ISS and Glass Lewis Policy Updates for the 2017 Proxy Season/media/update-pdfs/2016/11/... · 2/23/2016 · policies for shareholder meetings held on or after February 1, 2017 (ISS)

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November 29, 2016

SIDLEY UPDATE

ISS and Glass Lewis Policy Updates for the 2017 Proxy Season Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass Lewis) have updated their proxy voting policies for shareholder meetings held on or after February 1, 2017 (ISS) or January 1, 2017 (Glass Lewis).1 This Sidley Update (i) summarizes the changes in proxy voting policies that apply to U.S. companies, (ii) discusses their practical implications and (iii) provides guidance about preparing for the 2017 proxy season in light of these developments and related deadlines. The Appendix highlights the various circumstances in which ISS and Glass Lewis may recommend votes against one or more directors in an uncontested election.

Key Dates

Until December 9, 2016

Companies with annual meetings scheduled to be held between February 1 and September 15, 2017 may notify ISS of any changes to their self-selected peer companies for purposes of benchmarking 2016 CEO compensation

Mid-December 2016 Anticipated release of:

• Full set of ISS proxy voting summary guidelines

• ISS FAQs on U.S. proxy voting policies and procedures

• ISS FAQs on U.S. executive compensation policies and equity compensation plans (including the setting of annual burn rate thresholds and pay for performance quantitative concern thresholds)

December 31, 2016 Companies in the Russell 3000 Index may submit updates to their peer groups on file with Equilar, which Glass Lewis uses to formulate its voting recommendations

January 6, 2017 (or earlier, if annual limit is reached)

Deadline for companies to enroll in Glass Lewis’ Issuer Data Report (IDR) service

January 31, 2017 Deadline for S&P 500 companies holding meetings between March 1 and June 30, 2017 to elect to receive draft proxy voting reports by registering contact details with ISS

The key changes relate to (i) director overboarding (i.e., the number of boards that ISS and Glass Lewis deem acceptable for a director to serve on), (ii) adoption of charter or bylaw provisions that are viewed as adverse to shareholders such as a multi-class capital structure with unequal voting rights or restrictions on the ability of shareholders to submit binding shareholder proposals or amend the bylaws, and (iii) compensation-related matters.

SIDLEY UPDATE Page 2

Topics Key Policy Updates for 2017

ISS

Governance-Related Policy Updates

Overboarded Directors

Policy now in effect with respect to Non-CEO Directors – Recommend votes against individual directors who sit on more than five (down from six) public company boards; serving on more than five boards was noted as a concern in 2016 but will lead to negative vote recommendations in 2017 now that the one-year transition period has ended

CEO Directors – No change to current policy; continue to recommend votes against individual directors who are public company CEOs who sit on more than two public company boards besides their own (negative vote recommendations apply only at outside boards)

Common Stock Authorization Requests

ISS clarified that it will generally recommend votes for management proposals to increase the common stock authorization for a stock split or stock dividend as long as the effective increase in authorized shares satisfies ISS’ Common Stock Authorization policy

Shareholder-Adverse Provisions at Newly-Public Companies

Under a new policy, ISS will generally issue negative vote recommendations against directors if, prior to or in connection with an IPO, the company or its board implemented a multi-class capital structure with unequal voting rights or adopted bylaw or charter provisions materially adverse to shareholder rights

Under current ISS policy, a newly-public company can generally avoid negative vote recommendations by publicly committing to put a shareholder-adverse provision to a shareholder vote within three years of going public; ISS is updating the policy to delete that exception

Under the updated policy, a newly-public company must include a “reasonable” sunset provision on such shareholder-adverse provisions to avoid negative vote recommendations

Undue Restrictions on Shareholders’ Ability to Amend Bylaws

Under a new policy, ISS will generally issue negative vote recommendations against governance committee members if a company’s charter:

• prohibits the submission of binding shareholder proposals;

• imposes share ownership or holding period requirements on shareholder proponents that exceed SEC Exchange Act Rule 14a-8; or

• otherwise unduly restricts shareholders’ ability to amend the bylaws

Negative vote recommendations will continue at subsequent annual meetings until the restrictions are removed

Compensation-Related Policy Updates

Revisions to Equity Incentive Plan Policies

ISS is adding the following new scored factor to its Equity Plan Scorecard (EPSC) policy for evaluating equity incentive compensation plans: dividends payable prior to award vesting

• Full points if the plan expressly prohibits the payment of dividends for all award types before the vesting of the underlying award

• No points if there is no such prohibition or if it only applies to certain award types, even if the company has a general practice of not paying dividends until vesting


ISS is changing the current EPSC factor relating to minimum vesting requirements. Under the updated policy:

• Full points only if an equity plan specifies a minimum vesting period of one year for all award types under the plan (rather than “for at least one award type” under the current policy)

• No points if the plan allows for individual award agreements that reduce or eliminate the one-year vesting requirement

ISS will provide additional details about these and other compensation-related policy updates in FAQs to be published in mid-December 2016

Amendments to Cash and Equity Plans

ISS is revising its policy to clarify its approach to evaluating the various types of proposals to amend cash and equity incentive plans; the updated policy sets forth ISS’ approach depending on whether the plan is cash versus equity, and whether the proposal seeks approval for Section 162(m) purposes only or involves other amendments

Under the updated policy, ISS will generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if (i) the proposal seeks approval for Section 162(m) purposes only and (ii) the committee administering the plan consists entirely of independent outside directors (based on ISS’ Categorization of Directors)

• However, ISS’ recommendation will be case-by-case if (x) the company is presenting the plan to shareholders for the first time after its IPO or (y) if the proposal is bundled with other material plan amendments

When assessing equity incentive plan proposals that include amendments to the plan that would transfer shareholder value to employees, ISS will supplement its EPSC evaluation with an analysis of the overall impact of the proposed amendments to the plan

Shareholder Ratification of Non-Employee Director Compensation

Under a new policy, when evaluating management proposals asking shareholders to ratify non-employee director compensation, ISS will (i) consider whether or not the equity plan under which non-employee director grants are made warrants support, if it is on the ballot, and (ii) assess eight specified qualitative factors, including the magnitude of the compensation relative to similar companies, whether there are meaningful limits on director compensation, director stock ownership guidelines and disclosure regarding director compensation

Equity Plans for Non-Employee Directors

ISS is updating and expanding the list of qualitative factors it may use to evaluate a non-employee director equity plan proposal if it will exceed the applicable plan cost or burn rate benchmarks to align the list with the factors enumerated in ISS’ new policy on shareholder ratification of non-employee director compensation

Say-on-Pay Proposals at Cross-Market Companies

For cross-market companies (i.e., companies listed in the U.S. and treated as domestic issuers for SEC reporting purposes but incorporated elsewhere), ISS will evaluate say-on-pay proposals required by a foreign jurisdiction based on ISS’ U.S. say-on-pay policy so as to align its voting recommendations on analogous say-on-pay proposals; this update was noted in an ISS announcement but was not addressed in ISS’ 2017 policy updates; likely to be covered in compensation-related FAQs to be published in mid-December 2016


Topics Key Policy Updates for 2017

Glass Lewis

Overboarded Directors; Director Commitments

Policy now in effect – overboarding under the updated Glass Lewis policies was noted as a concern in 2016 but will lead to negative vote recommendations in 2017 now that the one-year transition period has ended

Non-Executive Officer Directors – Recommend votes against individual directors who sit on more than five (down from six) public company boards

Executive Officer Directors – Recommend votes against individual directors who are executive officers of public companies who sit on more than two (down from three) public company boards (negative vote recommendations generally apply only at outside boards)

When determining whether a director has sufficient time to devote to a board, Glass Lewis will consider relevant factors such as the size and location of the companies where the director serves, the director’s duties and roles on the various boards, tenure and attendance

Glass Lewis may refrain from recommending votes against an overboarded director if:

• the company discloses a sufficient rationale for the director’s continued board service (e.g., specialized knowledge, diversity); or

• if the excessive directorships are within a consolidated group of companies or the director represents a firm whose sole purpose is to manage a portfolio of investments which include the company

Governance at Newly-Public Companies

Glass Lewis will consider recommending votes against governance committee members (or the directors who served at the time of the governing documents’ adoption) if the board of a newly-public company approved governing documents that severely restrict shareholders’ rights indefinitely, such as anti-takeover provisions

Board Evaluation and Refreshment

Glass Lewis prefers a robust board evaluation process over sole reliance on age or tenure limits; believes process should focus on aligning director skills with company strategy

Shareholder Proposals Relating to Gender Pay Equity Disclosure

Glass Lewis will review proposals seeking greater disclosure of efforts to ensure gender pay equity on a case-by-case basis taking into account specified factors; will consider recommending in favor of such proposals if a company has not adequately addressed the issue, creating risk for the company’s operations and/or shareholders

ISS Policy Updates Governance-Related Policy Updates

Overboarded Directors

ISS considers a director who sits on what ISS considers to be an excessive number of public company boards to be “overboarded,” and that such director may be unable to devote sufficient time and energy to board responsibilities in order to be an effective representative of shareholders’ interests.2


For the 2017 proxy season, ISS will issue negative vote recommendations against directors who are not CEOs of public companies who sit on more than five public company boards. ISS decreased the number of boards from six to five in connection with its 2016 policy updates, but implemented a one-year transition period meaning that during the 2016 proxy season ISS included cautionary language in its proxy advisory research reports if a non-CEO director was serving on more than five public company boards, but did not issue a negative vote recommendation based on the revised policy. As of February 1, 2017, the transition period will end and the revised policy will take effect.

ISS has not revised its director overboarding policy with respect to directors who are sitting public company CEOs. ISS will continue to issue negative vote recommendations against such directors who sit on the boards of more than two public company boards besides their own.3 The negative vote recommendations will continue to apply only at the CEO’s outside boards.

Although the topic of overboarding by executive chairs (who are not the company’s CEO) was addressed in the 2016-2017 ISS Global Policy Survey launched by ISS in August 20164 and was discussed at two roundtables held by ISS in the Fall of 2016, the policy updates do not reflect any new or revised policy clarifying which prong of the overboarding policy (i.e., CEO vs. non-CEO directors) should apply to executive chairs. Accordingly, executive chairs will continue to be subject to the five-board limit applicable to non-CEO directors.

Practical Implications

According to ISS, under its previous policy, between July 1, 2014 and June 30, 2015, approximately 21 non-CEO directors at Russell 3000 companies were considered overboarded. ISS anticipated in October 2015 that under its revised policy 61 non-CEO directors at Russell 3000 companies would be considered overboarded.5 The one-year transition period should have provided an opportunity for directors to reevaluate and potentially reduce their board commitments in order to avoid a negative vote recommendation from ISS and for companies to engage with shareholders and craft appropriate disclosure around why a particular director should continue to serve on the board notwithstanding a negative vote recommendation.

Finally, as discussed in a previous Sidley Update,6 ISS updated a factor in its QualityScore governance ratings tool to align with the new lower threshold of five public company board seats applicable to non-CEO directors under the updated overboarding policy.

Common Stock Authorization Requests

ISS clarified that it will generally recommend votes for management proposals to increase the common stock authorization for a stock split or stock dividend, provided that the “effective increase” (rather than the “increase” under the current policy) in authorized shares is equal to or is less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy. ISS believes the clarification to the policy as it applies to forward stock splits and stock dividends is important because proposals to increase authorized common stock may be tied to the implementation of a planned stock split or stock dividend.

Shareholder-Adverse Provisions at Newly-Public Companies

ISS is concerned about the recent increase in the number of companies that have gone public with multi-class capital structures with unequal voting rights – from 8 in 2006 to 17 in 2016 through August. It takes issue with

http://www.sidley.com/news/2016-11-02-corporate-governance-update


the potential for abuse, as well as the challenge of eliminating such a structure once the company is public. ISS noted that most investor respondents to its 2016-2017 ISS Global Policy Survey view these structures as problematic and support negative vote recommendations against directors in this context.

Under a revised policy now entitled “Unilateral Bylaw/Charter Amendments and Problematic Capital Structures,” ISS will generally recommend withhold or against votes on directors individually, committee members or the entire board (except new nominees, who should be considered case-by-case) if, prior to or in connection with the company’s IPO, the company or its board adopted charter or bylaw provisions materially adverse to shareholder rights, or implemented a multi-class capital structure in which the classes have unequal voting rights considering the following factors:

• The level of impairment of shareholders’ rights;

• The disclosed rationale;

• The ability to change the governance structure (e.g., limitations on shareholders’ right to amend the charter or bylaws, or supermajority vote requirements to amend the charter or bylaws);

• Whether the company has a classified board;

• Any reasonable sunset provision (new; replaces the factor under the existing policy relating to whether the company has publicly committed to putting the provision to a shareholder vote within three years); and

• Other relevant factors.

ISS will vote case-by-case on director nominees at subsequent annual meetings until the adverse provision and/or problematic capital structure has been reversed or removed.

In its updated policy, ISS is deleting the reference to a public commitment to put such provisions to a shareholder vote within three years of the company’s IPO, reasoning that such vote is “a foregone conclusion” and therefore “not especially meaningful.”7 When determining vote recommendations under the new policy, ISS will consider the presence of a “reasonable” sunset provision on the shareholder-adverse provision.


The revised policy provides guidance to pre-IPO boards as to the vote recommendations the directors can expect from ISS at the first annual meeting after the company becomes public and at subsequent annual meetings. While IPO companies should continue to adopt governance structures that are appropriately tailored for each company and its best interests, their boards should be aware of the governance practices and capital structures that ISS will likely take issue with and potential mitigating factors. Pre-IPO companies should carefully consider the impact of adopting a multi-class capital structure with unequal voting rights on future director elections and the possibility of including a sunset provision on any unequal voting rights, as well as the disclosed rationale relating to such structure.


ISS Policies Relating to Other Topics Unchanged – At Least For Now

Share Issuance Authorities for Cross-Market Companies

In late October, ISS solicited comment on various draft policy updates, including a proposed policy relating to general share issuance proposals at cross-market companies (i.e., companies listed in the U.S. and treated as domestic issuers for SEC reporting purposes but incorporated elsewhere). As proposed, ISS would have recommended votes in favor of such proposals of up to a maximum of 20% of the company’s outstanding shares, so long as the duration of the authority is reasonable and clearly disclosed.8

The policy was proposed in response to the increasing number of formerly U.S.-domiciled companies which have reincorporated overseas and are now required to obtain shareholder approval to issue new shares. The goals of the proposed policy were to reflect U.S. rules and investor expectations (e.g., such as NYSE and NASDAQ listing rules which require a shareholder vote on issuances above 20% in certain circumstances), while simultaneously protecting shareholders from excessive dilution.

Based on public comments received during the 2017 benchmark policy consultation period, and in light of potential changes to NASDAQ listing rules on the topic and U.S. tax laws relating to redomestication, ISS has determined not to introduce a new policy on this issue for 2017. However, ISS plans to continue to study the subject and may address it in a future policy update.

Two other topics were addressed with respect to U.S. companies in the 2016-2017 ISS Global Policy Survey, but ISS did not solicit comment on draft policy updates relating to them or address them in its 2017 updates:

• Say-on-pay frequency

• Opting out of certain provisions of Maryland law

These remain subjects that ISS may address in future policy updates.

Undue Restrictions on Shareholders’ Ability to Amend Bylaws

ISS published a new policy whereby it will generally issue ongoing negative vote recommendations against governance committee members if a company’s charter imposes undue restrictions on shareholders’ ability to amend the bylaws. ISS provided two non-exhaustive examples of such restrictions: (i) an outright prohibition on the submission of binding shareholder proposals and (ii) share ownership or holding period requirements for shareholder proponents that are more onerous than those set forth in SEC Exchange Act Rule 14a-8 (i.e., generally holding shares valued at $2,000 or more for at least one year). ISS will continue to issue negative vote restrictions at subsequent annual meetings until the restrictions have been removed.

In its updated policy, ISS noted that some states permit companies to restrict the shareholders’ right to amend the bylaws in their charters, which ISS views as a material diminution of shareholder rights. This new policy will have a significant impact on Maryland corporations and REITs, a substantial majority of which have adopted charter provisions permissible under Maryland law which give the board the sole power to amend the bylaws.


The updated policy indicates that this new policy applies when shareholders do not have the ability to amend the bylaws. This suggests that ISS would not consider a supermajority vote requirement (such as 80%) to be an undue restriction on shareholders’ ability to amend the bylaws.


Companies – particularly Maryland corporations and REITs – should determine whether their charters include any restrictions on shareholders’ ability to amend the bylaws that could subject their governance committee members to negative vote recommendations under the new policy.

No ISS Policy Updates Relating to Proxy Access

ISS did not address proxy access in its 2017 updates despite its increased focus on the topic. As discussed in a previous Sidley Update, ISS recently added to its QualityScore governance ratings tool the following new scored questions relating to proxy access:

• What is the ownership threshold for proxy access?

• What is the ownership duration threshold for proxy access?

• What is the cap on shareholder nominees to fill board seats from proxy access?

• What is the aggregation limit on shareholders to form a nominating group for proxy access?

These questions supplement an existing factor asking whether or not the company has adopted proxy access, which was previously tracked for informational purposes only but is now scored for QualityScore purposes.

Now that ISS QualityScore reports are available, we are beginning to see how ISS views certain proxy access features. In the QualityScore report of a company that had adopted proxy access on standard terms (i.e., 3% for 3 years for up to 20% of the board (at least 2 directors) with a group size limit of 20), ISS gave the company a “star” for each of the four new scored questions relating to proxy access designating that the company scored in the “top” of the possible range of points with respect to such questions. Notably, for companies that have atypical proxy access provisions (e.g., a 5% ownership threshold or a group size limit of 10) or that have not adopted proxy access at all, ISS has left the field blank rather than giving the company a “red flag” for the applicable question(s), which would have signified that the factor negatively impacted the pillar’s absolute score.

Compensation-Related Policy Updates

Revisions to Equity Incentive Plan Policies

ISS revised its U.S. Equity Plan Scorecard (EPSC) policy to add a new factor and make minor changes to the various factor weightings. The new factor included in the updated policy is the consideration of the payment of dividends on unvested awards. ISS will award full points if the equity plan expressly prohibits for all award types the payment of dividends before the vesting of the underlying award (however, accrual of dividends payable upon vesting is acceptable); but will award no points if this prohibition is absent or incomplete (i.e., not applicable to all award types), even if the company has a general practice of not paying dividends until vesting.



ISS also modified the minimum vesting factor. Under its updated policy, ISS will award full points only if an equity plan specifies a minimum vesting period of one year for all award types under the plan (rather than “for at least one award type” under the current policy); and will award no points if the plan allows for individual award agreements that reduce or eliminate the one-year vesting requirement.

ISS indicated that additional details will be included in an updated ISS Equity Compensation Plans FAQ document to be published in mid-December 2016.

Amendments to Cash and Equity Plans

ISS is revising its policy to clarify its approach to evaluating the various types of proposals to amend cash and equity incentive plans. The updated policy sets forth ISS’ approach depending on whether the plan is cash versus equity, and whether the proposal seeks approval for Section 162(m) purposes only or involves other amendments. In connection with this policy update, ISS is revising the applicable section heading from “Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related Compensation Proposals)” to “Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m)).”

Under the updated policy, ISS will generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal (i) addresses administrative features only or (ii) seeks approval for Section 162(m) purposes only and the committee administering the plan consists entirely of independent outside directors (based on ISS’ Categorization of Directors). However, with respect to clause (ii), ISS’ recommendation will be case-by-case if (x) the company is presenting the plan to shareholders for the first time after its IPO or (y) if the proposal is bundled with other material plan amendments.

ISS will vote against such proposals if the proposal seeks approval for Section 162(m) purposes only and the committee administering the plan does not consist entirely of independent outside directors.

ISS will vote case-by-case on all other proposals to amend cash incentive plans. ISS will vote case-by-case on all other proposals to amend equity incentive plans, considering the following:

• If the proposal requests additional shares and/or the amendments may potentially increase the transfer of shareholder value to employees, the recommendation will be based on the EPSC evaluation as well as an analysis of the overall impact of the amendments;

• If the plan is being presented to shareholders for the first time after the company’s IPO, whether or not additional shares are being requested, the recommendation will be based on the EPSC evaluation as well as an analysis of the overall impact of any amendments; and

• If there is no request for additional shares and the amendments are not deemed to potentially increase the transfer of shareholder value to employees, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown for informational purposes.


The update provides a more straightforward framework to assist companies in determining how ISS will evaluate various types of equity plan proposals. To obtain a positive vote recommendation for a plan amendment proposal being submitted to shareholders for Section 162(m) purposes only, a company must have a fully


independent compensation committee administering the plan and must not bundle the proposal with material plan amendments.

Current ISS policy will remain in effect with respect to proposals that only seek Section 162(m) approval (e.g., at least once every five years, the material terms of the performance goals are submitted to shareholders to ensure tax deductibility of awards pursuant to Section 162(m)), without requesting additional shares or approval of any plan amendments. ISS will generally vote for such proposals regardless of EPSC factors so long as the committee administering the plan consists entirely of independent outside directors and the company is not presenting the plan to shareholders for the first time after its IPO.

Shareholder Ratification of Non-Employee Director Compensation

There have been a few high-profile lawsuits in recent years brought by shareholders alleging excessive non-employee director pay as discussed in a previous Sidley Update.9 To fend off similar shareholder suits, some companies have asked their shareholders to ratify their non-employee director compensation programs and ISS expects more advisory proposals of this type in 2017. Accordingly, ISS published a new policy for assessing management proposals seeking shareholder ratification of non-employee director compensation in which it will consider, if the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support pursuant to the updated policy applicable to non-employee director equity plans discussed below, as well as the following qualitative factors:

• The relative magnitude of director compensation as compared to companies of a similar profile;

• The presence of pay practices relating to director compensation that ISS considers to be “problematic”;

• Director stock ownership guidelines and holding requirements;

• Equity award vesting schedules;

• The mix of cash and equity-based compensation;

• Meaningful limits on director compensation;

• The availability of retirement benefits or perquisites; and

• The quality of disclosure regarding director compensation.

Equity Plans for Non-Employee Directors

Under current ISS policy, when non-employee director equity plans will exceed the plan cost or burn rate benchmarks when combined with employee and executive stock plans, ISS will vote case-by-case on the plan taking into consideration specified qualitative factors. ISS is updating and expanding that list of factors to match the qualitative factors enumerated in its new policy on shareholder ratification of non-employee director compensation (discussed above), including relative pay magnitude and meaningful pay limits.

http://www.sidley.com/news/2015-05-29_corporate_governance_and_executive_compensation_update


Say-on-Pay Proposals at Cross-Market Companies

Currently at cross-market companies ISS evaluates each compensation proposal under the policy of the country whose laws or listing rules required the proposal to be on the ballot, but generally aligns the vote recommendations of the proposals based on the policy perspective of the country in which the company is listed.

The majority of both investor and non-investor respondents to the 2016-2017 ISS Global Policy Survey indicated that ISS’ vote recommendations on multiple compensation proposals should be aligned so as not to produce inconsistent evaluations of a single compensation program. Participants at a roundtable ISS hosted on the topic in October 2016 also expressed a preference for aligning vote recommendations on multiple compensation proposals. Based on such feedback, ISS has announced that, for cross-market companies, it will base its voting recommendations on say-on-pay proposals required by a foreign jurisdiction on its U.S. say-on-pay policy. ISS did not address this topic in its 2017 updates so it will presumably be covered in compensation-related FAQs to be published in mid-December 2016.

Pay-for-Performance Updates for U.S. Companies

In response to a question in the 2016-2017 ISS Global Policy Survey, 79% of investor respondents supported the use of financial metrics in addition to total shareholder return (TSR) in ISS’ quantitative screens to identify potential pay-for-performance misalignment. Accordingly, for the 2017 proxy season, ISS will measure financial performance by a weighted average of multiple financial metrics including TSR and the following new metrics:

• Return on equity;

• Return on assets;

• Return on invested capital;

• Revenue growth;

• EBITDA growth; and

• Growth in cash flow from operations.

In its proxy research reports for 2017 annual meetings, ISS will include a standardized table comparing a company’s CEO granted pay and three-year financial performance based on TSR and the six new financial metrics listed above, relative to its ISS-selected peer group, generating a numeric result known as the “overall weighted financial performance metric.”

ISS may use the relative financial performance information in its qualitative pay-for-performance evaluations during the 2017 proxy season but it will not yet be a component of ISS’ quantitative pay-for-performance tests.

The relative financial performance evaluation will only apply to companies with at least two full years of trading data and financial results as a public company. Similarly, beginning with the 2017 proxy season, ISS will only apply its existing Relative Degree of Alignment quantitative pay-for-performance test to companies with two full fiscal years of trading data and CEO pay data – rather than one year under the current policy. ISS believes a two-year minimum is appropriate given that the purpose of the test is to measure long-term alignment of CEO pay and company performance relative to peers.


Glass Lewis Policy Updates

Overboarded Directors; Director Commitments

Like ISS, Glass Lewis revised its policy on directors who sit on what Glass Lewis considers to be an excessive number of public company boards for the 2016 proxy season. The one-year transition period during which Glass Lewis noted overboarding under the updated policy as a concern in its reports but did not issue negative vote recommendations will end on January 1, 2017. For the 2017 proxy season, Glass Lewis will issue negative vote recommendations against individual directors based on the updated policy.

Glass Lewis’ updated director overboarding policy is to recommend votes against individual directors who:

• Serve on a total of more than five (down from six) public company boards; or

• Are executive officers of public companies who serve on a total of more than two (down from three)public company boards, in which case Glass Lewis will generally recommend votes against only at theiroutside boards.

Glass Lewis has also updated its policy to describe circumstances where it will not recommend against a director it would otherwise consider to be overboarded. When determining whether a director’s service on an excessive number of boards may limit the director’s ability to devote sufficient time to board duties, Glass Lewis may consider relevant factors such as the following:

• The size and location of the other companies where the director serves on the board;

• The director’s board duties and roles at the companies where the director serves on the board;

• 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. Glass Lewis may refrain from issuing a negative vote recommendation against a director if the company discloses a sufficient rationale for the director’s continued board service. In particular, this disclosure should enable the company’s shareholders to evaluate relevant factors including:

• The scope of the director’s other commitments;

• The director’s contributions to the board including specialized knowledge of the company’s industry,strategy or key markets; and

• The diversity of skills, perspective and background the director provides.

Finally, Glass Lewis will not generally issue a negative vote recommendation on the basis of the director overboarding policy against (i) a director who serves on an excessive number of boards within a consolidated group of companies or (ii) a director who represents a firm whose sole purpose is to manage a portfolio of investments which include the company.



Glass Lewis’ updated policy on director overboarding is intended to address an upward trend in the time commitment associated with being a public company director.10 As discussed above with respect to ISS’ updated policy on director overboarding, this policy update could impact a significant number of directors. If they have not already done so during the one-year transition period, directors should reevaluate their directorships and determine whether to step down from any boards in order to avoid negative vote recommendations. If any directors will potentially trigger a negative vote recommendation under the revised policy, companies should engage with shareholders on this topic and consider how best to disclose its rationale as to why a particular director should continue to serve on the board notwithstanding the potential for a negative vote recommendation. Companies should also clearly describe any directorships involving circumstances under which Glass Lewis will refrain from issuing negative vote recommendations.

Governance at Newly-Public Companies

Glass Lewis generally refrains from making vote recommendations on the basis of governance standards during the one-year period following a company’s IPO. However, under a revised policy, if Glass Lewis determines that the board of a company that has gone public within the past year (e.g., through an IPO or spin-off) has approved governing documents that severely restrict shareholders’ rights indefinitely, Glass Lewis will consider recommending that shareholders vote against governance committee members or the directors who served at the time of the governing documents’ adoption, depending on the severity of the concern.

In conducting this evaluation, Glass Lewis will consider:

• The adoption of anti-takeover provisions (e.g., a poison pill or classified board);

• The presence of exclusive forum or fee-shifting provisions;

• Supermajority vote requirements to amend governing documents;

• Whether shareholders can call special meetings or act by written consent;

• The voting standard applicable to director elections;

• Whether shareholders can remove directors without cause; and

• The presence of evergreen provisions in the company’s equity compensation arrangements.

Glass Lewis also revised its policy applicable to a board’s adoption of an anti-takeover provision prior to an IPO. In that instance, Glass Lewis will consider issuing negative vote recommendations against the directors who served when it was adopted if the board did not (i) commit to put the provision to a shareholder vote at the company’s first shareholder meeting following the IPO (instead of within 12 months of the IPO under the current policy) or (ii) provide a sound rationale or sunset provision for adopting the anti-takeover provision.


The revised policy provides guidance to pre-IPO and pre-spin-off boards as to the vote recommendations the directors can expect from Glass Lewis at the first annual meeting after the company has become public and at subsequent annual meetings. While IPO and spin-off companies should continue to adopt governance structures


that are appropriately tailored for each company and its best interests, their boards should be aware of the governance practices that Glass Lewis will likely take issue with and potential mitigating factors.

Board Evaluation and Refreshment

Glass Lewis has clarified its policy relating to board refreshment but has not stated when it might issue negative vote recommendations on the basis of the clarified policy. Glass Lewis believes that the experience of long-tenured directors can be valuable to shareholders but that the failure to adequately refresh a board can lead to a lack of board responsiveness to poor company performance. Glass Lewis generally opposes sole reliance on age or tenure limits which can be “inflexible” and “arbitrary.” Instead, Glass Lewis strongly supports routine director evaluations, including independent external reviews, and periodic board refreshment to foster diversity and generate new ideas and business strategies. Glass Lewis believes that boards should consider any advisable changes to board composition based on identified gaps in diversity of skill sets and experience, the alignment of the board’s areas of expertise with company strategy, as well as the results of director evaluations. It also believes that shareholders should monitor board composition and address concerns through director elections.


In light of Glass Lewis’ clarified policy, boards should evaluate whether they have appropriate refreshment mechanisms in place. They should make sure that they are not overly reliant on age or tenure limits. While director evaluation processes should be tailored to the specific needs and objectives of a company, boards should implement processes that are robust and effective and, if they do not already do so, should consider assessing the performance of individual directors and engaging a third-party facilitator to assist with evaluations periodically. Director evaluations should culminate in deliberation and discussion about how the board and its committees can improve their effectiveness. Boards should discuss whether they have the right skill sets and experience represented based on current operations and the company’s strategy. Finally, boards should make active and thoughtful decisions on director re-nominations based on the results of director evaluations and the company’s needs.

Shareholder Proposals Relating to Gender Pay Equity Disclosure

In light of the increased frequency of shareholder proposals requesting that a company report on its efforts to ensure gender pay equity, Glass Lewis has added a new policy indicating that it will review such proposals on a case-by-case basis, taking into consideration the following factors:

• The company’s industry;

• The company’s current policies, efforts and disclosure with regard to gender pay equity;

• The company’s peers’ practices and disclosure concerning gender pay equity; and

• Any relevant legal and regulatory actions at the company.

Glass Lewis will consider recommending in favor of proposals requesting greater disclosure regarding gender pay equity where a company has not adequately addressed the issue and there is credible evidence that such inattention poses a risk to the company’s operations and/or shareholders.


Other Policy Updates Made by Glass Lewis

When evaluating shareholder proposals seeking a right of shareholders to act by written consent or call a special meeting, Glass Lewis considers specified factors, including “opportunities for shareholder action.” In its policy updates for 2017, Glass Lewis explicitly listed proxy access as an example of an opportunity for shareholder action that will be considered when evaluating such proposals.

Glass Lewis expects performance metrics for short-term incentive payments and long-term incentive plans to be appropriately linked to the key value drivers of a company’s business. In its policy updates for 2017, Glass Lewis encouraged companies that use non-GAAP or bespoke metrics to provide (i) clear explanations of any adjustments made to the applicable metrics or results and (ii) reconciliations between the metrics used and GAAP figures in its audited financial statements.

Guidance in Preparing for the 2017 Proxy Season

Companies may wish to review and become familiar with the various circumstances in which ISS and Glass Lewis may recommend a negative vote in uncontested director elections (set forth in the Appendix), or on other proposals that may be included in their proxy statements. Companies may also wish to contact their analysts at ISS shortly after filing the proxy statement to discuss any issues that could potentially trigger a negative vote recommendation. Companies may engage with Glass Lewis outside of the proxy solicitation period and outside of proxy season.

In addition to the steps discussed above, we recommend that companies:

• Provide updates, if any, to self-selected compensation peer groups.

o If the company (i) is in the Russell 3000 or Russell MicroCap Index, (ii) has an annual meeting scheduled to be held between February 1 and September 15, 2017 and (iii) made changes to its peer group used to set compensation for the fiscal year that will be disclosed in the next proxy statement (i.e., for 2016 compensation decisions), notify ISS of updates to its self-selected peer companies for purposes of CEO compensation benchmarking until December 9, 2016.

A company’s self-selected compensation peer companies are a key input to ISS’ peer selection process. However, ISS made clear in its Peer Group Selection Methodology FAQs11 that there are instances in which a company’s self-selected peer may not appear in the ISS peer group, such as when it does not meet the applicable size constraints or inclusion would lead to an overrepresentation of a particular industry within the ISS peer group.

Companies should take advantage of the opportunity to indicate any changes to their self-selected compensation peer groups since their last proxy disclosure. Companies can submit peer company updates using the Governance Analytics platform, information about which is available here.

http://www.issgovernance.com/u-s-company-peer-group-feedback


ISS will conduct a separate peer submission process in mid-2017 for companies with annual meetings scheduled to be held after September 15, 2017.

o For its pay-for-performance analysis, Glass Lewis uses the top 15 peers from a peer group generated by Equilar based on a company’s self-disclosed peer group and the strength of connection between peer companies (i.e., one-way vs. reciprocal connections). Equilar updates its market-based peers twice yearly in January and June. Companies in the Russell 3000 Index that plan on filing an updated peer group in their 2017 proxy statements may submit updates to their peer groups on file with Equilar by December 31, 2016 using the form available here.

• Verify data used by the proxy advisory firms in developing their reports.

o Glass Lewis allows companies to review an Issuer Data Report (IDR) comprising the key data points it uses in developing its report on the company’s annual meeting. IDRs do not contain Glass Lewis’ analysis or voting recommendations. IDRs are distributed by email to participating companies approximately 3-4 weeks prior to the annual meeting (although sometimes as close as 16 days prior), and companies generally have 48 hours (or 24 hours, in limited circumstances) to review the IDR and suggest corrections, with supporting public documentation; the review time may be over a weekend. Glass Lewis will only issue IDRs for companies that have released all proxy materials no less than 30 days before the annual meeting date. Glass Lewis is providing IDRs to a limited number of companies “on a first-come, first-served basis.” The enrollment period ends on January 6, 2017 or as soon as Glass Lewis’ annual limit for U.S. companies (which is not defined) is reached. For more information, see the Glass Lewis Issuer Data Report website, which includes a link for companies to request an email notification that is typically sent 1-7 business days in advance of when an IDR is available for review.

• Carefully review draft “preview” and/or final proxy voting reports relating to the company–with input from outside counsel and compensation consultants, as appropriate–and notify the relevant proxy advisory firm of any errors as soon as possible.

o S&P 500 companies that have registered with ISS to receive draft reports have a very narrow timeframe in which to correct any data errors or to otherwise engage with ISS on any issues; companies that are not in the S&P 500 generally do not receive access to draft reports.

S&P 500 companies may participate in the voting recommendation preview process by registering contact details with ISS using the Contact Information Form available here before ISS’ deadline, which is January 31, 2017 for meetings held between March 1 and June 30, 2017; for meetings outside of this timeframe contact information must be provided at least 30 days prior to the meeting. Companies that received and responded to a draft in the previous year need not register again but may update their list of contacts if needed.

Draft reports (which do not include a company’s QualityScore) are typically sent approximately 2-4 weeks prior to the annual meeting and will likely be closer to 2 weeks during the height of proxy season.

http://insight.equilar.com/app/peer_update/index.jsp

https://meetyl.com/issuer_data_report

https://www.issgovernance.com/iss-draft-review-process-u-s-issuers/


All comments and corrections are due in writing by the deadline specified in the cover letter accompanying the draft report, generally within 1-2 business days.

o Companies may report a data discrepancy in a Glass Lewis report through the “Report an Error or Omission” page on Glass Lewis’ website; because Glass Lewis bases its analysis entirely on publicly available information, a company must precisely identify where within the company’s public disclosure Glass Lewis can find and verify the correct information with which to revise its report.

• Review the composition of the board and the company’s corporate governance and compensation practices for potential vulnerabilities under ISS and Glass Lewis policy updates (for example, in relation to director overboarding and board refreshment) and decide what action, if any, to take in light of this assessment.

• Develop outreach tactics to engage with key institutional investors on governance-related matters, especially if the company had a majority-supported shareholder proposal at its last annual meeting that has not been implemented, and/or relatively low support for “say-on-pay” (less than 70% of votes cast).

• Review corporate governance and compensation disclosure included in last year’s proxy statement, and make improvements where appropriate.

If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or

Holly J. Gregory Partner

[email protected] +1 212 839 5853

John P. Kelsh Partner


Thomas J. Kim Partner


Corey Perry Partner


Rebecca Grapsas Counsel


Claire H. Holland Special Counsel


Sidley Corporate Governance and Executive Compensation Practice Lawyers in Sidley’s Corporate Governance and Executive Compensation practice regularly advise corporate management, boards of directors and board committees on a wide variety of corporate governance matters, including shareholder activism and engagement, fiduciary duties, board oversight responsibilities, board investigations and special committees, SEC disclosure, legal compliance, corporate responsibility, board evaluation, board and committee structures and issues arising under Sarbanes-Oxley and Dodd-Frank. Our advice relates to the procedural aspects as well as the legal consequences of corporate and securities transactions and other corporate actions, including takeover defenses, proxy contests, SEC filings and disclosure issues, stock option issues and general corporate law matters. Our broad client base allows us to provide advice regarding best practices and trends in such matters as directors’ and officers’ responsibilities, board and committee practices, disclosure controls and procedures, internal controls, executive compensation and other matters.

To receive Sidley Updates, please subscribe at www.sidley.com/subscribe.

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1 ISS, Americas Proxy Voting Guidelines Updates – 2017 Benchmark Policy Recommendations (Nov. 21, 2016), available here; Glass Lewis, 2017 Proxy Paper Guidelines: United States (Nov. 18, 2016), available here; and Glass Lewis, 2017 Proxy Paper Guidelines: Shareholder Initiatives (Nov. 18, 2016), available here. 2 ISS noted in its 2016 policy updates that the Public Company Governance Survey conducted by the National Association of Corporate Directors (NACD) for 2014-2015 revealed that average annual director time commitment has increased by 46 percent in nine years, from 190 hours in 2005 to 278 hours in 2014. 3 Although all of a CEO’s subsidiary boards will be counted as separate boards, ISS will not issue a negative vote recommendation against the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent, but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationship.

4 ISS, 2016-2017 ISS Global Policy Survey, Summary of Results (Sep. 29, 2016), available here. 5 See ISS, 2016 Benchmark Policy Consultation, Proposed Draft Policy Change Relating to Director Overboarding (Oct. 26, 2015), available here. 6 ISS Releases “QualityScore” Updates and Opens Data Verification Period, Sidley Update (Nov. 2, 2016), available here.

7 See ISS, Executive Summary of 2017 Proxy Voting Guideline Updates and Process (Nov. 21, 2016), available here. 8 ISS, 2017 Benchmark Policy Consultation, Proposed Draft Policy Change Relating to General Share Issuance Mandates for Cross-Market Companies (Oct. 27, 2016), available here.

9 Delaware Courts Tighten Their Scrutiny of Non-Employee Director Compensation Awards, Sidley Update (May 29, 2015), available here. 10 Glass Lewis referenced the NACD’s Public Company Governance Survey for 2015-2016 which indicates that on average a director spends approximately 248 hours per year serving on one public company board. 11 ISS, 2016 U.S. Peer Group Selection Methodology and Issuer Submission Process –Frequently Asked Questions (Jun. 23, 2016), available here.

https://www.issgovernance.com/file/policy/2017-americas-iss-policy-updates.pdf

http://www.glasslewis.com/wp-content/uploads/2016/11/2017_Guideline_US.pdf

http://www.glasslewis.com/wp-content/uploads/2016/11/2017_GUIDELINES_Shareholder_Initiatives.pdf


https://www.issgovernance.com/file/policy/2016-2017-iss-policy-survey-results-report.pdf

http://www.issgovernance.com/file/policy/us-overboarding.pdf


https://www.issgovernance.com/file/policy/executive-summary-of-key-2017-updates-and-policy.pdf

https://www.issgovernance.com/file/policy/general-share-issuance-mandates-for-cross-market-companies.pdf

http://www.sidley.com/news/2015-05-29_corporate_governance_and_executive_compensation_update

https://www.issgovernance.com/file/faq/USPeerGroupFAQ_June2016.pdf

Appendix

Circumstances That May Trigger ISS and Glass Lewis Negative Vote Recommendations in Uncontested Director Elections November 29, 2016

Table of Contents

Introduction ..................................................................................................................................... 1

Governance and Anti-Takeover Provisions ..................................................................................... 2

Director Competence/Commitment ................................................................................................. 7

Board Leadership, Size, Composition and Structure ..................................................................... 10

Other Governance-Related Matters .............................................................................................. 11

Compensation-Related Matters .................................................................................................... 14

Audit-Related Matters ................................................................................................................... 19

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Introduction Institutional Shareholder Services (ISS) and Glass Lewis have identified several circumstances that may trigger a negative vote recommendation in uncontested director elections at shareholder meetings of U.S. companies held during the 2017 proxy season. These circumstances are outlined in this special report. Changes to ISS and Glass Lewis proxy voting guidelines to take effect for the 2017 proxy season are noted in italics.

Sources:

• ISS, 2017 Americas Proxy Voting Guidelines Updates (published Nov. 21, 2016), available here.

• ISS, 2016 U.S. Summary Proxy Voting Guidelines (last updated Feb. 23, 2016), available here.

• ISS, U.S. Proxy Voting Policies and Procedures (Excluding Compensation-Related) – Frequently Asked Questions (last updated Mar. 14,2016), available here.

• ISS, U.S. Executive Compensation Policies – Frequently Asked Questions (last updated Mar. 16, 2016), available here.

• Glass Lewis, 2017 Proxy Paper Guidelines: United States (published Nov. 18, 2016), available here.

• Glass Lewis, 2017 Proxy Paper Guidelines: Shareholder Initiatives (published Nov. 18, 2016), available here.

Notes:

• Where the board is classified and a continuing director responsible for a problematic governance issue at the board/committee level thatwould warrant a negative vote recommendation is not up for election, ISS may hold any or all appropriate nominees, except new nominees,accountable.

• Where the recommendation is to vote against a committee chair and the chair is not up for election because the company has a classifiedboard, Glass Lewis will note the concern with regard to the committee chair but will not recommend voting against the other members of therelevant committee who are up for election.

• Generally speaking and except as set forth herein, Glass Lewis will not issue negative vote recommendations against directors on the basisof governance standards (e.g., board independence, committee membership and structure, meeting attendance, etc.) at a company thatcompleted an IPO within the past year.

• Glass Lewis applies certain exceptions to its independence standards to controlled companies. Specifically, Glass Lewis does not requirecontrolled companies to have boards that are at least two-thirds independent or fully-independent compensation committees and nominatingand governance committees. Finally, Glass Lewis does not require controlled companies to have an independent chair or an independentlead or presiding director.

https://www.issgovernance.com/file/policy/2017-americas-iss-policy-updates.pdf

https://www.issgovernance.com/file/policy/2016-us-summary-voting-guidelines-23-feb-2016.pdf

https://www.issgovernance.com/file/policy/us-policies-and-procedures-faq-14-march-2016.pdf

https://www.issgovernance.com/file/policy/us-executive-compensation-policies-faq-16-march-2016.pdf

http://www.glasslewis.com/wp-content/uploads/2016/11/2017_Guideline_US.pdf


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Governance and Anti-Takeover Provisions

Topic ISS Glass Lewis

Circumstances That May Trigger Negative Vote Recommendations Affected Directors Circumstances That May Trigger

Negative Vote Recommendations Affected Directors

Unilateral Bylaw / Charter

Amendments

• Board amendment of the company’s bylaws or charterwithout shareholder approval in a manner that materiallydiminishes shareholders’ rights or that could adverselyimpact shareholders, considering the following factors:o The board’s rationale for adopting the amendment

without shareholder ratification;o Disclosure of any significant engagement with

shareholders regarding the amendment;o The level of impairment of shareholders’ rights

caused by the amendment;o The board’s track record with regard to unilateral

board action on bylaw/charter amendments or other entrenchment provisions;

o The company’s ownership structure;o The company’s existing governance provisions;o The timing of the amendment in connection with a

significant business development; ando Other factors, as deemed appropriate, that may be

relevant to determine the impact of the amendmenton shareholders.

• Examples of materially adverse unilateral amendments:o Authorized capital increases that do not meet ISS’

Capital Structure Framework;o Board classification to establish staggered director

elections;o Director qualification bylaws that disqualify

shareholders’ nominees or directors who couldreceive third-party compensation;

o Fee-shifting bylaws that require a suing shareholder to bear all costs of a legal action that is not 100%successful;

o Increasing the vote requirement for shareholders toamend charter/bylaws;

o Removing a majority vote standard and substitutingplurality voting;

o Removing or restricting the right of shareholders tocall a special meeting (raising thresholds, restrictingagenda items); and

o Removing or materially restricting the shareholders’right to act in lieu of a meeting via written consent.

Individual Directors, Committee Members or the Entire Board (except new nominees who will be considered on a case-by-case basis)

Amendments Generally: • Board amendment of the company’s governing

documents to reduce or remove importantshareholder rights, or to otherwise impede the abilityof shareholders to exercise such rights, withoutshareholder approval

• Examples:o The elimination of the ability of shareholders to

call a special meeting or to act by written consent;o An increase to the ownership threshold required

for shareholders to call a special meeting;o An increase to vote requirements for charter or

bylaw amendments;o The adoption of provisions that limit the ability of

shareholders to pursue full legal recourse–such asbylaws that require arbitration of shareholder claims or “fee-shifting” or “loser pays” bylaws;

o The adoption of a classified board structure; ando The elimination of the ability of shareholders to

remove a director without cause.

Governance Committee Chair or Governance Committee Members

Director Compensation Bylaws: • Board adopts without shareholder approval

provisions in its charter or bylaws that, through ruleson director compensation, may inhibit the ability ofshareholders to nominate directors

Exclusive Forum Provision: • When during the past year the board adopted an

exclusive forum provision without shareholder approval outside of a spin-off, merger or IPO

• If the board is currently seeking shareholder approvalof an exclusive forum provision pursuant to abundled bylaw amendment rather than as a separateproposal

Governance Committee Members

Nominating/Governance Committee Chair

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Unilateral Bylaw / Charter

Amendments (cont’d)

• Examples of unilateral amendments generally not considered materially adverse (considered on a case-by-case basis): o Advance notice bylaws that set customary and

reasonable deadlines; o Director qualification bylaws that require disclosure

of third-party compensation arrangements; and o Exclusive forum provisions (if the venue is the

company’s state of incorporation).

• Case-by-case on director nominees in subsequent years until the adverse amendment is reversed or submitted to a binding shareholder vote, except that ISS will generally recommend against in subsequent years if the directors: o Classified the board; o Adopted supermajority vote requirements to

amend the bylaws or charter; or o Eliminated shareholders’ ability to amend the

bylaws.

Undue Restrictions on Shareholders’

Ability to Amend Bylaws

• If the charter imposes undue restrictions on shareholders’ ability to amend the bylaws, including (but not limited to): o Outright prohibition on the submission of binding

shareholder proposals; or o Share ownership requirements or time holding

requirements in excess of SEC Exchange Act Rule 14a-8.

Negative vote recommendations on an ongoing basis.


Governance / Capital Structure at Newly Public

Companies

• For newly public companies, if, prior to or in connection with the company’s public offering, the company or board adopted bylaw or charter provisions adverse to shareholders’ rights, or implemented a multi-class capital structure in which the classes have unequal voting rights, considering the following factors: o The level of impairment of shareholders’ rights; o The disclosed rationale; o The ability to change the governance structure

(e.g., limitations on shareholders’ right to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter);

Individual Directors, Committee Members or the Entire Board (except new nominees who will be considered on a case-by-case basis)

• For newly public companies (e.g., those that have completed an IPO or spin-off within the past year), if the board approved governing documents that significantly restrict the ability of shareholders to effect change, considering: o The adoption of anti-takeover provisions such as

a poison pill or classified board; o Supermajority vote requirements to amend

governing documents; o The presence of exclusive forum or fee-shifting

provisions; o Whether shareholders can call special meetings

or act by written consent;

Members of the Governance Committee or Entire Board (directors who served when the problematic provision was adopted, depending on the severity of the concern)

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o The ability of shareholders to hold directorsaccountable through annual director elections, or whether the company has a classified boardstructure;

o Any reasonable sunset provision; ando Other relevant factors.ISS is deleting the exception in the current policy thatenables a newly public company to generally avoid anegative vote recommendation by publicly committingto put a shareholder-adverse provision to ashareholder vote within three years of going public.

• Case-by-case on director nominees in subsequent yearsuntil the adverse provision and/or problematic capitalstructure is reversed or removed.

o The voting standard provided for the election ofdirectors;

o The ability of shareholders to remove directorswithout cause; and

o The presence of evergreen provisions in thecompany’s equity compensation arrangements.

• When a board adopts an anti-takeover provision(e.g., poison pill or classified board) preceding anIPO and the board (i) did not also commit to submitthe anti-takeover provision to a shareholder vote atthe company’s first shareholder meeting following theIPO (rather than within 12 months of the IPO) or (ii) did not provide a sound rationale or sunset provisionfor adopting the anti-takeover provision

Entire Board

Poison Pills • A poison pill has a dead-hand or modified dead-handfeature, in which case a negative vote recommendationwill be made every year until the feature is removed

• The board adopts a poison pill with a term of more than12 months or renews any existing pill, including a pillwith a term of 12 months or less, without shareholderapproval (a commitment or policy that puts a newlyadopted pill to a binding shareholder vote maypotentially offset a negative vote recommendation)

• The company maintains a poison pill that was notapproved by shareholders (ISS will review annually for companies with classified boards and at least onceevery three years for companies with declassifiedboards)

• The board makes a “material adverse change” to anexisting poison pill without shareholder approval

• On a case-by-case basis: the board adopts a poison pillwith a term of 12 months or less without shareholderapproval, taking into account:o The date of the pill’s adoption relative to the date of

the next meeting of shareholders (i.e., whether thecompany had time to put the pill on the ballot for shareholder ratification given the circumstances);

o The company’s rationale;o The company’s governance structure and practices;

ando The company’s track record of accountability to

shareholders.

Entire Board (except new nominees who will be considered on a case-by-case basis)

• When a poison pill with a term of longer than oneyear was adopted without shareholder approvalwithin the prior 12 months

• If the board has, without seeking shareholder approval and without adequate justification, extendedthe term of a poison pill by one year or less in twoconsecutive years

Entire Board

• If a poison pill with a term of one year or less wasadopted without shareholder approval and withoutadequate justification


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Proxy Access Lack of Board Responsiveness to a Majority-Supported Shareholder Proxy Access Proposal: • If the proxy access provision implemented or proposed

by management contains material restrictions more stringent than those included in the shareholder proposal with respect to the following: o Ownership thresholds >3%; o Ownership duration >3 years; o Aggregation limits <20 shareholders; and o Cap on proxy access nominees set at <20% of the

board. • If the aggregation limit or cap on proxy access nominees

differs from the terms of the shareholder proposal and the company has not disclosed its shareholder outreach efforts and engagement

• If the proxy access provision contains restrictions or

conditions on proxy access nominees, ISS will review case-by-case considering the following restrictions as “potentially problematic,” particularly in combination: o Prohibitions on resubmission of failed nominees in

subsequent years; o Restrictions on third-party compensation of proxy

access nominees; o Restrictions on the use of proxy access and proxy

contest procedures for the same meeting; o How long and under what terms an elected

shareholder nominee will count towards the maximum number of proxy access nominees; and

o When the right will be fully implemented and accessible to qualifying shareholders.

• ISS will consider the following restrictions as “especially problematic”: o Counting individual funds within a mutual fund

family as separate shareholders for purposes of an aggregation limit; and

o The imposition of post-meeting shareholding requirements for nominating shareholders.

Individual Directors, Nominating/Governance Committee Members or the Entire Board

See discussion under Other Governance-Related Matters – Lack of Board Responsiveness below

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Proxy Access Nominees: • Case-by-case on proxy access nominees considering the

following and any other relevant factors, including those that are specific to the company, to the nominee and/or to the nature of the election (such as whether there are more candidates than board seats): o Nominee/nominator specific factors:

Nominators’ rationale. Nominators’ critique of

management/incumbent directors. Nominee’s qualifications, independence and

overall fitness for directorship. o Company specific factors:

Company performance relative to its peers. Background to the contested situation (if

applicable). Board’s track record and responsiveness. Independence of directors/nominees. Governance profile of the company. Evidence of board entrenchment. Current board composition (skill sets, tenure,

diversity, etc.). Ongoing controversies, if any.

o Election specific factors:

Whether the number of nominees exceeds the number of board seats.

Vote standard for the election of directors.

Individual Directors

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Director Competence/Commitment Topic

ISS Glass Lewis Circumstances That May Trigger Negative Vote Recommendations Affected Directors Circumstances That May Trigger


Director Attendance

• A director attends less than 75% of the aggregate ofhis/her board and committee meetings for the period ofservice (or missed more than one meeting, if thedirector’s total service was three or fewer meetings),unless the absence was due to medical issues/illness or family emergencies (or with respect to new nominees,schedule conflicts due to commitments made prior toappointment), and the reason for such absence isdisclosed in the proxy statement or other SEC filing

• If the proxy disclosure is unclear and insufficient todetermine whether the director attended at least 75% ofboard and committee meetings during the period ofservice

Individual Directors (except new nominees who will be considered on a case-by-case basis)

• A director fails to attend a minimum of 75% of theaggregate of his/her board and applicable committeemeetings (not applicable if a director has served for less than one full year or if the proxy discloses thatthe director missed meetings due to serious illness or other extenuating circumstances)

Individual Directors (except those who have served less than one full year)

Director Overboarding

• A director who sits on more than five public companyboards

• A director who is CEO of a public company who sits onboards of more than two public companies besidesCEO’s own board (the negative vote recommendationwill not apply to the boards of controlled subsidiaries(>50% ownership) of the CEO’s own board); at outsideboards and <50% subsidiaries, ISS will review case-by-case, considering:

o Structure of the parent subsidiary relationship (e.g.,holding company);

o Similarity of business lines between the parent andsubsidiary;

o Percentage of subsidiary held by the parent company;and

o Total number of boards on which he/she serves.• Boards of subsidiaries with publicly-traded stock count

as separate boards

Individual Directors • A non-executive director who sits on more than five public company boards

• A director who is an executive officer of any public company who sits on more than one public company board besides his/her own board

• Glass Lewis 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

• Glass Lewis may refrain from recommending votes against a director if the company provides sufficient rationale for the director’s continued board service that allow shareholders to evaluate the scope of the directors’ other commitments, as well as the director’s contributions to the board, including specialized knowledge of the company’s industry, strategy or key markets, the diversity of skills, perspective and background the director provides, and other relevant factors

• Glass Lewis will also generally refrain from recommending votes against a director who serves on an excessive number of boards within a consolidated group of companies or a director who


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represents a firm whose sole purpose is to manage a portfolio of investments which include the company

Audit Committee Overboarding

• Any audit committee member who sits on more than three public company audit committees, unless he/she is a retired CPA, CFO, controller or has similar experience, in which case the limit is four committees

Audit Committee Members

Service at Other Companies

• Egregious actions related to service on other boards that raise substantial doubt about the director’s ability to effectively oversee management and serve the best interests of shareholders at any company

Individual Directors, Committee Members or the Entire Board

• Director who has served on boards or as an executive 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, considering, among other factors: o Length of time passed since the incident giving

rise to the concern; o Shareholder support for the director; o The severity of the issue; o The director’s role (e.g., committee

membership); o Director tenure at the company; o Whether ethical lapses accompanied the

oversight lapse; and o Evidence of strong oversight at other

companies • 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

• A director who has received two against recommendations from Glass Lewis for identical reasons within the prior year at different companies


• Any compensation committee member 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

Compensation Committee Members

Late Section 16 Filings

• A director who belatedly filed a significant Form 4 or 5, or who has a pattern of late filings if the late filing was the director’s fault

Individual Directors (case-by-case)

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Inadequate Number of Committee Meetings

• The nominating and/or governance committee did not meet during the year

• The compensation committee did not meet during the year

• The audit committee did not meet at least four times during the year

Applicable Committee Chair

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Board Leadership, Size, Composition and Structure Topic



Independent Board Leadership

• When the board chair is not independent and an independent lead or presiding director has not been appointed

• When the independent lead or presiding director is rotated among directors from meeting to meeting

Governance Committee Chair

Board Size • When there are more than 20 board members Nominating/Governance Committee Members

• When there are less than five board members Nominating/Governance Committee Chair

Insufficient Board Independence

• The full board is less than majority independent All Inside Directors and Affiliated Outside Directors

• Where more than one-third of the members of the board are inside or affiliated directors, Glass Lewis will recommend votes against some of the inside and/or affiliated directors to reach the two-thirds independence threshold

Individual Inside and/or Affiliated Directors

Lack of Key Committees

• The company lacks an audit, compensation or nominating committee so that the full board functions as that committee

• The company lacks a formal nominating committee (even if the board attests that independent directors fulfill the functions of such a committee)

All Inside Directors and Affiliated Outside Directors

Key Committees Not Entirely Independent

• A director is an “inside” or affiliated outside director serving on the audit, compensation or nominating committee

Individual Directors • Any inside or affiliated director seeking appointment to an audit, compensation, nominating, or governance committee, or who has served in that capacity in the past year

• Compensation committee members who are not independent based on Glass Lewis standards


Audit Committee Size and

Composition

• 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

• If the committee has less than three members

Audit Committee Chair

Waiver of Term/Age Limits

• If the board waives its term/age limits unless sufficient explanation is provided (e.g., consummation of a merger)

Nominating and/or Governance Committee Members

Lack of Relevant Experience

• 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

Nominating Committee Chair

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Other Governance-Related Matters Topic



Poor Performance, Accountability and

Oversight

• The board lacks accountability and oversight, coupled with sustained poor performance of the company relative to peers measured by one-year and three-year total shareholder returns in the bottom half of a Russell 3000 company’s four-digit Global Industry Classification Group (ISS will take into consideration the company’s five-year total shareholder return and operational metrics); ISS will consider “problematic” the following governance practices: o A classified board structure; o A supermajority vote requirement; o A plurality vote standard in uncontested director

elections or a majority vote standard for director elections with no carve-out for contested elections;

o Inability of shareholders to call special meetings or act by written consent;

o A dual-class capital structure; and/or o A non-shareholder approved poison pill.

Entire Board (except new nominees who will be considered on a case-by-case basis)

• If, for the last three years, the company’s performance has been in the bottom quartile of the sector and the directors have not taken reasonable steps to address the poor performance

Entire Board

Governance Failures

• Material failures of governance, stewardship, risk oversight (examples include bribery, large or serial fines or sanctions from regulatory bodies, significant adverse legal judgments or settlements, any hedging of company stock, or significant pledging of company stock) or fiduciary responsibilities at the company


• When a company has disclosed a sizable loss or writedown, and the risk committee contributed to the loss through poor oversight

Risk Committee Members

• Where a company maintains a significant level of financial risk exposure but fails to disclose any explicit form of board-level risk oversight (committee or otherwise)

Chair of the Board (but not Chair/CEO except in egregious cases)

• Under extraordinary circumstances, failure to replace management as appropriate

• Where the board or management has failed to sufficiently identify and manage a material environmental or social risk that did or could negatively impact shareholder value

Audit or Risk Committee Members or Other Directors Responsible for Oversight of Such Risks

• Particularly egregious actions by the company relating to the mismanagement of corporate funds through political donations or lobbying activities

Governance Committee Chair or Other Responsible Directors

Lack of Board Responsiveness

• Failure to adequately respond to a shareholder proposal that received the support of a majority of votes cast in the previous year, taking into account: o Disclosed outreach efforts by the board to shareholders

in the wake of the vote; o Rationale provided in the proxy statement for the level

of implementation;

Individual Directors, Committee Members or the Entire Board on a case-by-case basis

• When the board failed to implement a shareholder proposal relating to important shareholder rights that received support from a majority of the votes cast (excluding abstentions and broker non-votes) (e.g., proposals to declassify the board, adopt majority voting to elect directors or permit shareholders to call a special meeting); in determining whether a board


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o The subject matter of the proposal; o The level of support for and opposition to the resolution

in past meetings; o Actions taken by the board in response to the majority

vote and its engagement with shareholders; o The continuation of the underlying issue as a voting

item on the ballot (as either shareholder or management proposals); and

o Other factors as appropriate.

has sufficiently implemented such a proposal, Glass Lewis 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)

• When the board failed to respond appropriately after at least 25% of shareholders (excluding abstentions and broker non-votes) voted against the recommendation of management on a director’s election, a management proposal or a shareholder proposal, Glass Lewis will examine the severity of the underlying issue and the lack of appropriate response may be a contributing factor to a future recommendation against a director nominee

Individual Directors or the Entire Board

• When the compensation committee failed to implement a shareholder proposal regarding a compensation-related issue, if the proposal received the affirmative vote of a majority of the voting shares, and if a reasonable analysis suggests the compensation committee should have taken steps to implement the request


• At the previous board election, any director received more than 50% negative votes of the votes cast and the company failed to address the underlying issues that caused these high negative votes


• When a director received a greater than 50% against vote the prior year and the director was not removed and the issues that raised shareholder concern were not corrected o Also see discussion of 25% threshold in box

directly above.

Nominating Committee Chair

• The board failed to act on takeover offers where the majority of shares were tendered


Exclusion of Shareholder

Proposal

• Omission from the proxy statement/ballot of a properly submitted shareholder proposal without obtaining any of: o Voluntary withdrawal of the proposal by the proponent; o No-action relief from the SEC; and o A U.S. District Court ruling that it can exclude the

proposal from its ballot.


Bundling of Proxy Proposals

• If the company bundles disparate proposals into a single proposal


Conflicts of Interest / Related

• A CFO who is on the board


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Party Transactions

• A director, or a director who has an immediate family member, providing material consulting or other material professional services to the company

• A director, or a director who has an immediate family member, engaging in airplane, real estate, or similar deals, including perquisite-type grants, amounting to more than US$50,000 in payments from the company

• Interlocking directorships of CEOs or other top executives who serve on each other’s boards

• An inside director who simultaneously serves as a director and as an employee of the company and 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)

Individual Inside and/or Affiliated Directors

• 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

Nominating Committee Members

• When for two consecutive years the company provides what Glass Lewis considers 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 shareholder 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)


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Compensation-Related Matters Topic



Lack of Responsiveness:

Say-on-Pay

• The board failed to respond adequately to a previous say-on-pay vote that received the support of less than 70% of votes cast, taking into account: o The company’s response, including: Disclosure of engagement efforts with major

institutional investors regarding the issues that contributed to the low level of support.

Specific actions taken to address the issues that contributed to the low level of support.

Other recent compensation actions taken by the company.

o Whether the issues raised are recurring or isolated; o The company’s ownership structure; and o Whether the support level was less than 50%, which

would warrant the highest degree of responsiveness.

Compensation Committee Members and potentially the Entire Board (except new nominees who will be considered on a case-by-case basis)

• When the committee failed to address shareholder concerns following majority shareholder rejection of the say-on-pay proposal in the previous year, including where the proposal was approved but there was a significant shareholder vote (i.e., > 25% of votes cast) against the say-on-pay proposal in the prior year; lack of appropriate response where shareholder support was significant may be a contributing factor to a future recommendation against the compensation committee chair or all compensation committee members; Glass Lewis expects the compensation committee to provide some level of response to a significant vote against, including engaging with large shareholders to identify their concerns; in the absence of evidence that the board is actively engaging with shareholders and responding accordingly, Glass Lewis may recommend holding compensation committee members accountable for failing to adequately respond to shareholder opposition, giving careful consideration to the level of shareholder protest and the severity and history of compensation problems

Compensation Committee Members and/or Compensation Committee Chair

Problematic Compensation

Practices

• In the absence of a say-on-pay vote or in egregious situations if: o There is a significant misalignment between CEO

pay and company performance under ISS’ pay-for-performance analysis


• Members who are up for election and served at the time of poor pay-for-performance if shareholders are not provided with a say-on-pay vote

• If shareholders are provided with a say-on-pay vote but there is a pattern of failing to align pay with performance and/or the company exhibits egregious compensation practices o Glass Lewis will consider not recommending

against Compensation Committee Members if the disconnect between pay and performance is marginal and the company has outperformed its peers


• 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

Compensation Committee Chair

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or management has excessive discretion to alter performance terms or increase amounts of awards in contravention of previously defined targets

• In the absence of a say-on-pay vote or in egregious situations if:

o The board exhibits a significant level of poor communication and responsiveness to shareholders on compensation issues raised previously;

o The company fails to submit one-time transfers of stock options to a shareholder vote;

o The company fails to fulfill the terms of a burn rate commitment made to shareholders;

o The company maintains significant “problematic pay practices,” such as: Repricing or replacing of underwater stock

options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options).

Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting.

New or extended agreements that provide for: - CIC payments exceeding three times base

salary and average/target/most recent bonus.

- CIC severance payments without involuntary job loss or substantial diminution of duties (“single” or “modified single” triggers).

- CIC payments with excise tax gross-ups (including “modified” gross-ups).

Incentives that may motivate excessive risk-taking such as:

- Multi-year guaranteed bonuses. - A single or common performance metric

used for short- and long-term plans. - Lucrative severance packages. - High pay opportunities relative to industry

peers. - Disproportionate supplemental pensions. - Mega annual equity grants that provide

unlimited upside with no downside risk. Options backdating.


• When the company entered into excessive employment agreements and/or severance agreements

• When performance goals were lowered when employees failed or were unlikely to meet original goals, or performance-based compensation was paid despite goals not being attained

• When excessive employee perquisites and benefits were allowed

• When the company repriced options or completed a “self tender offer” without shareholder approval within the past two years

• When vesting of in-the-money options is accelerated • When option exercise prices were backdated • When option exercise prices were spring-loaded or

otherwise timed around the release of material information

• When the company has engaged in bullet-dodging where there has been a pattern of granting options at or near historic lows

• When a new employment contract is given to an executive that does not include a clawback provision and the company had a material restatement in the recent past, especially if the restatement was due to fraud

• When the compensation committee has approved large one-off payments

• The inappropriate, unjustified use of discretion by the compensation committee

• Sustained poor pay-for-performance practices


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Problematic pay practices that may result in a negative vote recommendation on a case-by-case basis: • Egregious employment contracts (contracts containing

multi-year guarantees for salary increases, non-performance based bonuses, or equity compensation)

• Overly generous new-hire package for new CEO (excessive “make whole” provisions without sufficient rationale or any problematic pay practices)

• Abnormally large bonus payouts without justifiable performance linkage or proper disclosure (includes performance metrics that are changed, canceled or replaced during the performance period without adequate explanation of the action and the link to performance)

• Egregious pension/SERP (supplemental executive retirement plan) payouts (inclusion of additional years of service not worked that result in significant benefits provided in new arrangements or inclusion of performance-based equity or other long-term awards in the pension calculation)

• Excessive perquisites (perquisites for former and/or retired executives (e.g., lifetime benefits, car allowances, personal use of corporate aircraft, or other inappropriate arrangements), extraordinary relocation benefits, including any home loss buyouts, or excessive amounts of perquisites compensation)

• Excessive severance and/or change in control (CIC) provisions: o CIC payments exceeding three times base salary

plus target/average/last paid bonus; o New or materially amended arrangements that

provide for CIC payments without loss of job or substantial diminution of job duties (single-triggered or modified single-triggered where an executive may voluntarily leave for any reason and still receive the CIC severance package);

o New or materially amended employment or severance agreements that provide for an excise tax gross-up (modified gross-ups would be treated in the same manner as full gross-ups);

o Excessive payments upon an executive’s termination in connection with performance failure; and/or

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o Liberal CIC definition in individual contracts or equity plans which could result in payments to executives without an actual CIC occurring.

• Tax reimbursements (excessive reimbursement of income taxes on executive perquisites or other payments (e.g., related to personal use of corporate aircraft, executive life insurance, bonus, restricted stock vesting, secular trusts, etc.))

• Dividends or dividend equivalents paid on unvested performance shares or units

• Internal pay disparity (excessive differential between CEO total pay and that of the next highest-paid named executive officer)

• Repricing or replacing of underwater stock options/stock appreciation rights without prior shareholder approval (including cash buyouts, option exchanges and certain voluntary surrender of underwater options where shares surrendered may be subsequently re-granted)

• Insufficient executive compensation disclosure by externally-managed issuers (EMIs)

• Other pay practices that may be deemed problematic but are not covered in any of the above categories

• Any director who approved or allowed the backdating of options where a company granted backdated options to an executive who is also a director


• When options were backdated, there were material weaknesses in internal controls, there was a resulting restatement, and disclosures indicate there was a lack of documentation with respect to the option grants


Failure to Include Say-on-Pay Proposal at Frequency Desired by

Shareholders

• The board implemented a say-on-pay vote on a less frequent basis than the frequency that received the majority of votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency


• When no say-on-pay frequency received a majority vote in favor and the board implements a say-on-pay vote on a less frequent basis than the frequency that received a plurality of the votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency, taking into account: o The board’s rationale for selecting a frequency that is

different from the frequency that received a plurality; o The company’s ownership structure and vote results;


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o ISS’ analysis of whether there are compensation concerns or a history of problematic compensation practices; and

o The previous year’s support level on the company’s say-on-pay proposal.

Failure to Include Say-on-Pay

Proposal When Expected

• In the absence of clearly disclosed and compelling rationale, failure to provide a say-on-pay vote in the year that the company stated it would

Compensation Committee Members and potentially the Entire Board

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Audit-Related Matters Topic



Poor Accounting Practices

• Poor accounting practices which rise to a level of serious concern (such as fraud, misapplication of GAAP and material weaknesses identified in Sarbanes-Oxley Section 404 (internal control over financial reporting) disclosures) are identified, taking into consideration the practices’ severity, breadth, chronological sequence and duration, and the company’s efforts at remediation or corrective actions

Audit Committee Members and potentially the Entire Board

• When material accounting fraud occurred at the company

• When annual and/or multiple quarterly financial statements had to be restated and (i) the restatement involves fraud or manipulation by insiders; or (ii) the restatement is accompanied by an SEC inquiry or investigation; or (iii) other special circumstances

• If the company repeatedly fails to file its financial reports in a timely fashion (e.g., two or more quarterly or annual financial statements filed late within the last five quarters)

• 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

• When the company has aggressive accounting policies and/or poor disclosure or lack of sufficient transparency in its financial statements

• 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


Problematic Non-Audit Fees

• Non-audit fees paid to the auditor are excessive (e.g., non-audit fees are greater than audit fees plus audit-related fees plus tax compliance/preparation fees)

Audit Committee Members • If the non-audit fees or tax fees exceed audit plus audit-related fees in either the current year or the prior year

• All 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


• 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


• 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


Excessively Low Audit Fees

• When audit fees are excessively low, especially when compared with other companies in the same industry


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Other Problematic Audit-Related

Practices

• The company receives an adverse opinion on its financial statements from its auditor

Audit Committee Members • 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)

• Where the auditor has resigned and reported that a section 10A letter has been issued


• There is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company or its shareholders to pursue legitimate legal recourse against the audit firm

Audit Committee Members • If the contract with the auditor specifically limits the auditor’s liability to the company for damages


• When the committee reappointed an auditor that Glass Lewis no longer considers to be independent for reasons unrelated to fee proportions


Failure to Include Auditor

Ratification on the Ballot

• If the company failed to put auditor ratification on the ballot for shareholder approval


Documents

ISS and Glass Lewis Policy Updates for the 2017 Proxy Season/media/update-pdfs/2016/11/... · 2/23/2016 · policies for shareholder meetings held on or after February 1, 2017 (ISS)