ISS and Glass Lewis Policy Updates for the 2018 Proxy … · In ISS’ 2017-2018 Governance Principles Survey, 69% of investor respondents replied that they would consider a lack

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November 29, 2017

SIDLEY UPDATE

ISS and Glass Lewis Policy Updates for the 2018 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, 2018 (ISS) or January 1, 2018 (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 2018 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.

The key changes to ISS’ proxy voting policies relate to:

• Climate Change Shareholder Proposals – When evaluating such proposals, ISS will now assess the company’s disclosure of its process for identifying, measuring and managing climate change risks;

• Long-Term Poison Pills – ISS will recommend voting against all directors every year if a company has a poison pill with a duration of more than one year that has not been approved by public shareholders; also the exemption for poison pills adopted in 2009 or earlier will no longer apply;

• Non-Employee Director Pay Evaluations – Beginning in 2019, ISS may recommend voting against members of the board committee responsible for setting or approving excessive non-employee director compensation in two or more consecutive years without a compelling rationale or other mitigating factors;

• Gender Pay Gap Shareholder Proposals – ISS will evaluate such proposals on a case-by-case basis considering (i) the company’s current policies and disclosures on diversity and inclusion and the use of fair compensation practices, (ii) whether the company has been the subject of any recent controversy, litigation or regulatory actions related to gender pay gap issues and (iii) whether the company’s reporting relating to gender pay gap policies or initiatives lags its peers;

• Board Responsiveness to a Low Say-on-Pay Vote – When evaluating whether a board has been sufficiently responsive to a say-on-pay proposal that received less than 70% support, ISS will now take into account (i) the timing and frequency of engagements with major institutional investors to learn their concerns and whether independent directors participated, (ii) disclosure of the feedback from dissenting investors that led them to oppose the say-on-pay proposal and (iii) whether the company made meaningful changes that were responsive to investor concerns; and

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• Pay-For-Performance Methodology Updates – As part of its quantitative pay-for-performance evaluation, ISS will now consider a company’s ranking of CEO total pay and company financial performance (based on three or four metrics which will vary by industry) over three years relative to a peer group.

The key updates to Glass Lewis’ proxy voting policies relate to:

• Climate Change Shareholder Proposals – Glass Lewis will generally recommend in favor of shareholder proposals requesting that companies with increased exposure to climate change-related risks provide enhanced disclosure to shareholders;

• Board Gender Diversity – Beginning in Beginning in 2019, Glass Lewis will generally recommend voting against nominating committee chairs (and potentially other nominating committee members) at companies with no female board members unless they have provided a sufficient rationale for not having any female directors or have disclosed a plan to address the lack of gender diversity on the board;

• Board Responsiveness – The policy will now be triggered when dissent is 20% (rather than 25%) of votes cast; also, for companies with a dual-class share structure, the policy will be triggered when a majority of unaffiliated shareholders supported a shareholder proposal or opposed a management proposal;

• Proxy Access “Fix It” Shareholder Proposals – Glass Lewis will evaluate such proposals on a case-by-case basis and generally recommend against them if the existing proxy access provisions “reasonably conform with broad market practice;”

• Virtual-Only Shareholder Meetings – Beginning in 2019, Glass Lewis will generally recommend voting against governance committee members where the board plans to hold a virtual-only shareholder meeting and the company does not provide robust disclosure assuring shareholders that they will have the same participation rights as at an in-person meeting;

• Dual-Class Share Structures – Glass Lewis will generally recommend in favor of recapitalization proposals that would eliminate a dual-class share structure to allow for all shareholders to have one vote per share; also, when evaluating corporate governance following an IPO or spin-off within the past year, the presence of a dual-class share structure will now be an additional factor in determining whether shareholder rights are being severely restricted; and

• Pay-For-Performance Methodology Updates – Glass Lewis clarified the grading system it uses to rank companies in its pay-for-performance model.

A more comprehensive discussion of the policy updates follows.

Topics Key Policy Updates for 2018

Governance-Related Policy Updates

Board Gender Diversity

ISS: Boards with no female directors will receive a notation in their proxy research reports, but for now ISS will not issue negative recommendations against directors on the basis of a lack of gender diversity on the board.


In an update to the fundamental principles ISS applies when determining recommendations on director nominees, ISS added an explicit statement that “Boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.”

In ISS’ 2017-2018 Governance Principles Survey, 69% of investor respondents replied that they would consider a lack of female directors on a public company board “problematic,” and many indicated that they may consider it appropriate to engage with the company if this were the case.2

Glass Lewis: In 2018, Glass Lewis will not make voting recommendations solely on the basis that a company lacks gender diversity on the board, but it may be noted as a concern in a company’s proxy report and considered when evaluating a company’s oversight structures. Beginning in 2019, where a board has no female directors, Glass Lewis will generally recommend voting against the nominating committee chair and potentially other nominating committee members, depending on other factors such as the company’s size, industry and governance profile. Glass Lewis will assess a company’s disclosure of diversity considerations and may refrain from issuing negative recommendations (i) if a company is outside of the Russell 3000 Index, (ii) when a board has provided a sufficient rationale for not having any female directors or (iii) when the company has disclosed a plan to address the lack of gender diversity on the board.

During the one-year transition period, boards should reevaluate their composition and consider adding diverse directors. At a minimum, companies with no female directors should consider how best to disclose either their rationale for not having any female directors or a plan to increase gender diversity on the board.

Board Responsiveness

ISS: No change generally, but see Board Responsiveness – Say-on-Pay below.

Glass Lewis: Under its current policies, Glass Lewis expects a board to show some level of responsiveness to shareholder concerns when 25% or more of shareholders vote contrary to management’s recommendation. Glass Lewis has revised its policy for 2018 to expect responsiveness when dissent is 20% of votes cast, and noted that this is particularly true in the case of director elections or compensation proposals. In light of this revised policy, companies should disclose their shareholder engagement efforts and other responsiveness measures when shareholder disapproval is 20% or more.

Furthermore, when determining if a board at a company with a dual-class share structure has been sufficiently responsive, Glass Lewis will now scrutinize the level of approval or disapproval attributed to unaffiliated shareholders. Where vote results show that a majority of unaffiliated shareholders supported a shareholder proposal or opposed a management proposal, Glass Lewis will expect the board to demonstrate an appropriate level of responsiveness.

Companies with dual-class share structures should consider calculating their annual meeting vote results broken out by unaffiliated shareholders in accordance with this new policy to determine whether they may be at risk of receiving negative recommendations from Glass Lewis.

Shareholder Proposals Relating to Climate Change

ISS: ISS generally supports shareholder proposals seeking disclosure of climate change risk. When evaluating such proposals, ISS will continue to assess a company’s disclosure regarding the financial, physical and regulatory risks the company faces, and will now also assess the company’s disclosure of its process for identifying, measuring and managing those risks.

The expanded policy follows an increased focus by investors on the role of the board and management in assessing and responding to climate change-related risks. It also better


aligns ISS’ policy with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), which call for consistent and voluntary climate-related financial disclosures.

Glass Lewis: Glass Lewis will generally recommend in favor of shareholder proposals requesting that companies in certain extractive or energy-intensive industries that have increased exposure to climate change-related risks provide disclosure to shareholders about their climate change scenario analyses and other climate change-related considerations. Although Glass Lewis is generally supportive of the TCFD’s disclosure recommendations, Glass Lewis will evaluate shareholder proposals requesting that companies report in accordance with such recommendations on a case-by-case basis. When evaluating shareholder proposals calling for increased disclosure of climate change-related information, Glass Lewis will consider five factors: (i) the industry in which the company operates; (ii) the company’s current level of disclosure; (iii) the oversight afforded to issues related to climate change; (iv) the disclosure and oversight afforded to climate change-related issues at peer companies and (v) if companies in the company’s market and/or industry have provided any disclosure that is aligned with the TCFD’s recommendations.

Poison Pills ISS: Long-Term Pills – ISS believes that the adoption or maintenance of any poison pill for more than one year should be approved by shareholders. ISS will issue negative recommendations on all directors every year (now regardless of whether the board is classified or annually elected) if the company has an active poison pill with a duration of more than one year that has not been approved by public shareholders (shareholder approval pre-IPO is insufficient). ISS will no longer make an exemption to this policy for directors at companies with poison pills adopted in 2009 and earlier (they had been grandfathered under current ISS policy).

Short-Term Pills – ISS will continue to evaluate on a case-by-case basis poison pills with a term of one year or less that have not been approved by shareholders, now with “special emphasis” on the disclosed rationale for the unilateral adoption, and considering other relevant factors (e.g., a commitment to put any renewal to a shareholder vote).

The results of ISS’ 2017-2018 Policy Application Survey revealed that (i) companies consider one-year poison pills generally acceptable and (ii) investors strongly support evaluating short-term poison pills that are not put to a shareholder vote on a case-by-case basis.3

Glass Lewis: No change.

Proxy Access ISS: No change.

Glass Lewis: Under a new policy, Glass Lewis will evaluate proxy access “fix it” proposals on a case-by-case basis, considering the company’s existing proxy access provisions to assess whether they unnecessarily restrict shareholders’ ability to use proxy access. If the existing proxy access provisions “reasonably conform with broad market practice,” Glass Lewis will generally recommend against “fix it” proposals. However, Glass Lewis may recommend in favor of a “fix it” proposal at a company with an unnecessarily restrictive proxy access provision if the proposal directly addresses areas of the company’s proxy access provision that Glass Lewis believes warrant shareholder concern.

Under another new policy, Glass Lewis will evaluate on a case-by-case basis shareholder proposals requesting that non-U.S. companies adopt proxy access. Glass Lewis will make its voting recommendations based on the regulatory landscape within the country in question. Glass Lewis will recommend against such


proposals if existing laws, policies or regulations in the country where the company is domiciled either (i) already provide shareholders with adequate proxy access rights or (ii) would prohibit the company from adopting proxy access.

Virtual-Only Shareholder Meetings

ISS: According to the results of ISS’ 2017-2018 Governance Principles Survey, 36% of investor respondents generally consider hybrid shareholder meetings acceptable, but not virtual-only shareholder meetings. Another 32% of investor respondents consider hybrid meetings acceptable and also consider virtual-only meetings acceptable if they provide shareholders with the same rights as a physical meeting. Despite being a topic raised in the survey, ISS did not adopt a new proxy voting policy on virtual-only meetings applicable to U.S. companies for 2018. It did, however, adopt new policies on the topic applicable to companies in the UK/Ireland and Europe and noted that it will monitor the issue closely in other markets given the rise of frequency of virtual-only meetings globally.

Glass Lewis: In 2018, Glass Lewis will not make voting recommendations solely on the basis that a company is holding a virtual-only shareholder meeting. Beginning in 2019, Glass Lewis will generally recommend voting against governance committee members where the board is planning to hold a virtual-only shareholder meeting and the company does not provide robust disclosure in a company’s proxy statement which assures shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting. This new policy is another data point for companies to consider when evaluating the pros and cons of moving to or continuing to hold virtual-only shareholder meetings. Companies that have determined to hold virtual-only shareholder meetings should consider including detailed disclosure about how shareholders will be able to participate in the meeting to try to avoid negative recommendations from Glass Lewis.

Dual-Class Share Structures

ISS: In its 2017-2018 Governance Principles Survey, ISS asked whether it is ever appropriate for a company to have a multi-class capital structure with unequal voting rights and, if so, whether there should be a sunset provision on these rights. 43% of investor respondents indicated that unequal voting rights are never appropriate for a public company, and an equal number of investor respondents replied that it may be appropriate for newly public companies to have unequal voting rights structures that are subject to automatic sunset provisions or other public companies if the capital structure is periodically approved by the holders of the low-vote shares. 50% of non-investor respondents indicated that companies should be allowed to choose whatever capital structure they see fit. Despite being a topic raised in the survey, ISS did not adopt a new proxy voting policy on dual-class share structures applicable to U.S. companies for 2018 (however, it is already considered a “problematic” governance practice under current ISS policy).

Glass Lewis: Glass Lewis reiterated its belief that dual-class voting structures are typically not in the best interests of common shareholders. Accordingly, it adopted a new policy whereby Glass Lewis will generally recommend that shareholders vote in favor of recapitalization proposals that would eliminate a company’s dual-class share structure to allow for all shareholders to have one vote per share. It will also recommend against proposals to adopt a new class of common stock.

In addition, when evaluating corporate governance following an IPO or spin-off within the past year, Glass Lewis will now include the presence of a dual-class share structure which does not afford common shareholders voting power that is aligned with their economic interest as an additional factor in determining whether shareholder rights are being severely restricted indefinitely. This is similar to a policy ISS adopted in 2017. 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 that Glass Lewis may issue negative recommendations against directors at the first annual meeting after the company has become public if the company adopts a dual-class share structure.

Also see the box above for a new Glass Lewis policy regarding board responsiveness at companies with dual-class share structures.

Director Time Commitments for Overboarding Policy

ISS: No change.

Glass Lewis: Under current Glass Lewis policy, (i) a non-executive director is considered overboarded if he or she sits on more than five public company boards and (ii) a director who is an executive officer of a public company is considered overboarded if he or she sits on more than two public company boards (including his or her own). Glass Lewis made a clarification to this policy with respect to directors who serve in executive roles other than CEO (e.g., executive chair). Beginning in 2018, when determining whether an exception to the policy is warranted, Glass Lewis will evaluate the specific duties and responsibilities of their executive role in addition to the company’s disclosure regarding that director’s time commitments. The refinement of the policy suggests that Glass Lewis may be willing to grant exceptions to the two-board limit when disclosure shows that an executive director’s duties and time commitments would not interfere with his or her ability to hold multiple directorships.

Poor Director Attendance

ISS: ISS will no longer issue negative recommendations against newly-appointed directors for poor attendance at board and committee meetings.

Because new directors do not have advance notice of the board meeting schedule, current ISS policy excuses them for poor attendance if the company discloses a new director’s schedule conflicts. Under the new policy, new directors who only served for part of the past year will be exempt from the poor attendance policy altogether.


Director Independence Classification Terminology

ISS: ISS is revising its director independence classifications to include the following three categories:

• Executive Directors (will be comprised of directors currently categorized as Inside Directors except as set forth in the bullet below)

• Non-Executive, Non-Independent Directors (will be comprised of (i) directors currently categorized as Inside Directors due to controlling interests in the company and (ii) directors currently categorized as Affiliated Outside Directors)

• Independent Directors

The update is intended to conform the terminology in the ISS Categorization of Directors across markets. It will not result in changes in vote recommendations against directors.


Problematic Pledging of Company Stock

ISS: ISS will evaluate pledging of company stock on a case-by-case basis, considering its magnitude and rationale, efforts to wind it down and stock ownership guidelines. This new explicit policy reflects ISS’ approach since 2013 to recommend against directors on the committee responsible for oversight of risks related to pledging if there is a significant level of pledging of company stock by executives or directors. Companies should consider enhancing their disclosure about pledges of company stock in light of the revised policy.



SPAC Extension Proposals

ISS: ISS will evaluate special purpose acquisition company (SPAC) extension proposals on a case-by-case basis, considering four factors: (i) the length of the request; (ii) any pending transactions or progression of the acquisition process; (iii) any “equity kicker” (i.e., added incentive for non-redeeming shareholders) and (iv) prior extension requests. This new policy sheds light on how ISS will evaluate SPAC extension proposals, which have become more prevalent in recent years.


State Laws Mandating Classified Boards

ISS: ISS will issue negative recommendations on directors every year if the company has opted into, or failed to opt out of, state laws requiring a classified board structure. This new policy is consistent with ISS’ approach since 2010 to recommend against directors at approximately 20 Indiana corporations for failure to opt out of the state’s law mandating a classified board. ISS felt the new policy was necessary because shareholder proposals that contradict state law are excludable.


Compensation-Related Policy Updates

ISS will provide additional details about compensation-related policy updates in FAQs to be published in mid-December 2017.

Non-Employee Director Pay Evaluations

ISS: Beginning in 2019, ISS may issue negative recommendations against members of the board committee responsible for setting or approving excessive non-employee director (NED) compensation in two or more consecutive years without a compelling rationale or other mitigating factors. Because negative recommendations will only be triggered by a recurring pattern, the updated policy will not result in vote recommendations against directors in 2018.

The new policy is consistent with the results of ISS’ 2017-2018 Policy Application Survey where investors and companies agreed that NED compensation should generally only lead to negative recommendations if ISS identifies a pattern of excess NED compensation over multiple years.

ISS has not described in its policy guidelines what would constitute “excessive” NED compensation. In the Policy Application Survey summary of results, ISS explained that it compares a company’s director compensation to other companies within the same index and industry group to identify NED pay outliers. Once an outlier has been identified, ISS “reviews the structure of director compensation to identify problematic director pay practices at the company (e.g., performance equity awards, excessive perquisites or retirement programs).”


Shareholder Proposals on Gender Pay Gap

ISS: Under a new policy, ISS will evaluate shareholder proposals seeking reports on a company’s pay data by gender, or policies or goals aimed at reducing any gender pay gap, on a case-by-case basis, considering:

• The company’s current policies and disclosures on diversity and inclusion and its compensation philosophy and use of fair and equitable compensation practices

• Whether the company has been the subject of recent controversy, litigation or regulatory actions related to gender pay gap issues

• Whether the company’s reporting relating to gender pay gap policies or initiatives lags its peers


The flexible approach in the new policy reflects the mixed results of ISS’ 2017-2018 Policy Application Survey, where 60% of investor respondents indicated that companies should disclose gender pay gap information and 67% of company respondents disagreed. Both groups agreed that robust disclosure of diversity policies and fair compensation practices mitigate the lack of data on the gender pay gap.

Glass Lewis: No change. Glass Lewis adopted a policy on this topic in 2017 that is similar to ISS’ new policy.

Board Responsiveness – Say-on-Pay

ISS: ISS clarified the factors it considers when evaluating whether a board has been sufficiently responsive to a previous say-on-pay proposal that received less than 70% of votes cast. Specifically, ISS will take into account (i) the timing and frequency of engagements with major institutional investors to learn their concerns and whether independent directors participated, (ii) disclosure of the feedback from dissenting investors that led them to oppose the say-on-pay proposal and (iii) whether the company made meaningful changes that were responsive to investor concerns. In light of the revised policy, companies should consider enhancing their disclosure and involving independent directors in their engagement efforts.

Glass Lewis: See the box on page 2 for new Glass Lewis policies regarding board responsiveness generally.

Board Responsiveness – Say-on-Pay Frequency

ISS: ISS expects companies to adopt a say-on-pay frequency that is at least as often as the frequency option that received the plurality of votes cast. Under its current policy, ISS expected companies to adopt the frequency that received the majority of votes cast and considered other factors when a frequency received a plurality but not a majority of votes cast.


Failure to Include a Say-on-Pay Proposal

ISS: Consistent with current ISS practice, ISS will issue a negative recommendation against compensation committee members (and potentially the full board) if a company fails to include a say-on-pay proposal when required by SEC rules, or at least as often as the frequency implemented by the company.


Failure to Include a Say-on-Pay Frequency Proposal

ISS: ISS will recommend against the say-on-pay proposal or, if no say-on-pay proposal is on the ballot, against compensation committee members (and potentially the full board) if a company that has implemented a biennial or triennial say-on-pay vote fails to include a say-on-pay frequency proposal when required by SEC rules.

The new policy stems from ISS’ observation that dozens of large companies failed to hold their second required say-on-pay frequency votes in 2017 (the Dodd-Frank Act required the frequency vote to be held at least once every six years and it was first required in 2011). ISS will not issue negative recommendations if a company that has implemented annual say-on-pay votes fails to include a say-on-pay frequency vote.


Pay-for-Performance Analysis

ISS: As part of its quantitative pay-for-performance evaluation, ISS will now consider a company’s ranking of CEO total pay and company financial performance (based on three or four metrics which will vary by industry) over three years


relative to a peer group. ISS has stated that it will provide specific details about the updated quantitative screening methodology in a forthcoming white paper.

The update also clarifies that the measurement period applicable to evaluating the multiple of CEO total pay relative to the peer group median is the most recent fiscal year, which is consistent with ISS’ current approach.

Glass Lewis: Glass Lewis will generally recommend against compensation committee members at companies with a pattern of failing Glass Lewis’ pay-for-performance test. Glass Lewis clarified the grading system it uses to rank companies in its pay-for-performance model as follows:

• An “A” grade means that the company pays its executives significantly less than its peers while outperforming the comparator group

• A “B” grade means that the company pays its executives relatively less than its peers while slightly outperforming the comparator group

• A “C” grade means that pay and performance percentile rankings relative to peers are generally aligned

• A “D” grade means there is a disconnect between pay and performance; indicates high pay and low performance relative to the comparator group

• An “F” grade means there is a significant disconnect between pay and performance; the company pays its executives significantly more than its peers while underperforming the comparator group

CEO Pay Ratio ISS: ISS will include a company’s CEO pay ratio in its proxy research reports beginning in 2018, but for now ISS will not factor the ratio into its evaluation of, or voting recommendation on, the company’s say-on-pay proposal. ISS highlighted three questions for companies and investors to consider with respect to CEO pay ratio disclosures:

• How does the company’s ratio compare with peer companies?

• What is driving any difference uncovered in the ratio? Is it the CEO’s pay, the median employee’s pay or both?

• Are there labor force issues, such as use of contractors, significant use of part-time employees, or offshore labor sourcing, that drive differences?4

In ISS’ 2017-2018 Governance Principles Survey, nearly 3/4 of investor respondents indicated that they intend to use the CEO pay ratios: (i) to compare the ratios across companies/industry sectors and/or (ii) assess year-to-year changes in the ratio at an individual company. Only 16% of investor respondents indicated that they are not planning to analyze CEO pay ratio data.

Glass Lewis: Like ISS, Glass Lewis will include a company’s CEO pay ratio as a data point in its proxy report in 2018, but the ratio will not be a determinative factor in Glass Lewis’ voting recommendations.

Guidance in Preparing for the 2018 Proxy Season

Key Dates

Until December 8, 2017 Companies with annual meetings scheduled to be held between February 1 and September 15, 2018 may notify ISS of any changes to their self-selected peer


companies for purposes of benchmarking 2017 CEO compensation

Mid-December 2017 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) (preliminary FAQs released November 21, 2017)

December 31, 2017 Companies in the Russell 3000 Index may submit updates to their peer groups on file with Equilar, which Glass Lewis uses to generate peer groups used in formulating its voting recommendations

January 31, 2018 Deadline for S&P 500 companies holding meetings between March 1 and June 30, 2018 to elect to receive draft proxy voting reports by registering contact details with ISS

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, 2018 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 2017 compensation decisions), notify ISS of updates to its self-selected peer companies for purposes of CEO compensation benchmarking by December 8, 2017.

A company’s self-selected compensation peer companies are a key input to ISS’ peer selection process. However, ISS makes clear in its Peer Group Selection Methodology FAQs5 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 the fiscal year covered by ISS’ last report. Companies


can submit peer company updates using the Governance Analytics platform, information about which is available here. If a company does not provide an updated peer group to ISS, the previously collected peer group will be used to determine ISS’ peers for the company’s 2018 report.

ISS will conduct a separate peer submission process in mid-2018 for companies with annual meetings scheduled to be held after September 15, 2018.

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 2018 proxy statements may submit updates to their peer groups on file with Equilar by December 31, 2017 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. If a company was a participant in the 2017 IDR program, Glass Lewis will automatically notify it when the 2018 sign-up period begins. 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, 2018 for meetings held between March 1 and June 30, 2018; 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.

https://www.issgovernance.com/company-peer-group-feedback

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/


Draft reports (which do not include a company’s QualityScore) are typically sent approximately2-4 weeks prior to the annual meeting, and will likely be closer to 2 weeks during the height ofproxy season.

All comments and corrections are due in writing by the deadline specified in the cover letteraccompanying 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 orOmission” page on Glass Lewis’ website; because Glass Lewis bases its analysis entirely on publiclyavailable information, a company must precisely identify where within the company’s publicdisclosure 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 compensationpractices for potential vulnerabilities under ISS and Glass Lewis policy updates (for example, in relationto board gender diversity, virtual-only shareholder meetings or a dual-class share structure) and decidewhat 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 thathas 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, andmake 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

[email protected]

Corey Perry Partner


Rebecca Grapsas Counsel


+1 202 736 8615

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.

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1 ISS, 2018 Americas Proxy Voting Guidelines Updates (Nov. 16, 2017), available here; Glass Lewis, 2018 Proxy Paper Guidelines: United States (Nov. 22, 2017), available here; and Glass Lewis, 2018 Proxy Paper Guidelines: Shareholder Initiatives (Nov. 22, 2017), available here. 2 ISS, 2017-2018 ISS Global Policy Survey, Summary of Results (Sep. 25, 2017), available here. 3 ISS, 2017-2018 ISS Policy Application Survey, Summary of Results (Oct. 19, 2017), available here.

4 ISS, ISS Governance Insights email with a feature on Contextualizing CEO Pay Ratio Disclosure (Oct. 6, 2017). 5 ISS, U.S. Peer Group Selection Methodology and Issuer Submission Process –Frequently Asked Questions (Nov. 9, 2017), available here.

https://www.issgovernance.com/file/policy/2018-Americas-Policy-Updates.pdf

http://www.glasslewis.com/wp-content/uploads/2017/11/US_Guidelines_2018.pdf

http://www.glasslewis.com/wp-content/uploads/2017/11/ShareholderInitiatives_2018_Guidelines.pdf

https://www.issgovernance.com/file/policy/2017-2018-iss-policy-survey-results-report.pdf

https://www.issgovernance.com/file/policy/2017-2018-Policy-Application-Survey-Results-Summary.pdf

https://www.issgovernance.com/file/policy/uspeergroupfaq.pdf

SIDLEY CORPORATE GOVERNANCE REPORT

Circumstances That May Trigger ISS and Glass Lewis Negative Vote Recommendations in Uncontested Director Elections November 2017

Table of Contents

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

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

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

Board Leadership, Size, Composition and Structure ....................................................................... 9

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

Compensation-Related Matters .................................................................................................... 15

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

1

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 2018 proxy season. These circumstances are outlined in this report. Changes to ISS and Glass Lewis proxy voting guidelines to take effect for the 2018 proxy season are noted in italics. Finally, ISS has revised the director independence classification terminology in its ISS Categorization of Directors to include the following three categories: Executive Directors; Non-Executive, Non-Independent Directors; and Independent Directors.

Sources:

• ISS, 2018 Americas Proxy Voting Guidelines Updates (published Nov. 16, 2017), available here.

• ISS, 2017 U.S. Summary Proxy Voting Guidelines (last updated Mar. 14, 2017), available here.

• ISS, U.S. Proxy Voting Policies and Procedures (Excluding Compensation-Related) – Frequently Asked Questions (last updated Apr. 20, 2017), available here.

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

• ISS, U.S. Compensation Policies – Preliminary Frequently Asked Questions (Nov. 2017), available here.

• Glass Lewis, 2018 Proxy Paper Guidelines: United States (published Nov. 22, 2017), available here.

• Glass Lewis, 2018 Proxy Paper Guidelines: Shareholder Initiatives (published Nov. 22, 2017), available here.

Notes:

• Where the board is classified and a continuing director responsible for a problematic governance issue at the board/committee level that would 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 classified board, Glass Lewis will note the concern with regard to the committee chair but will not recommend voting against the other members of the relevant 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 basis of governance standards (e.g., board independence, committee membership and structure, meeting attendance, etc.) at a company that completed an IPO within the past year.

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

https://www.issgovernance.com/file/policy/2018-Americas-Policy-Updates.pdf

https://www.issgovernance.com/file/policy/2017-us-summary-voting-guidelines.pdf

https://www.issgovernance.com/file/policy/us-policies-and-procedures-faq-april-2017.pdf

https://www.issgovernance.com/file/policy/1_u.s.-executive-compensation-policies-faq-dec-2016.pdf

https://www.issgovernance.com/file/policy/Preliminary-U.S.-Compensation-FAQ.pdf

http://www.glasslewis.com/wp-content/uploads/2017/11/US_Guidelines_2018.pdf

http://www.glasslewis.com/wp-content/uploads/2017/11/ShareholderInitiatives_2018_Guidelines.pdf

2

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 charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact 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; and o Other factors, as deemed appropriate, that may be

relevant to determine the impact of the amendment on 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 could receive 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 to amend charter/bylaws;

o Removing a majority vote standard and substituting plurality voting;

o Removing or restricting the right of shareholders to call a special meeting (raising thresholds, restricting agenda 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 important shareholder rights, or to otherwise impede the ability of shareholders to exercise such rights, without shareholder 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 as bylaws that require arbitration of shareholder claims or “fee-shifting” or “loser pays” bylaws;

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

remove a director without cause.

Governance Committee Chair or Governance Committee Members

Director Compensation Bylaws: • When the board adopts without shareholder approval

provisions in its charter or bylaws that, through rules on director compensation, may inhibit the ability of shareholders 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; and

• If the board is currently seeking shareholder approval of an exclusive forum provision pursuant to a bundled bylaw amendment rather than as a separate proposal.

Governance Committee Members Nominating/Governance Committee Chair

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Unilateral Bylaw / Charter

Amendments (cont’d)

• Examples of unilateral amendments generally notconsidered 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; ando Exclusive forum provisions (if the venue is the

company’s state of incorporation).

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

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

bylaws.Undue

Restrictions on Shareholders’

Ability to Amend Bylaws

• If the company’s governing documents impose unduerestrictions on shareholders’ ability to amend the bylaws,including (but not limited to):o Outright prohibition on the submission of binding

shareholder proposals; oro Share ownership requirements or time holding

requirements in excess of SEC Exchange Act Rule14a-8.

Negative vote recommendations on an ongoing basis.

Governance Committee Members

Governance / Capital Structure at Newly Public

Companies

• For newly public companies, if, prior to or in connectionwith the company’s public offering, the company or board adopted bylaw or charter provisions adverse toshareholders’ rights, or implemented a multi-classcapital structure in which the classes have unequalvoting 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 amendthe bylaws or charter, or supermajority voterequirements to amend the bylaws or charter);

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; and

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 havecompleted an IPO or spin-off within the past year), ifthe board approved governing documents thatsignificantly restrict the ability of shareholders to effectchange, 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;o The voting standard provided for the election of

directors;o The ability of shareholders to remove directors

without cause;

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 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 presence of evergreen provisions in thecompany’s equity compensation arrangements;and

o The presence of a dual-class share structurewhich does not afford common shareholdersvoting power that is aligned with their economicinterest.

• 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

Removal of Shareholder Discretion on

Classified Boards

• If the company has opted into, or failed to opt out of,state laws requiring a classified board structure.

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

Poison Pills • The company has a poison pill that was not approved byshareholders (public shareholders only, approval prior toa company’s becoming public is insufficient); however,vote case-by-case on nominees if the board adopts aninitial pill with a term of one year or less, depending onthe disclosed rationale for the adoption and other factorsas relevant (e.g., a commitment to put any renewal to ashareholder vote).

• The board makes a material adverse modification to anexisting pill, including, but not limited to, extension,renewal or lowering the trigger, without shareholder approval.

Entire Board • 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.


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 morestringent 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; ando 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 andthe company has not disclosed its shareholder outreachefforts and engagement.

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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• If the proxy access provision contains restrictions orconditions 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 themaximum number of proxy access nominees; and

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

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

family as separate shareholders for purposes of anaggregation limit; and

o The imposition of post-meeting shareholdingrequirements for nominating shareholders.

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

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

Nominators’ rationale; Nominators’ critique of management/incumbent

directors; and 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;

Individual Directors

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Current board composition (skill sets, tenure,diversity, etc.); and

Ongoing controversies, if any.

o Election-specific factors: Whether the number of nominees exceeds the

number of board seats; and Vote standard for the election of directors.

7

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, 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 those who have served less than one full year)

• A director who fails to attend a minimum of 75% ofthe aggregate of his/her board and applicablecommittee meetings (not applicable if a director hasserved for less than one full year or if the proxydiscloses that the director missed meetings due toserious 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 company boards.

• A director who is CEO of a public company who sits on boards of more than two public companies besides the CEO’s own board (the negative vote recommendation will not apply to the boards of controlled subsidiaries (>50% ownership) of the CEO’s own board); at outside boards 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 and

subsidiary;o Percentage of subsidiary held by the parent company;

ando 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.o 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.

o Beginning in 2018, when evaluating whether a director who serves in an executive role other than CEO (e.g., executive chair) is overboarded, Glass Lewis will consider the specific duties and responsibilities of the director’s executive role in addition to the company’s disclosure regarding that director’s time commitments.

o 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 director’s 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.

o Glass Lewis will also generally refrain from recommending votes against a director who serves on an excessive number of boards within a


8




consolidated group of companies or a director who 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 or 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)

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

9

Board Leadership, Size, Composition and Structure Topic



Independent Board Leadership

• When the board chair is not independent and anindependent lead or presiding director has not beenappointed.

• When the independent lead or presiding director isrotated 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 fewer than five board members. Nominating/Governance Committee Chair

Insufficient Board Independence

• Independent directors comprise 50% or less of theboard.

• Under 2017 policy, was less than a majority.

All Executive Directors and Non-Independent, Non-Executive Directors

• Where more than one-third of the members of theboard are inside or affiliated directors, Glass Lewis willrecommend votes against some of the inside and/or affiliated directors to reach the two-thirdsindependence threshold.

Individual Inside and/or Affiliated Directors

Lack of Key Committees

• The company lacks an audit, compensation ornominating committee so that the full board functions asthat committee.

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

All Executive Directors and Non-Independent, Non-Executive Directors

Key Committees Not Entirely Independent

• A non-independent director serves on the audit,compensation or nominating committee.

Individual Directors • Any inside or affiliated director seeking appointment toan audit, compensation, nominating, or governancecommittee, or who has served in that capacity in thepast year.

• Compensation committee members who are notindependent based on Glass Lewis standards.


Audit Committee Size and

Composition

• If the audit committee does not have a financial expertor the committee’s financial expert does not have ademonstrable financial background sufficient tounderstand the financial issues unique to publiccompanies.

• If the committee has fewer than three members.

Audit Committee Chair

Waiver of Term/Age Limits

• If the board waives its term/age limits unless sufficientexplanation is provided (e.g., consummation of amerger).

Nominating and/or Governance Committee Members

Lack of Relevant Experience

• Where the board’s failure to ensure the board hasdirectors with relevant experience, either throughperiodic director assessment or board refreshment,has contributed to a company’s poor performance.

Nominating Committee Chair

Lack of Board Gender Diversity

• ISS will highlight boards with no gender diversity but willnot recommend against directors on this basis.

N/A • Beginning in 2019, where a board has no femaledirectors.o Glass Lewis will review disclosure of diversity

considerations and may refrain from

Nominating Committee Chair and potentially other Nominating Committee Members

10




recommending against directors (i) if the company is outside of the Russell 3000 index, (ii) when a board has provided a sufficientrationale for not having female directors or (iii) when the company has disclosed a plan toaddress the lack of gender diversity on theboard.

11

Other Governance-Related Matters Topic



Poor Performance, Accountability and

Oversight

• The board lacks mechanisms to promote 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 plurality carve-out for contested elections;

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

o A multi-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 or hedging of company stock) or fiduciary responsibilities at the company.

• ISS has deleted the reference to significant pledging of company stock, which is now subject to its own policy (see below).


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

resolution in past meetings;

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 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


12




o Actions taken by the board in response to the majorityvote and its engagement with shareholders;

o The continuation of the underlying issue as a votingitem on the ballot (as either shareholder or management proposals); and

o Other factors as appropriate.

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 20% of shareholders (excluding abstentionsand broker non-votes) (25% in 2017) voted against therecommendation of management on a director’selection, a management proposal or a shareholder proposal, Glass Lewis will examine the severity of theunderlying issue, and the lack of appropriate responsemay be a contributing factor to a futurerecommendation against a director nominee.o Particularly relevant in the case of director

elections and compensation proposals.

Individual Directors or the Entire Board

• When the compensation committee failed toimplement a shareholder proposal regarding acompensation-related issue, if the proposal receivedthe affirmative vote of a majority of the voting shares,and if a reasonable analysis suggests thecompensation committee should have taken steps toimplement the request.


• When the board of a company with a dual-class sharestructure failed to demonstrate an appropriate level ofresponsiveness after a majority of unaffiliatedshareholders supported a shareholder proposal or opposed a management proposal.

Individual Directors or the Entire Board

• At the previous board election, any director received morethan 50% negative votes of the votes cast and thecompany failed to address the underlying issues thatcaused these high negative votes.


• When a director received a greater than 50% againstvote the prior year and the director was not removedand the issues that raised shareholder concern werenot corrected.o Also see discussion of 20% threshold in box

directly above.

Nominating Committee Chair

• The board failed to act on takeover offers where themajority of shares were tendered.


Exclusion of Shareholder

Proposal

• Omission from the proxy statement/ballot of a properlysubmitted shareholder proposal without obtaining any of:o Voluntary withdrawal of the proposal by the proponent;o No-action relief from the SEC; ando 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 asingle proposal.


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Conflicts of Interest / Related

Party Transactions

• A CFO who is on the board. • 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).


Problematic Pledging of

Company Stock by Executives and

Directors

• Where a significant level of pledged company stock by executives or directors raises concerns, taking into account: o The presence of an anti-pledging policy, disclosed in the

proxy statement, that prohibits future pledging activity; o The magnitude of aggregate pledged shares in terms of

total common shares outstanding, market value and trading volume;

o Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;

o Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and

o Any other relevant factors. Under 2017 policy, significant pledging of company stock was included as an example of a governance failure (see above).

Members of the committee that oversees risks related to pledging and potentially the Entire Board (except new nominees who will be considered on a case-by-case basis)

14




Virtual-Only Shareholder

Meetings

• Beginning in 2019, where the board is planning to hold a virtual-only shareholder meeting. o Glass Lewis may refrain from recommending

against Governance Committee Members if the company provides robust disclosure assuring that shareholders will have the same participation rights as they would at an in-person meeting.


15

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 (including the timing and frequency of engagements and whether independent directors participated);

Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; and

Disclosure of specific and meaningful actions taken to address shareholders’ concerns.

o 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., >20% of votes cast (25% in 2017)) 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 or management has excessive discretion to alter performance terms or increase amounts of awards in contravention of previously defined targets.

Compensation Committee Chair

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

Compensation Committee Members and potentially the Entire Board (except new

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


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

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); and

- 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; and - Mega annual equity grants that provide

unlimited upside with no downside risk; and Options backdating.

ISS has removed from this list one-time transfers of stock options without a shareholder vote and failure of the company to fulfill a burn rate commitment made to shareholders. 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).

nominees who will be considered on a case-by-case basis)

• 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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• 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

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.

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• 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 implements a say-on-pay vote on a less frequent basis than the frequency that received the plurality of votes cast.

• Under 2017 policy, ISS expected companies to adopt the frequency that received the majority of votes cast and considered other factors when a frequency received a plurality but not a majority of votes cast.


Failure to Include Say-on-Pay

Proposal or Say-on-Pay Frequency

Proposal When Required

• In the absence of a say-on-pay vote or in egregious situations if: o The company fails to include a say-on-pay ballot item

when required under SEC provisions, or under the company’s declared frequency of say-on-pay; or

o The company fails to include a say-on-pay frequency ballot item when required under SEC provisions.


Excessive Non-Employee Director

Compensation

• If there is a pattern (i.e., 2 or more consecutive years) of awarding excessive non-employee director compensation without disclosing a compelling rationale or other mitigating factors.

Compensation Committee Members (or members of other board committee responsible for approving/setting non-employee director compensation) but not in 2018

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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.


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).


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• 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 2018 Proxy … · In ISS’ 2017-2018 Governance Principles Survey, 69% of investor respondents replied that they would consider a lack