for performance
|
|
|
F.
|
The company’s percentile
rank for pay is significantly higher than its percentile rank for performance
|
For
the avoidance of confusion, the above grades encompass the relationship between a company’s percentile rank for pay and
its percentile rank in performance. Separately, a specific comparison between the company’s executive pay and its peers’
executive pay levels is discussed in the analysis for additional insight into the grade. Likewise, a specific comparison between
the company’s performance and its peers’ performance is reflected in the analysis for further context.
We
also use this analysis to inform our voting decisions on say-on-pay proposals. As such, if a company receives a “D”
or “F” from our proprietary model, we are more likely to recommend that shareholders vote against the say-on-pay proposal.
However, other qualitative factors such as an effective overall incentive structure, the relevance of selected performance metrics,
significant forthcoming enhancements or reasonable long-term payout levels may give us cause to recommend in favor of a proposal
even when we have identified a disconnect between pay and performance.
SHORT-TERM
INCENTIVES
A
short-term bonus or incentive (“STI”) should be demonstrably tied to performance. Whenever possible, we believe a
mix of corporate and individual performance measures is appropriate. We would normally expect performance measures for STIs to
be based on company-wide or divisional financial measures as well as non- financial factors such as those related to safety, environmental
issues, and customer satisfaction. While we recognize that companies operating in different sectors or markets may seek to utilize
a wide range of metrics, we expect such measures to be appropriately tied to a company’s business drivers.
Further,
the threshold, target and potential maximum awards that can be achieved under STI awards should be disclosed. Shareholders should
expect stretching performance targets for the maximum award to be achieved. Any increase in the potential target and maximum award
should be clearly justified to shareholders.
Glass
Lewis recognizes that disclosure of some measures or performance targets may include commercially confidential information. Therefore,
we believe it may be reasonable to exclude such information in some cases as long as the company provides sufficient justification
for non-disclosure. However, where a short-term bonus has been paid, companies should disclose the extent to which performance
has been achieved against relevant targets, including disclosure of the actual target achieved.
Where
management has received significant STIs but short-term performance over the previous year prima facie appears to be poor or negative,
we believe the company should provide a clear explanation of why these
significant
short-term payments were made. Further, where a Company has applied upward discretion, which includes lowering goals mid-year
or increasing calculated payouts, we expect a robust discussion of why the decision was necessary. In addition, we believe that
where companies use non-GAAP or bespoke metrics, clear reconciliations between these figures and GAAP figures in audited financial
statement should be provided.
Given
the pervasiveness of non-formulaic plans in this market, we do not generally recommend against a pay program on this basis alone.
If a company has chosen to rely primarily on a subjective assessment or the board’s discretion in determining short-term
bonuses, we believe that the proxy statement should provide a meaningful discussion of the board’s rationale in determining
the bonuses paid as well as a rationale for the use of a non-formulaic mechanism. Particularly where the aforementioned disclosures
are substantial and satisfactory, such a structure will not provoke serious concern in our analysis on its own. However, in conjunction with other significant issues in a program’s design or operation, such as a disconnect between pay and performance,
the absence of a cap on payouts, or a lack of performance-based long-term awards, the use of a non-formulaic bonus may help drive
a negative recommendation.
LONG-TERM
INCENTIVES
Glass
Lewis recognizes the value of equity-based incentive programs, which are often the primary long-term incentive for executives.
When used appropriately, they can provide a vehicle for linking an executive’s pay to company performance, thereby aligning
their interests with those of shareholders. In addition, equity-based compensation can be an effective way to attract, retain
and motivate key employees.
There
are certain elements that Glass Lewis believes are common to most well-structured long-term incentive (“LTI”) plans.
These include:
|
|
•
|
No re-testing or lowering of performance
conditions;
|
|
|
•
|
Performance metrics that cannot
be easily manipulated by management;
|
|
|
•
|
Two or more performance metrics;
|
|
|
•
|
At
least one relative performance metric that compares the company’s performance to
a relevant peer group or index;
|
|
|
•
|
Performance periods of at least
three years;
|
|
|
•
|
Stretching
metrics that incentivize executives to strive for outstanding performance while not encouraging excessive risk-taking; and
|
|
|
•
|
Individual limits expressed as
a percentage of base salary.
|
Performance
measures should be carefully selected and should relate to the specific business/industry in which the company operates and, especially,
the key value drivers of the company’s business. As with short- term incentive plans, the basis for any adjustments to metrics
or results should be clearly explained.
While
cognizant of the inherent complexity of certain performance metrics, Glass Lewis generally believes that measuring a company’s
performance with multiple metrics serves to provide a more complete picture of the company’s performance than a single metric;
further, reliance on just one metric may focus too much management attention on a single target and is therefore more susceptible
to manipulation. When utilized for relative measurements, external benchmarks such as a sector index or peer group should be disclosed
and transparent. The rationale behind the selection of a specific index or peer group should also be disclosed. Internal benchmarks
should also be disclosed and transparent, unless a cogent case for confidentiality is made and fully explained. Similarly, actual
performance and vesting levels for previous grants earned during the fiscal year should be disclosed.
We
also believe shareholders should evaluate the relative success of a company’s compensation programs, particularly with regard
to existing equity-based incentive plans, in linking pay and performance when evaluating new LTI plans to determine the impact
of additional stock awards. We will therefore review the company’s pay-for-performance grade (see below for more information)
and specifically the proportion of total compensation that is stock-based.
GRANTS
OF FRONT-LOADED AWARDS
Many
U.S. companies have chosen to provide large grants, usually in the form of equity awards, that are intended to serve as compensation
for multiple years. This practice, often called front-loading, is taken up either in the regular course of business or as a response
to specific business conditions and with a predetermined objective. We believe shareholders should generally be wary of this approach,
and we accordingly weigh these grants with particular scrutiny.
While
the use of front-loaded awards is intended to lock-in executive service and incentives, the same rigidity also raises the risk
of effectively tying the hands of the compensation committee. As compared with a more responsive annual granting schedule program,
front-loaded awards may preclude improvements or changes to reflect evolving business strategies. The considerable emphasis on
a single grant can place intense pressures on every facet of its design, amplifying any potential perverse incentives and creating
greater room for unintended consequences. In particular, provisions around changes of control or separations of service must ensure
that executives do not receive excessive payouts that do not reflect shareholder experience or company performance.
We
consider a company’s rationale for granting awards under this structure and also expect any front-loaded awards to include
a firm commitment not to grant additional awards for a defined period, as is commonly associated with this practice. Even when
such a commitment is provided, unexpected circumstances may lead the board to make additional payments or awards for retention
purposes, or to incentivize management towards more realistic goals or a revised strategy. If a company breaks its commitment
not to grant further awards, we may recommend against the pay program unless a convincing rationale is provided.
The
multiyear nature of these awards generally lends itself to significantly higher compensation figures in the year of grant than
might otherwise be expected. In analyzing the grant of front-loaded awards to executives, Glass Lewis considers the quantum of
the award on an annualized basis, rather than the lump sum, and may compare this result to prior practice and peer data, among
other benchmarks.
ONE-TIME
AWARDS
Glass
Lewis believes shareholders should generally be wary of awards granted outside of the standard incentive schemes, as such awards
have the potential to undermine the integrity of a company’s regular incentive plans or the link between pay and performance,
or both. We generally believe that if the existing incentive programs fail to provide adequate incentives to executives, companies
should redesign their compensation programs rather than make additional grants.
However,
we recognize that in certain circumstances, additional incentives may be appropriate. In these cases, companies should provide
a thorough description of the awards, including a cogent and convincing explanation of their necessity and why existing awards
do not provide sufficient motivation. Further, such awards should be tied to future service and performance whenever possible.
Additionally,
we believe companies making supplemental or one-time awards should also describe if and how the regular compensation arrangements
will be affected by these additional grants. In reviewing a company’s use of supplemental awards, Glass Lewis will evaluate
the terms and size of the grants in the context of the company’s overall incentive strategy and granting practices, as well
as the current operating environment.
CONTRACTUAL
PAYMENTS AND ARRANGEMENTS
Beyond
the quantum of contractual payments, Glass Lewis will also consider the design of any entitlements. Certain executive employment
terms may help to drive a negative recommendation, including, but not limited to:
|
|
•
|
Excessively
broad change in control triggers;
|
|
|
•
|
Inappropriate
severance entitlements;
|
|
|
•
|
Inadequately
explained or excessive sign-on arrangements;
|
|
|
•
|
Guaranteed
bonuses (especially as a multiyear occurrence); and
|
|
|
•
|
Failure
to address any concerning practices in amended employment agreements.
|
In
general, we are wary of terms that are excessively restrictive in favor of the executive, or that could potentially incentivize
behaviors that are not in a company’s best interest.
SIGN-ON
AWARDS AND SEVERANCE BENEFITS
We
acknowledge that there may be certain costs associated with transitions at the executive level. In evaluating the size of severance
and sign-on arrangements, we may consider the executive’s regular target compensation level, or the sums paid to other
executives (including the recipient’s predecessor, where applicable) in evaluating the appropriateness of such an arrangement.
We
believe sign-on arrangements should be clearly disclosed and accompanied by a meaningful explanation of the payments and the process
by which the amounts were reached. Further, the details of and basis for any “make-whole” payments (paid as compensation
for awards forfeited from a previous employer) should be provided.
With
respect to severance, we believe companies should abide by predetermined payouts in most circumstances. While in limited circumstances
some deviations may not be inappropriate, we believe shareholders should be provided with a meaningful explanation of any additional
or increased benefits agreed upon outside of regular arrangements.
In
the U.S. market, most companies maintain severance entitlements based on a multiple of salary and, in many cases, bonus. In almost
all instances we see, the relevant multiple is three or less, even in the case of a change in control. We believe the basis and
total value of severance should be reasonable and should not exceed the upper limit of general market practice. We consider the
inclusion of long-term incentives in cash severance calculations to be inappropriate, particularly given the commonality of accelerated
vesting and the proportional weight of long-term incentives as a component of total pay. Additional considerations, however,
will be accounted for when reviewing atypically structured compensation approaches.
CHANGE
IN CONTROL
Glass
Lewis considers double-trigger change in control arrangements, which require both a change in control and termination or constructive
termination, to be best practice. Any arrangement that is not explicitly double-trigger may be considered a single-trigger or
modified single-trigger arrangement.
Further,
we believe that excessively broad definitions of change in control are potentially problematic as they may lead to situations
where executives receive additional compensation where no meaningful change in status or duties has occurred.
EXCISE
TAX GROSS-UPS
Among
other entitlements, Glass Lewis is strongly opposed to excise tax gross-ups related to IRC § 4999 and their expansion, especially
where no consideration is given to the safe harbor limit. We believe that under no normal circumstance is the inclusion of excise
tax gross-up provisions in new agreements or the addition of such provisions to amended agreements acceptable. In consideration
of the fact that minor increases in change-in-control payments can lead to disproportionately large excise taxes, the potential
negative impact of tax gross-ups far outweighs any retentive benefit. Depending on the circumstances, the addition of new gross-ups
around this excise tax particularly may lead to negative recommendations for a company’s say-on- pay proposal, the chair
of the compensation committee, or the entire committee, particularly in cases where a company had committed not to provide any
such entitlements in the future.
AMENDED
EMPLOYMENT AGREEMENTS
Any
contractual arrangements providing for problematic pay practices which are not addressed in materially amended employment agreements
will potentially be viewed by Glass Lewis as a missed opportunity on the part of the company to align its policies with current
best practices. Such problematic pay practices include, but are not limited to, excessive change in control entitlements, modified
single-trigger change in control entitlements, excise tax gross-ups, and multi-year guaranteed awards.
RECOUPMENT
PROVISIONS (“CLAWBACKS”)
Section
954 of the Dodd-Frank Act requires the SEC to create a rule requiring listed companies to adopt policies for recouping certain
compensation during a three-year look-back period. The rule is more stringent than Section 304 of the Sarbanes-Oxley Act and applies
to incentive-based compensation paid to current or former executives in the case of a financial restatement — specifically,
the recoupment provision applies in cases where the company is required to prepare an accounting restatement due to erroneous
data resulting from material non-compliance with any financial reporting requirements under the securities laws. Although the
SEC has yet to finalize the relevant rules, we believe it is prudent for boards to adopt detailed bonus recoupment policies
that go beyond Section 304 of the Sarbanes-Oxley Act to prevent executives from retaining performance-based awards that were not
truly earned.
We
are increasingly focusing attention on the specific terms of recoupment policies beyond whether a company maintains a clawback
that simply satisfies the minimum legal requirements. We believe that 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 based. Such policies
allow the board to review all performance- related bonuses and awards made to senior executives during a specified lookback period
and, to the extent feasible, allow the company to recoup such bonuses where appropriate. Notwithstanding the foregoing, in cases
where a company maintains only a bare-minimum clawback, the absence of more expansive recoupment tools may inform our overall
view of the compensation program.
HEDGING
OF STOCK
Glass
Lewis believes that the hedging of shares by executives in the shares of the companies where they are employed severs the alignment
of interests of the executive with shareholders. We believe companies should adopt strict policies to prohibit executives from
hedging the economic risk associated with their share ownership in the company.
PLEDGING
OF STOCK
Glass
Lewis believes that shareholders should examine the facts and circumstances of each company rather than apply a one-size-fits-all
policy regarding employee stock pledging. Glass Lewis believes that shareholders benefit when employees, particularly senior
executives have “skin-in-the-game” and therefore recognizes the benefits of measures designed to encourage employees
to both buy shares out of their own pocket and to retain shares they have been granted; blanket policies prohibiting stock pledging
may discourage executives
and
employees from doing either.
However,
we also recognize that the pledging of shares can present a risk that, depending on a host of factors, an executive with significant
pledged shares and limited other assets may have an incentive to take steps to avoid a forced sale of shares in the face of a
rapid stock price decline. Therefore, to avoid substantial losses from a forced sale to meet the terms of the loan, the executive
may have an incentive to boost the stock price in the short term in a manner that is unsustainable, thus hurting shareholders
in the long-term. We also recognize concerns regarding pledging may not apply to less senior employees, given the latter group’s
significantly more limited influence over a company’s stock price. Therefore, we believe that the issue of pledging shares
should be reviewed in that context, as should polices that distinguish between the two groups.
Glass
Lewis believes that the benefits of stock ownership by executives and employees may outweigh the risks of stock pledging, depending
on many factors. As such, Glass Lewis reviews all relevant factors in evaluating proposed policies, limitations and prohibitions
on pledging stock, including:
|
|
•
|
The number of shares pledged;
|
|
|
•
|
The percentage executives’
pledged shares are of outstanding shares;
|
|
|
•
|
The percentage executives’
pledged shares are of each executive’s shares and total assets;
|
|
|
•
|
Whether the pledged shares were
purchased by the employee or granted by the company;
|
|
|
•
|
Whether there are different policies
for purchased and granted shares;
|
|
|
•
|
Whether the granted shares were
time-based or performance-based;
|
|
|
•
|
The overall governance profile
of the company;
|
|
|
•
|
The
volatility of the company’s stock (in order to determine the likelihood of a sudden
stock price drop);
|
|
|
•
|
The nature and cyclicality, if
applicable, of the company’s industry;
|
|
|
•
|
The participation and eligibility
of executives and employees in pledging;
|
|
|
•
|
The
company’s current policies regarding pledging and any waiver from these policies
for employees and executives; and
|
|
|
•
|
Disclosure of the extent of any
pledging, particularly among senior executives.
|
COMPENSATION
CONSULTANT INDEPENDENCE
As
mandated by Section 952 of the Dodd-Frank Act, as of January 11, 2013, the SEC approved new listing requirements for both the
NYSE and NASDAQ which require compensation committees to consider six factors (https://www.sec.gov/rules/final/2012/33-9330.pdf,
p.31-32) in assessing compensation advisor independence. According to the SEC, “no one factor should be viewed as a determinative
factor.” Glass Lewis believes this six-factor assessment is an important process for every compensation committee to undertake
but believes companies employing a consultant for board compensation, consulting and other corporate services should provide
clear disclosure beyond just a reference to examining the six points, in order to allow shareholders to review the specific
aspects of the various consultant relationships.
We
believe compensation consultants are engaged to provide objective, disinterested, expert advice to the compensation committee.
When the consultant or its affiliates receive substantial income from providing other services to the company, we believe the
potential for a conflict of interest arises and the independence of
the
consultant may be jeopardized. Therefore, Glass Lewis will, when relevant, note the potential for a conflict of interest when
the fees paid to the advisor or its affiliates for other services exceeds those paid for compensation consulting.
CEO
PAY RATIO
As
mandated by Section 953(b) of the Dodd-Frank Wall Street Consumer and Protection Act, beginning in 2018, issuers will be required
to disclose the median annual total compensation of all employees except the CEO, the total annual compensation of the CEO or
equivalent position, and the ratio between the two amounts. Glass Lewis will display the pay ratio as a data point in our Proxy
Papers, as available. While we recognize that the pay ratio has the potential to provide additional insight when assessing a company’s
pay practices, at this time it will not be a determinative factor in our voting recommendations.
FREQUENCY OF
SAY-ON-PAY
The
Dodd-Frank Act also requires companies to allow shareholders a non-binding vote on the frequency of say-on-pay votes, i.e. every
one, two or three years. Additionally, Dodd-Frank requires companies to hold such votes on the frequency of say-on-pay votes at
least once every six years.
We
believe companies should submit say-on-pay votes to shareholders every year. We believe that the time and financial burdens to
a company with regard to an annual vote are relatively small and incremental and are outweighed by the benefits to shareholders
through more frequent accountability. Implementing biannual or triennial votes on executive compensation limits shareholders’
ability to hold the board accountable for its compensation practices through means other than voting against the compensation
committee. Unless a company provides a compelling rationale or unique circumstances for say-on-pay votes less frequent than annually, we will generally recommend that shareholders support annual votes on compensation.
VOTE ON GOLDEN
PARACHUTE ARRANGEMENTS
The
Dodd-Frank Act also requires companies to provide shareholders with a separate non-binding vote on approval of golden parachute
compensation arrangements in connection with certain change-in-control transactions. However, if the golden parachute arrangements
have previously been subject to a say-on-pay vote which shareholders approved, then this required vote is waived.
Glass
Lewis believes the narrative and tabular disclosure of golden parachute arrangements benefits all shareholders. Glass Lewis
analyzes each golden parachute arrangement on a case-by-case basis, taking into account, among other items: the nature of the
change-in-control transaction, the ultimate value of the payments particularly compared to the value of the transaction, any excise
tax gross-up obligations, the tenure and position of the executives in question before and after the transaction, any new or
amended employment agreements entered into in connection with the transaction, and the type of triggers involved (i.e., single
vs. double).
EQUITY-BASED
COMPENSATION PLAN PROPOSALS
We
believe that equity compensation awards, when not abused, are useful for retaining employees and providing an incentive for
them to act in a way that will improve company performance. Glass Lewis recognizes that equity-based compensation plans are critical
components of a company’s overall compensation program and we analyze such plans accordingly based on both quantitative
and qualitative factors.
Our
quantitative analysis assesses the plan’s cost and the company’s pace of granting utilizing a number of different
analyses, comparing the program with absolute limits we believe are key to equity value creation and with a carefully chosen peer
group. In general, our model seeks to determine whether the proposed plan is either absolutely excessive or is more than one standard
deviation away from the average plan for the peer group on a range of criteria, including dilution to shareholders and the projected
annual cost relative to the company’s financial performance. Each of the analyses (and their constituent parts) is weighted
and the plan is scored in accordance with that weight.
We
compare the program’s expected annual expense with the business’s operating metrics to help determine whether the
plan is excessive in light of company performance. We also compare the plan’s expected annual cost to the enterprise value
of the firm rather than to market capitalization because the employees, managers and directors of the firm contribute to the creation
of enterprise value but not necessarily market capitalization (the biggest difference is seen where cash represents the vast
majority of market capitalization). Finally, we do not rely exclusively on relative comparisons with averages because, in addition
to creeping averages serving to inflate compensation, we believe that some absolute limits are warranted.
We
then consider qualitative aspects of the plan such as plan administration, the method and terms of exercise, repricing history,
express or implied rights to reprice, and the presence of evergreen provisions. We also closely review the choice and use of,
and difficulty in meeting, the awards’ performance metrics and targets, if any. We believe significant changes to the terms
of a plan should be explained for shareholders and clearly indicated. Other factors such as a company’s size and operating
environment may also be relevant in assessing the severity of concerns or the benefits of certain changes. Finally, we may consider
a company’s executive compensation practices in certain situations, as applicable.
We
evaluate equity plans based on certain overarching principles:
|
|
•
|
Companies should seek more shares
only when needed;
|
|
|
•
|
Requested
share amounts should be small enough that companies seek shareholder approval every three
to four years (or more frequently);
|
|
|
•
|
If
a plan is relatively expensive, it should not grant options solely to senior executives
and board members;
|
|
|
•
|
Dilution
of annual net share count or voting power, along with the “overhang” of incentive
plans, should be limited;
|
|
|
•
|
Annual
cost of the plan (especially if not shown on the income statement) should be reasonable
as a percentage of financial results and should be in line with the peer group;
|
|
|
•
|
The expected annual cost of the
plan should be proportional to the business’s value;
|
|
|
•
|
The
intrinsic value that option grantees received in the past should be reasonable compared
with the business’s financial results;
|
|
|
•
|
Plans should not permit re-pricing
of stock options;
|
|
|
•
|
Plans should not contain excessively
liberal administrative or payment terms;
|
|
|
•
|
Plans
should not count shares in ways that understate the potential dilution, or cost, to common
shareholders. This refers to “inverse” full-value award multipliers;
|
|
|
•
|
Selected
performance metrics should be challenging and appropriate, and should be subject to relative performance measurements; and
|
|
|
•
|
Stock
grants should be subject to minimum vesting and/or holding periods sufficient to ensure
sustainable performance and promote retention.
|
OPTION
EXCHANGES AND REPRICING
Glass
Lewis is firmly opposed to the repricing of employee and director options regardless of how it is accomplished. Employees should
have some downside risk in their equity-based compensation program and repricing eliminates any such risk. As shareholders have
substantial risk in owning stock, we believe that the equity compensation of employees and directors should be similarly situated
to align their interests with those of shareholders. We believe this will facilitate appropriate risk- and opportunity-taking
for the company by employees.
We
are concerned that option grantees who believe they will be “rescued” from underwater options will be more inclined
to take unjustifiable risks. Moreover, a predictable pattern of repricing or exchanges substantially alters a stock option’s
value because options that will practically never expire deeply out of the money are worth far more than options that carry a
risk of expiration.
In
short, repricings and option exchange programs change the bargain between shareholders and employees after the bargain has been
struck.
There
is one circumstance in which a repricing or option exchange program may be acceptable: if macroeconomic or industry trends,
rather than specific company issues, cause a stock’s value to decline dramatically and the repricing is necessary to motivate
and retain employees. In this circumstance, we think it fair to conclude that option grantees may be suffering from a risk that
was not foreseeable when the original “bargain” was struck. In such a circumstance, we will recommend supporting a
repricing if the following conditions are true:
|
|
•
|
Officers and board members cannot
participate in the program;
|
|
|
•
|
The
stock decline mirrors the market or industry price decline in terms of timing and approximates
the decline in magnitude;
|
|
|
•
|
The
exchange is value-neutral or value-creative to shareholders using very conservative assumptions and with a recognition of the adverse selection problems inherent in voluntary
programs;
|
|
|
•
|
The vesting requirements on exchanged
or repriced options are extended beyond one year;
|
|
|
•
|
Shares
reserved for options that are reacquired in an option exchange will permanently retire
(i.e., will not be available for future grants) so as to prevent additional shareholder
dilution in the future; and
|
|
|
•
|
Management
and the board make a cogent case for needing to motivate and retain existing employees, such as being in a competitive employment market.
|
OPTION
BACKDATING, SPRING-LOADING AND BULLET-DODGING
Glass
Lewis views option backdating, and the related practices of spring-loading and bullet-dodging, as egregious actions that warrant
holding the appropriate management and board members responsible. These practices are similar to re-pricing options and eliminate
much of the downside risk inherent in an option grant that is designed to induce recipients to maximize shareholder return.
Backdating
an option is the act of changing an option’s grant date from the actual grant date to an earlier date when the market price
of the underlying stock was lower, resulting in a lower exercise price for the option. Since 2006, Glass Lewis has identified
over 270 companies that have disclosed internal or government investigations into their past stock-option grants.
Spring-loading
is granting stock options while in possession of material, positive information that has not been disclosed publicly. Bullet-dodging
is delaying the grants of stock options until after the release of mate
rial,
negative information. This can allow option grants to be made at a lower price either before the release of positive news or following
the release of negative news, assuming the stock’s price will move up or down in response to the information. This raises
a concern similar to that of insider trading, or the trading on material non-public information.
The
exercise price for an option is determined on the day of grant, providing the recipient with the same market risk as an investor
who bought shares on that date. However, where options were backdated, the executive or the board (or the compensation committee)
changed the grant date retroactively. The new date may be at or near the lowest price for the year or period. This would be like
allowing an investor to look back and select the lowest price of the year at which to buy shares.
A
2006 study of option grants made between 1996 and 2005 at 8,000 companies found that option backdating can be an indication of
poor internal controls. The study found that option backdating was more likely to occur at companies without a majority independent
board and with a long-serving CEO; both factors, the study concluded, were associated with greater CEO influence on the company’s
compensation and governance practices.49
Where
a company granted backdated options to an executive who is also a director, Glass Lewis will recommend voting against that executive/director,
regardless of who decided to make the award. In addition, Glass Lewis will recommend voting against those directors who either
approved or allowed the backdating. Glass Lewis feels that executives and directors who either benefited from backdated options
or authorized the practice have breached their fiduciary responsibility to shareholders.
Given
the severe tax and legal liabilities to the company from backdating, Glass Lewis will consider recommending voting against members
of the audit committee who served when options were backdated, a restatement occurs, material weaknesses in internal controls
exist and disclosures indicate there was a lack of documentation. These committee members failed in their responsibility to
ensure the integrity of the company’s financial reports.
When
a company has engaged in spring-loading or bullet-dodging, Glass Lewis will consider recommending voting against the compensation
committee members where there has been a pattern of granting options at or near historic lows. Glass Lewis will also recommend
voting against executives serving on the board who benefited from the spring-loading or bullet-dodging.
DIRECTOR
COMPENSATION PLANS
Glass
Lewis believes that non-employee directors should receive reasonable and appropriate compensation for the time and effort they
spend serving on the board and its committees. However, a balance is required. Fees should be competitive in order to retain and
attract qualified individuals, but excessive fees represent a financial cost to the company and potentially compromise the objectivity
and independence of non-employee directors. We will consider recommending support for compensation plans that include option grants
or other equity-based awards that help to align the interests of outside directors with those of shareholders. However, to ensure
directors are not incentivized in the same manner as executives but rather serve as a check on imprudent risk-taking in executive
compensation plan design, equity grants to directors should not be performance-based. Where an equity plan exclusively or primarily
covers non-employee directors as participants, we do not believe that the plan should provide for performance-based awards in
any capacity.
When
non-employee director equity grants are covered by the same equity plan that applies to a company’s broader employee base,
we will use our propriety model and analyst review of this model to guide our voting recommendations. If such a plan broadly allows
for performance-based awards to directors or explicitly provides for such grants, we may recommend against the overall plan
on this basis, particularly if the company has granted performance-based awards to directors in past.
|
|
49
|
Lucian Bebchuk, Yaniv Grinstein
and Urs Peyer. “LUCKY CEOs.” November, 2006.
|
EMPLOYEE
STOCK PURCHASE PLANS
Glass
Lewis believes that employee stock purchase plans (“ESPPs”) can provide employees with a sense of ownership in their
company and help strengthen the alignment between the interests of employees and shareholders. We evaluate ESPPs by assessing
the expected discount, purchase period, expected purchase activity (if previous activity has been disclosed) and whether the plan
has a “lookback” feature. Except for the most extreme cases, Glass Lewis will generally support these plans given
the regulatory purchase limit of $25,000 per employee per year, which we believe is reasonable. We also look at the number of
shares requested to see if a ESPP will significantly contribute to overall shareholder dilution or if shareholders will not have
a chance to approve the program for an excessive period of time. As such, we will generally recommend against ESPPs that contain
“evergreen” provisions that automatically increase the number of shares available under the ESPP each year.
EXECUTIVE
COMPENSATION TAX DEDUCTIBILITY — AMENDMENT TO IRS 162(M)
The
“Tax Cut and Jobs Act” had significant implications on Section 162(m) of the Internal Revenue Code, a provision
that allowed companies to deduct compensation in excess of $1 million for the CEO and the next three most highly compensated executive
officers, excluding the CFO, if the compensation is performance-based and is paid under shareholder-approved plans. Glass Lewis
does not generally view amendments to equity plans and changes to compensation programs in response to the elimination of tax
deductions under 162(m) as problematic. This specifically holds true if such modifications contribute to the maintenance of a
sound performance-based compensation program.
As
grandfathered contracts may continue to be eligible for tax deductions under the transition rule for Section 162(m), companies
may therefore submit incentive plans for shareholder approval to take of advantage of the tax deductibility afforded under 162(m)
for certain types of compensation.
We
believe the best practice for companies is to provide robust disclosure to shareholders so that they can make fully-informed judgments
about the reasonableness of the proposed compensation plan. To allow for meaningful shareholder review, we prefer that disclosure
should include specific performance metrics, a maximum award pool, and a maximum award amount per employee. We also believe
it is important to analyze the estimated grants to see if they are reasonable and in line with the company’s peers.
We
typically recommend voting against a 162(m) proposal where: (i) a company fails to provide at least a list of performance targets;
(ii) a company fails to provide one of either a total maximum or an individual maximum; or (iii) the proposed plan or individual
maximum award limit is excessive when compared with the plans of the company’s peers.
The
company’s record of aligning pay with performance (as evaluated using our proprietary pay-for-performance model) also
plays a role in our recommendation. Where a company has a record of setting reasonable pay relative to business performance,
we generally recommend voting in favor of a plan even if the plan caps seem large relative to peers because we recognize the value
in special pay arrangements for continued exceptional performance.
As
with all other issues we review, our goal is to provide consistent but contextual advice given the specifics of the company and
ongoing performance. Overall, we recognize that it is generally not in shareholders’ best interests to vote against such
a plan and forgo the potential tax benefit since shareholder rejection of such plans will not curtail the awards; it will only
prevent the tax deduction associated with them.
Governance
Structure and the Shareholder Franchise
ANTI-TAKEOVER
MEASURES
POISON
PILLS (SHAREHOLDER RIGHTS PLANS)
Glass
Lewis believes that poison pill plans are not generally in shareholders’ best interests. They can reduce management accountability
by substantially limiting opportunities for corporate takeovers. Rights plans can thus prevent shareholders from receiving a buy-out
premium for their stock. Typically we recommend that shareholders vote against these plans to protect their financial interests
and ensure that they have an opportunity to consider any offer for their shares, especially those at a premium.
We
believe boards should be given wide latitude in directing company activities and in charting the company’s course. However,
on an issue such as this, where the link between the shareholders’ financial interests and their right to consider and accept
buyout offers is substantial, we believe that shareholders should be allowed to vote on whether they support such a plan’s
implementation. This issue is different from other matters that are typically left to board discretion. Its potential impact on
and relation to shareholders is direct and substantial. It is also an issue in which management interests may be different from
those of shareholders; thus, ensuring that shareholders have a voice is the only way to safeguard their interests.
In
certain circumstances, we will support a poison pill that is limited in scope to accomplish a particular objective, such as
the closing of an important merger, or a pill that contains what we believe to be a reasonable qualifying offer clause. We will
consider supporting a poison pill plan if the qualifying offer clause includes each of the following attributes:
|
|
•
|
The form of offer is not required
to be an all-cash transaction;
|
|
|
•
|
The offer is not required to remain
open for more than 90 business days;
|
|
|
•
|
The offeror is permitted to amend
the offer, reduce the offer, or otherwise change the terms;
|
|
|
•
|
There is no fairness opinion requirement;
and
|
|
|
•
|
There is a low to no premium requirement.
|
Where
these requirements are met, we typically feel comfortable that shareholders will have the opportunity to voice their opinion on
any legitimate offer.
NOL
POISON PILLS
Similarly,
Glass Lewis may consider supporting a limited poison pill in the event that a company seeks shareholder approval of a rights
plan for the express purpose of preserving Net Operating Losses (NOLs). While companies with NOLs can generally carry these losses
forward to offset future taxable income, Section 382
of
the Internal Revenue Code limits companies’ ability to use NOLs in the event of a “change of ownership.”50
In this case, a company may adopt or amend a poison pill (“NOL pill”) in order to prevent an inadvertent change
of ownership by multiple investors purchasing small chunks of stock at the same time, and thereby preserve the ability to carry
the NOLs forward. Often such NOL pills have trigger thresholds much lower than the common 15% or 20% thresholds, with some NOL
pill triggers as low as 5%.
Glass
Lewis evaluates NOL pills on a strictly case-by-case basis taking into consideration, among other factors, the value of the NOLs
to the company, the likelihood of a change of ownership based on the size of the holding and the nature of the larger shareholders,
the trigger threshold and whether the term of the plan is limited in duration (i.e., whether it contains a reasonable “sunset”
provision) or is subject to periodic board review and/ or shareholder ratification. In many cases, companies will propose the
adoption of bylaw amendments specifically restricting certain share transfers, in addition to proposing the adoption of a NOL
pill. In general, if we support the terms of a particular NOL pill, we will generally support the additional protective amendment
in the absence of significant concerns with the specific terms of that proposal.
Furthermore,
we believe that shareholders should be offered the opportunity to vote on any adoption or renewal of a NOL pill regardless of
any potential tax benefit that it offers a company. As such, we will consider recommending voting against those members of the
board who served at the time when an NOL pill was adopted without shareholder approval within the prior twelve months and where
the NOL pill is not subject to shareholder ratification.
FAIR
PRICE PROVISIONS
Fair
price provisions, which are rare, require that certain minimum price and procedural requirements be observed by any party that
acquires more than a specified percentage of a corporation’s common stock. The provision is intended to protect minority
shareholder value when an acquirer seeks to accomplish a merger or other transaction which would eliminate or change the interests
of the minority shareholders. The provision is generally applied against the acquirer unless the takeover is approved by a majority
of ”continuing directors” and holders of a majority, in some cases a supermajority as high as 80%, of the combined
voting power of all stock entitled to vote to alter, amend, or repeal the above provisions.
The
effect of a fair price provision is to require approval of any merger or business combination with an “interested shareholder”
by 51% of the voting stock of the company, excluding the shares held by the interested shareholder. An interested shareholder
is generally considered to be a holder of 10% or more of the company’s outstanding stock, but the trigger can vary.
Generally,
provisions are put in place for the ostensible purpose of preventing a back-end merger where the interested shareholder would
be able to pay a lower price for the remaining shares of the company than he or she paid to gain control. The effect of a fair
price provision on shareholders, however, is to limit their ability to gain a premium for their shares through a partial tender
offer or open market acquisition which typically raise the share price, often significantly. A fair price provision discourages
such transactions because of the potential costs of seeking shareholder approval and because of the restrictions on purchase
price for completing a merger or other transaction at a later time.
Glass
Lewis believes that fair price provisions, while sometimes protecting shareholders from abuse in a takeover situation, more
often act as an impediment to takeovers, potentially limiting gains to shareholders from a variety of transactions that could
significantly increase share price. In some cases, even the independent directors of the board cannot make exceptions when such
exceptions may be in the best interests of shareholders. Given the existence of state law protections for minority shareholders
such as Section 203 of the Delaware Corporations Code, we believe it is in the best interests of shareholders to remove fair price
provisions.
|
|
50
|
Section 382 of the Internal
Revenue Code refers to a “change of ownership” of more than 50 percentage points by one or more 5% shareholders within
a three-year period. The statute is intended to deter the “trafficking” of net operating losses.
|
QUORUM REQUIREMENTS
Glass
Lewis believes that a company’s quorum requirement should be set at a level high enough to ensure that a broad range of
shareholders are represented in person or by proxy, but low enough that the company can transact necessary business. Companies
in the U.S. are generally subject to quorum requirements under the laws of their specific state of incorporation. Additionally,
those companies listed on the NASDAQ Stock Market are required to specify a quorum in their bylaws, provided however that such
quorum may not be less than one-third of outstanding shares. Prior to 2013, the New York Stock Exchange required a quorum of 50%
for listed companies, although this requirement was dropped in recognition of individual state requirements and potential confusion
for issuers. Delaware, for example, required companies to provide for a quorum of no less than one-third of outstanding shares;
otherwise such quorum shall default to a majority.
We
generally believe a majority of outstanding shares entitled to vote is an appropriate quorum for the transaction of business
at shareholder meetings. However, should a company seek shareholder approval of a lower quorum requirement we will generally support
a reduced quorum of at least one-third of shares entitled to vote, either in person or by proxy. When evaluating such proposals,
we also consider the specific facts and circumstances of the company, such as size and shareholder base.
DIRECTOR AND
OFFICER INDEMNIFICATION
While
Glass Lewis strongly believes that directors and officers should be held to the highest standard when carrying out their duties
to shareholders, some protection from liability is reasonable to protect them against certain suits so that these officers feel
comfortable taking measured risks that may benefit shareholders. As such, we find it appropriate for a company to provide indemnification
and/or enroll in liability insurance to cover its directors and officers so long as the terms of such agreements are reasonable.
REINCORPORATION
In
general, Glass Lewis believes that the board is in the best position to determine the appropriate jurisdiction of incorporation
for the company. When examining a management proposal to reincorporate to a different state or country, we review the relevant
financial benefits, generally related to improved corporate tax treatment, as well as changes in corporate governance provisions,
especially those relating to shareholder rights, resulting from the change in domicile. Where the financial benefits are de minimis
and there is a decrease in shareholder rights, we will recommend voting against the transaction.
However,
costly, shareholder-initiated reincorporations are typically not the best route to achieve the furtherance of shareholder rights.
We believe shareholders are generally better served by proposing specific shareholder resolutions addressing pertinent issues
which may be implemented at a lower cost, and perhaps even with board approval. However, when shareholders propose a shift into
a jurisdiction with enhanced shareholder rights, Glass Lewis examines the significant ways would the company benefit from shifting
jurisdictions including the following:
|
|
•
|
Is the board sufficiently independent?
|
|
|
•
|
Does the company have anti-takeover
protections such as a poison pill or classified board in place?
|
|
|
•
|
Has
the board been previously unresponsive to shareholders (such as failing to implement
a shareholder proposal that received majority shareholder support)?
|
|
|
•
|
Do shareholders have the right
to call special meetings of shareholders?
|
|
|
•
|
Are there other material governance
issues of concern at the company?
|
|
|
•
|
Has the company’s performance
matched or exceeded its peers in the past one and three years?
|
|
|
•
|
How
has the company ranked in Glass Lewis’ pay-for-performance analysis during the
last three years?
|
|
|
•
|
Does the company have an independent
chair?
|
We
note, however, that we will only support shareholder proposals to change a company’s place of incorporation in exceptional
circumstances.
EXCLUSIVE
FORUM AND FEE-SHIFTING BYLAW PROVISIONS
Glass
Lewis recognizes that companies may be subject to frivolous and opportunistic lawsuits, particularly in conjunction with a merger
or acquisition, that are expensive and distracting. In response, companies have sought ways to prevent or limit the risk of such
suits by adopting bylaws regarding where the suits must be brought or shifting the burden of the legal expenses to the plaintiff,
if unsuccessful at trial.
Glass
Lewis believes that charter or bylaw provisions limiting a shareholder’s choice of legal venue are not in the best interests
of shareholders. Such clauses may effectively discourage the use of shareholder claims by increasing their associated costs and
making them more difficult to pursue. As such, shareholders should be wary about approving any limitation on their legal recourse
including limiting themselves to a single jurisdiction (e.g., Delaware) without compelling evidence that it will benefit shareholders.
For
this reason, we recommend that shareholders vote against any bylaw or charter amendment seeking to adopt an exclusive forum provision
unless the company: (i) provides a compelling argument on why the provision would directly benefit shareholders; (ii) provides
evidence of abuse of legal process in other, non-favored jurisdictions; (iii) narrowly tailors such provision to the risks involved;
and (iv) maintains a strong record of good corporate governance practices.
Moreover,
in the event a board seeks shareholder approval of a forum selection clause pursuant to a bundled bylaw amendment rather than
as a separate proposal, we will weigh the importance of the other bundled provisions when determining the vote recommendation
on the proposal. We will nonetheless recommend voting against the chair of the governance committee for bundling disparate proposals
into a single proposal (refer to our discussion of nominating and governance committee performance in Section I of the guidelines).
Similarly,
some companies have adopted bylaws requiring plaintiffs who sue the company and fail to receive a judgment in their favor pay
the legal expenses of the company. These bylaws, also known as “fee-shifting” or “loser pays” bylaws,
will likely have a chilling effect on even meritorious shareholder lawsuits as shareholders would face an strong financial disincentive
not to sue a company. Glass Lewis therefore strongly opposes the adoption of such fee-shifting bylaws and, if adopted without
shareholder approval, will recommend voting against the governance committee. While we note that in June of 2015 the State of
Delaware banned the adoption of fee-shifting bylaws, such provisions could still be adopted by companies incorporated in other
states.
AUTHORIZED
SHARES
Glass
Lewis believes that adequate capital stock is important to a company’s operation. When analyzing a request for additional
shares, we typically review four common reasons why a company might need additional capital stock:
|
|
1.
|
Stock
Split — We typically consider three metrics
when evaluating whether we think a stock split is likely or necessary: The historical
stock pre-split price, if any; the current price relative to the company’s most
common trading price over the past 52 weeks; and some absolute limits on stock price
that, in our view, either always make a stock split appropriate if desired by management
or would almost never be a reasonable price at which to split a stock.
|
|
|
2.
|
Shareholder
Defenses — Additional authorized shares could
be used to bolster takeover defenses
|
such
as a poison pill. Proxy filings often discuss the usefulness of additional shares in defending against or discouraging a hostile
takeover as a reason for a requested increase. Glass Lewis is typically against such defenses and will oppose actions intended
to bolster such defenses.
|
|
3.
|
Financing
for Acquisitions — We look at whether the
company has a history of using stock for acquisitions and attempt to determine what
levels of stock have typically been required to accomplish such transactions. Likewise,
we look to see whether this is discussed as a reason for additional shares in the proxy.
|
|
|
4.
|
Financing
for Operations — We review the company’s
cash position and its ability to secure financing through borrowing or other means.
We look at the company’s history of capitalization and whether the company has
had to use stock in the recent past as a means of raising capital.
|
Issuing
additional shares generally dilutes existing holders in most circumstances. Further, the availability of additional shares, where
the board has discretion to implement a poison pill, can often serve as a deterrent to interested suitors. Accordingly, where
we find that the company has not detailed a plan for use of the proposed shares, or where the number of shares far exceeds those
needed to accomplish a detailed plan, we typically recommend against the authorization of additional shares. Similar concerns
may also lead us to recommend against a proposal to conduct a reverse stock split if the board does not state that it will reduce
the number of authorized common shares in a ratio proportionate to the split.
While
we think that having adequate shares to allow management to make quick decisions and effectively operate the business is critical,
we prefer that, for significant transactions, management come to shareholders to justify their use of additional shares rather
than providing a blank check in the form of a large pool of unallocated shares available for any purpose.
ADVANCE
NOTICE REQUIREMENTS
We
typically recommend that shareholders vote against proposals that would require advance notice of shareholder proposals or of
director nominees.
These
proposals typically attempt to require a certain amount of notice before shareholders are allowed to place proposals on the ballot.
Notice requirements typically range between three to six months prior to the annual meeting. Advance notice requirements typically
make it impossible for a shareholder who misses the deadline to present a shareholder proposal or a director nominee that might
be in the best interests of the company and its shareholders.
We
believe shareholders should be able to review and vote on all proposals and director nominees. Shareholders can always vote
against proposals that appear with little prior notice. Shareholders, as owners of a business, are capable of identifying issues
on which they have sufficient information and ignoring issues on which they have insufficient information. Setting arbitrary notice
restrictions limits the opportunity for shareholders to raise issues that may come up after the window closes.
VIRTUAL
SHAREHOLDER MEETINGS
A
relatively small but growing contingent of companies have elected to hold shareholder meetings by virtual means only. Glass Lewis
believes that virtual meeting technology can be a useful complement to a traditional, in-person shareholder meeting by expanding
participation of shareholders who are unable to attend a shareholder meeting in person (i.e. a “hybrid meeting”).
However, we also believe that virtual-only meetings have the potential to curb the ability of a company’s shareholders to
meaningfully communicate with the company’s management.
Prominent
shareholder rights advocates, including the Council of Institutional Investors, have expressed concerns that such virtual-only
meetings do not approximate an in-person experience and may serve to reduce the board’s accountability to shareholders.
When analyzing the governance profile of companies that choose
to
hold virtual-only meetings, we look for robust disclosure in a company’s proxy statement which assures shareholders that
they will be afforded the same rights and opportunities to participate as they would at an in-person meeting.
Examples
of effective disclosure include: (i) addressing the ability of shareholders to ask questions during the meeting, including time
guidelines for shareholder questions, rules around what types of questions are allowed, and rules for how questions and comments
will be recognized and disclosed to meeting participants;
(ii) procedures,
if any, for posting appropriate questions received during the meeting and the company’s answers, on the investor page
of their website as soon as is practical after the meeting; (iii) addressing technical and logistical issues related to accessing
the virtual meeting platform; and (iv) procedures for accessing technical support to assist in the event of any difficulties accessing
the virtual meeting.
We
will generally recommend voting against members of the governance committee where the board is planning to hold a virtual-only
shareholder meeting and the company does not provide such disclosure.
VOTING STRUCTURE
DUAL-CLASS
SHARE STRUCTURES
Glass
Lewis believes dual-class voting structures are typically not in the best interests of common shareholders. Allowing one vote
per share generally operates as a safeguard for common shareholders by ensuring that those who hold a significant minority of
shares are able to weigh in on issues set forth by the board.
Furthermore,
we believe that the economic stake of each shareholder should match their voting power and that no small group of shareholders,
family or otherwise, should have voting rights different from those of other shareholders. On matters of governance and shareholder
rights, we believe shareholders should have the power to speak and the opportunity to effect change. That power should not be
concentrated in the hands of a few for reasons other than economic stake.
We
generally consider a dual-class share structure to reflect negatively on a company’s overall corporate governance. Because
we believe that companies should have share capital structures that protect the interests of non-controlling shareholders as well
as any controlling entity, we typically recommend that shareholders vote in favor of recapitalization proposals to eliminate dual-class
share structures. Similarly, we will generally recommend against proposals to adopt a new class of common stock.
With
regards to our evaluation of corporate governance following an IPO or spin-off within the past year, we will now include the presence
of dual-class share structures as an additional factor in determining whether shareholder rights are being severely restricted
indefinitely.
When
analyzing voting results from meetings of shareholders at companies controlled through dual-class structures, we will carefully
examine the level of approval or disapproval attributed to unaffiliated shareholders when determining whether board responsiveness
is warranted. Where vote results indicate that a majority of unaffiliated shareholders supported a shareholder proposal or opposed
a management proposal, we believe the board should demonstrate an appropriate level of responsiveness.
CUMULATIVE
VOTING
Cumulative
voting increases the ability of minority shareholders to elect a director by allowing shareholders to cast as many shares of the
stock they own multiplied by the number of directors to be elected. As companies generally have multiple nominees up for election,
cumulative voting allows shareholders to cast all of their votes for a single nominee, or a smaller number of nominees than up
for election, thereby raising the likelihood of electing one or more of their preferred nominees to the board. It can be important
when a board is controlled by insiders or affiliates and where the company’s ownership structure includes one or more shareholders who control a majority-voting block of company stock.
Glass
Lewis believes that cumulative voting generally acts as a safeguard for shareholders by ensuring that those who hold a significant
minority of shares can elect a candidate of their choosing to the board. This allows the creation of boards that are responsive
to the interests of all shareholders rather than just a small group of large holders.
We
review cumulative voting proposals on a case-by-case basis, factoring in the independence of the board and the status of the company’s
governance structure. But we typically find these proposals on ballots at companies where independence is lacking and where
the appropriate checks and balances favoring shareholders are not in place. In those instances we typically recommend in favor
of cumulative voting.
Where
a company has adopted a true majority vote standard (i.e., where a director must receive a majority of votes cast to be elected,
as opposed to a modified policy indicated by a resignation policy only), Glass Lewis will recommend voting against cumulative
voting proposals due to the incompatibility of the two election methods. For companies that have not adopted a true majority voting
standard but have adopted some form of majority voting, Glass Lewis will also generally recommend voting against cumulative voting
proposals if the company has not adopted anti-takeover protections and has been responsive to shareholders.
Where
a company has not adopted a majority voting standard and is facing both a shareholder proposal to adopt majority voting and a
shareholder proposal to adopt cumulative voting, Glass Lewis will support only the majority voting proposal. When a company has
both majority voting and cumulative voting in place, there is a higher likelihood of one or more directors not being elected as
a result of not receiving a majority vote. This is because shareholders exercising the right to cumulate their votes could unintentionally
cause the failed election of one or more directors for whom shareholders do not cumulate votes.
SUPERMAJORITY
VOTE REQUIREMENTS
Glass
Lewis believes that supermajority vote requirements impede shareholder action on ballot items critical to shareholder interests.
An example is in the takeover context, where supermajority vote requirements can strongly limit the voice of shareholders in making
decisions on such crucial matters as selling the business. This in turn degrades share value and can limit the possibility of
buyout premiums to shareholders. Moreover, we believe that a supermajority vote requirement can enable a small group of shareholders
to overrule the will of the majority shareholders. We believe that a simple majority is appropriate to approve all matters presented
to shareholders.
TRANSACTION
OF OTHER BUSINESS
We
typically recommend that shareholders not give their proxy to management to vote on any other business items that may properly
come before an annual or special meeting. In our opinion, granting unfettered discretion is unwise.
ANTI-GREENMAIL
PROPOSALS
Glass
Lewis will support proposals to adopt a provision preventing the payment of greenmail, which would serve to prevent companies
from buying back company stock at significant premiums from a certain shareholder. Since a large or majority shareholder could
attempt to compel a board into purchasing its shares at a large premium, the anti-greenmail provision would generally require
that a majority of shareholders other than the majority shareholder approve the buyback.
MUTUAL FUNDS:
INVESTMENT POLICIES AND ADVISORY AGREEMENTS
Glass
Lewis believes that decisions about a fund’s structure and/or a fund’s relationship with its investment advisor or
sub-advisors are generally best left to management and the members of the board, absent a showing of egregious or illegal conduct
that might threaten shareholder value. As such, we focus our analyses of such proposals on the following main areas:
|
|
•
|
The terms of any amended advisory
or sub-advisory agreement;
|
|
|
•
|
Any changes in the fee structure
paid to the investment advisor; and
|
|
|
•
|
Any material changes to the fund’s
investment objective or strategy.
|
We
generally support amendments to a fund’s investment advisory agreement absent a material change that is not in the best
interests of shareholders. A significant increase in the fees paid to an investment advisor would be reason for us to consider
recommending voting against a proposed amendment to an investment advisory agreement or fund reorganization. However, in certain
cases, we are more inclined to support an increase in advisory fees if such increases result from being performance-based rather
than asset-based. Furthermore, we generally support sub-advisory agreements between a fund’s advisor and sub-advisor,
primarily because the fees received by the sub-advisor are paid by the advisor, and not by the fund.
In
matters pertaining to a fund’s investment objective or strategy, we believe shareholders are best served when a fund’s
objective or strategy closely resembles the investment discipline shareholders understood and selected when they initially bought
into the fund. As such, we generally recommend voting against amendments to a fund’s investment objective or strategy
when the proposed changes would leave shareholders with stakes in a fund that is noticeably different than when originally purchased,
and which could therefore potentially negatively impact some investors’ diversification strategies.
REAL
ESTATE INVESTMENT TRUSTS
The
complex organizational, operational, tax and compliance requirements of Real Estate Investment Trusts (“REITs”) provide
for a unique shareholder evaluation. In simple terms, a REIT must have a minimum of 100 shareholders (the “100 Shareholder
Test”) and no more than 50% of the value of its shares can be held by five or fewer individuals (the “5/50 Test”).
At least 75% of a REITs’ assets must be in real estate, it must derive 75% of its gross income from rents or mortgage interest,
and it must pay out 90% of its taxable earnings as dividends. In addition, as a publicly traded security listed on a stock exchange,
a REIT must comply with the same general listing requirements as a publicly traded equity.
In
order to comply with such requirements, REITs typically include percentage ownership limitations in their organizational documents,
usually in the range of 5% to 10% of the REITs outstanding shares. Given the complexities of REITs as an asset class, Glass
Lewis applies a highly nuanced approach in our evaluation of REIT proposals, especially regarding changes in authorized share
capital, including preferred stock.
PREFERRED
STOCK ISSUANCES AT REITS
Glass
Lewis is generally against the authorization of preferred shares that allows the board to determine the preferences, limitations
and rights of the preferred shares (known as “blank-check preferred stock”). We believe that granting such broad
discretion should be of concern to common shareholders, since blank-check preferred stock could be used as an antitakeover device
or in some other fashion that adversely affects the voting power or financial interests of common shareholders. However, given
the requirement that a REIT must distribute 90% of its net income annually, it is inhibited from retaining capital to make investments
in its business. As such, we recognize that equity financing likely plays a key role in a REIT’s growth and creation of
shareholder value. Moreover, shareholder concern regarding the use of preferred stock as an anti-takeover mechanism may be allayed
by the fact that most REITs maintain ownership limitations in their certificates of incorporation. For these reasons, along with
the fact that REITs typically do not engage in private placements of preferred stock (which result in the rights of common shareholders
being adversely impacted), we may support requests to authorize shares of blank-check preferred stock at REITs.
BUSINESS DEVELOPMENT
COMPANIES
Business
Development Companies (“BDCs”) were created by the U.S. Congress in 1980; they are regulated under the Investment
Company Act of 1940 and are taxed as regulated investment companies (“RICs”) under the Internal Revenue Code. BDCs
typically operate as publicly traded private equity firms that invest in early stage to mature private companies as well as small
public companies. BDCs realize operating income when their investments are sold off, and therefore maintain complex organizational,
operational, tax and compliance requirements that are similar to those of REITs—the most evident of which is that BDCs must
distribute at least 90% of their taxable earnings as dividends.
AUTHORIZATION
TO SELL SHARES AT A PRICE BELOW NET ASSET VALUE
Considering
that BDCs are required to distribute nearly all their earnings to shareholders, they sometimes need to offer additional shares
of common stock in the public markets to finance operations and acquisitions. However, shareholder approval is required in order
for a BDC to sell shares of common stock at a price below Net Asset Value (“NAV”). Glass Lewis evaluates these proposals
using a case-by-case approach, but will recommend supporting such requests if the following conditions are met:
|
|
•
|
The
authorization to allow share issuances below NAV has an expiration date of one year or
less from the date that shareholders approve the underlying proposal (i.e. the meeting
date);
|
|
|
•
|
The proposed discount below NAV
is minimal (ideally no greater than 20%);
|
|
|
•
|
The
board specifies that the issuance will have a minimal or modest dilutive effect (ideally
no greater than 25% of the company’s then-outstanding common stock prior to the
issuance); and
|
|
|
•
|
A
majority of the company’s independent directors who do not have a financial interest
in the issuance approve the sale.
|
In
short, we believe BDCs should demonstrate a responsible approach to issuing shares below NAV, by proactively addressing shareholder
concerns regarding the potential dilution of the requested share issuance, and explaining if and how the company’s past
below-NAV share issuances have benefitted the company.
AUDITOR
RATIFICATION AND BELOW-NAV ISSUANCES
When
a BDC submits a below-NAV issuance for shareholder approval, we will refrain from recommending against the audit committee chair
for not including auditor ratification on the same ballot. Because of the unique way these proposals interact, votes may be tabulated
in a manner that is not in shareholders’ interests. In cases where these proposals appear on the same ballot, auditor ratification
is generally the only “routine proposal,” the presence of which triggers a scenario where broker non-votes may be
counted toward shareholder quorum, with unintended consequences.
Under
the 1940 Act, below-NAV issuance proposals require relatively high shareholder approval. Specifically, these proposals must be
approved by the lesser of: (i) 67% of votes cast if a majority of shares are represented at the meeting; or (ii) a majority of
outstanding shares. Meanwhile, any broker non-votes counted toward quorum will automatically be registered as “against”
votes for purposes of this proposal. The unintended result can be a case where the issuance proposal is not approved, despite
sufficient voting shares being cast in favor. Because broker non-votes result from a lack of voting instruction by the shareholder,
we do not believe shareholders’ ability to weigh in on the selection of auditor outweighs the consequences of failing to
approve an issuance proposal due to such technicality.
Shareholder Initiatives
Glass
Lewis generally believes decisions regarding day-to-day management and policy decisions, including those related to social, environmental
or political issues, are best left to management and the board as they in almost all cases have more and better information about
company strategy and risk. However, when there is a clear link between the subject of a shareholder proposal and value enhancement
or risk mitigation, Glass Lewis will recommend in favor of a reasonable, well-crafted shareholder proposal where the company has
failed to or inadequately addressed the issue.
We
believe that shareholders should not attempt to micromanage a company, its businesses or its executives through the shareholder
initiative process. Rather, we believe shareholders should use their influence to push for governance structures that protect
shareholders and promote director accountability. Shareholders should then put in place a board they can trust to make informed
decisions that are in the best interests of the business and its owners, and hold directors accountable for management and policy
decisions through board elections. However, we recognize that support of appropriately crafted shareholder initiatives may at
times serve to promote or protect shareholder value.
To
this end, Glass Lewis evaluates shareholder proposals on a case-by-case basis. We generally recommend supporting shareholder proposals
calling for the elimination of, as well as to require shareholder approval of, antitakeover devices such as poison pills and classified
boards. We generally recommend supporting proposals likely to increase and/or protect shareholder value and also those that
promote the furtherance of shareholder rights. In addition, we also generally recommend supporting proposals that promote director
accountability and those that seek to improve compensation practices, especially those promoting a closer link between compensation
and performance, as well as those that promote more and better disclosure of relevant risk factors where such disclosure is lacking
or inadequate.
ENVIRONMENTAL,
SOCIAL & GOVERNANCE INITIATIVES
For
a detailed review of our policies concerning compensation, environmental, social and governance shareholder initiatives, please
refer to our comprehensive Proxy Paper Guidelines for Shareholder Initiatives, available at www.glasslewis.com.
DISCLAIMER
This
document is intended to provide an overview of Glass Lewis’ proxy voting policies and guidelines. It is not intended to
be exhaustive and does not address all potential voting issues. Additionally, none of the information contained herein should
be relied upon as investment advice. The content of this document has been developed based on Glass Lewis’ experience with
proxy voting and corporate governance issues, engagement with clients and issuers and review of relevant studies and surveys,
and has not been tailored to any specific person.
No
representations or warranties express or implied, are made as to the accuracy or completeness of any information included herein.
In addition, Glass Lewis shall not be liable for any losses or damages arising from or in connection with the information contained
herein or the use, reliance on or inability to use any such information. Glass Lewis expects its subscribers possess sufficient
experience and knowledge to make their own decisions entirely independent of any information contained in this document.
All
information contained in this report is protected by law, including but not limited to, copyright law, and none of such information
may be copied or otherwise reproduced, repackaged, further transmitted, transferred, disseminated, redistributed or resold, or
stored for subsequent use for any such purpose, in whole or in part, in any form or manner or by any means whatsoever, by any
person without Glass Lewis’ prior written consent.
©
2019 Glass, Lewis & Co., Glass Lewis Europe, Ltd., and CGI Glass Lewis Pty Ltd. (collectively, “Glass Lewis”).
All Rights Reserved.
|
North America
|
|
|
UNITED STATES
|
|
|
|
|
|
|
|
|
|
Headquarters
|
|
|
|
|
255 California Street
|
|
|
|
|
Suite 1100
|
|
|
|
|
San Francisco, CA 94111
|
|
|
|
|
+1 415 678 4110
|
|
|
|
|
+1 888 800 7001
|
|
|
|
|
|
|
|
|
|
44 Wall Street
|
|
|
|
|
Suite 503
|
|
|
|
|
New York, NY 10005
|
|
|
|
|
+1 212 797 3777
|
|
|
|
|
|
|
|
|
|
2323 Grand Boulevard
|
|
|
|
|
Suite 1125
|
|
|
|
|
Kansas City, MO 64108
|
|
|
|
|
+1 816 945 4525
|
|
|
|
|
|
|
Europe
|
|
|
IRELAND
|
|
|
|
|
15 Henry Street
|
|
|
|
|
Limerick
|
|
|
|
|
+353 61 292 800
|
|
|
|
|
|
|
|
|
|
UNITED KINGDOM
|
|
|
|
|
80 Coleman Street
|
|
|
|
|
Suite 4.02
|
|
|
|
|
London, EC2R 5BJ
|
|
|
|
|
+44 207 653 8800
|
|
|
|
|
|
|
|
|
|
GERMANY
|
|
|
|
|
IVOX Glass Lewis
|
|
|
|
|
Kaiserallee 23a
|
|
|
|
|
76133 Karlsruhe
|
|
|
|
|
+49 721 3549622
|
|
|
|
|
|
|
Asia Pacific
|
|
|
AUSTRALIA
|
|
|
|
|
CGI Glass Lewis
|
|
|
|
|
Suite 5.03, Level 5
|
|
|
|
|
255 George St
|
|
|
|
|
Sydney NSW 2000
|
|
|
|
|
+61 2 9299 9266
|
