Last week, Institutional Shareholder Services (ISS) and Glass Lewis launched their Annual Benchmark Policy Surveys (available here and here) to help inform potential changes to their voting policies for the 2025 proxy season. The ISS policy survey addresses poison pills, climate change and executive compensation topics. The Glass Lewis policy survey focuses on a wide variety of topics, including board oversight of climate, artificial intelligence and cybersecurity matters, executive compensation topics, shareholder rights, and multijurisdictional governance regimes. The ISS and Glass Lewis policy surveys are summarized below.

The ISS policy survey will close on September 5, 2024, at 5 p.m. ET. ISS will also host roundtable discussions and other engagements as part of its policy update process. ISS typically announces proposed policy changes in October and adopts its final policy changes in November. The Glass Lewis policy survey will close on August 30, 2024, at 5 p.m. PT. After processing the feedback, Glass Lewis will first share a summary of the survey results with clients and post on its website, before publishing its 2025 Benchmark Voting Policy Guidelines. More information on the policy development processes for ISS and Glass Lewis are available here and here.

ISS POLICY SURVEY

Shareholder Rights

Poison Pills. Noting that shareholder rights plans (or “poison pills”) have morphed from a defense against unsolicited takeovers, into a defensive response to the accumulation of shares by activists, ISS is focused on the low triggering levels and short duration of poison pills. According to ISS, companies have attempted to normalize triggers of 12.5%, 10%, or even lower, compared to the 15-20% that used to be considered standard and most newly-adopted pills have an initial duration of one year or less. ISS asks respondents if the adoption by a board of a short-term poison pill to defend against an activist campaign should be acceptable under ISS’s Benchmark policy. ISS also asks whether earlier staged companies should be entitled to greater leeway when it comes to the adoption of a short-term poison pill, whether it is acceptable for a board to set the trigger of a short-term poison pill below 15%, whether a two-tier trigger threshold with a higher trigger for passive investors is a mitigating factor for a low trigger and how important a “qualifying offer clause” is, giving shareholders the ability to bypass the pill in the event of an offer that is deemed beneficial.

Environmental & Social

GHG Emissions. ISS asks whether respondents’ organizations believe that Scope 3 GHG emission reduction targets should be disclosed, and if so, whether the targets should be (1) Mid-term Scope 3 targets only; (2) Net Zero Scope 3 targets only; and (3) both Mid-term and Net Zero Scope 3 targets.

Climate-Related Shareholder Proposals. When evaluating climate-related shareholder resolutions asking companies to report on or establish targets or plans to reduce emissions, ISS will generally recommend in favor considering factors such as: adequacy of climate-related disclosure; existing and potential legal and regulatory risks; peer comparisons; and board and management oversight disclosure. ISS asks respondents which of these factors are most relevant when addressing proposals asking for a report on or to take climate-related actions.

Workplace Diversity Shareholder Proposals. ISS asks respondents about human capital management metrics and disclosure topics that respondents believe investors should support if requested in a shareholder proposal, which includes the following metrics: (1) racial/ethnic diversity and gender representation data; (2) promotion velocity data by race/ethnicity and gender; (3) retention rates by race/ethnicity and gender; (4) hiring rates by race/ethnicity and gender; (5) board oversight of the human capital management issue raised in the proposal; (6) management oversight of the human capital management issued raised in the proposal; (7) adjusted gender pay gap disclosure; (8) unadjusted gender pay gap disclosure.

Executive Compensation

Pay-for-Performance Misalignment – Extended Time-Vested Awards. When ISS views acompany to exhibit a quantitative pay-for-performance misalignment, it will usually view a predominance of performance-conditioned equity awards as a positive mitigating factor and the predominance of time-vesting equity awards as a negative exacerbating factor. Citing that in recent years, a growing number of investors have become skeptical of performance conditioned equity awards, which result in complex, non-rigorous performance goals and above target payouts, ISS asks respondents whether it should put greater emphasis on time-based equity awards. ISS asks whether it should revise its views and if so, what length of extended vesting period for time-based equity awards would suffice as a positive mitigating factor in the context of a pay-for-performance misalignment. ISS also asks whether a meaningful post-vesting holding period should be a positive mitigating factor.

Discretionary Annual Incentive Programs. ISS generally has a negative view of discretionary awards. In light of a practice by some companies (including many large financial firms) maintaining discretionary annual incentive programs based entirely on year-end performance assessments without disclosed, pre-set goals, ISS asks whether largely discretionary annual incentive programs are problematic even if the program structure is consistent with industry or peer practice of certain companies.

Profit Distributions for Managed Funds. Companies in certain industries, including alternative asset managers, will sometimes make awards or distributions representing a share of the profits from managed funds, which ISS notes are not capped, are complex and result in exceedingly high compensation. Such companies cite industry and competition concerns with privately held competitors when justifying such compensation practices. ISS asks whether respondents believe the ISS policy should consider a different approach to award structure or quantum of distributions that represent profits from managed funds.

GLASS LEWIS POLICY SURVEY

Board Oversight & Performance

Artificial Intelligence Risk Oversight. Glass Lewis notes that in response to many companies embracing the use of artificial intelligence (“AI”), investors are expecting safeguards to mitigate risks, assess the impact of AI on operations and ensure ethical use. Glass Lewis includes several questions relating to AI oversight and asks respondents about their expectations for AI board expertise, board disclosure and board accountability. Glass Lewis also asks respondents about the importance of different components of a company’s risk assessment disclosure on AI and AI ethics, such as details of AI integration into internal operations and processes, overview of how AI-related issues could affect the company’s data security and privacy-related vulnerabilities, social and ethical issues related to the use of AI and potential for reputational harm, and details regarding board oversight (including director expertise and ongoing education/training on AI).

Cybersecurity Oversight. In light of the continued focus of investors, regulators and other stakeholders on cybersecurity governance, Glass Lewis asks respondents about the importance of certain factors when assessing the board’s oversight, including: the number/cost of cybersecurity attacks and remediation efforts; director expertise and training; alignment of the company’s cybersecurity program with an external framework or standard; and the use of independent cyber consultants. Glass Lewis also asks investors whether they would consider opposing the election/reelection of directors following a significant cybersecurity attack and if so, what particular factors of the attack weigh into their decision.

Nominating Committee in Focus. Glass Lewis asks investors whether they would consider voting against the election of the nominating/governance committee chair or members if there are no directors on the board with clear skills and/or experience in an area that is relevant to the company (e.g., AI, cybersecurity, ESG, supply chain).

Effect of Performance at One Company on Votes at Other Companies. Respondents are asked whether they would consider opposing the election/reelection of a director at one company when these are material concerns with the performance of such director at another company.

Affiliated Transactions. Glass Lewis notes that a board’s rationale for entering into transactions with entities controlled or affiliated with inside directors as necessary to the company’s ordinary day-to-day operations is an important component in assessing whether it serves the best interests of all stakeholders. Respondents are asked about their expectations regarding disclosure of the rationale for these transactions, including the level of detail expected.

Auditor Rotation. Glass Lewis asks whether, for markets in which rotation of a company’s auditor is not required, which includes the U.S., should there be a maximum period for which a firm should serve as a company’s auditor.

Environmental & Social

Impact of Climate Transition Strategy on Director Elections. Relating to climate change specifically, investors are asked whether they are evaluating companies’ climate transition strategies when asking decisions on director elections. Glass Lewis also seeks input on what transition strategy disclosure would be helpful for investors for Glass Lewis to include in its Proxy Papers.

Climate-Related Proposals. Respondents are asked which factors would make them consider opposing a company’s Say on Climate proposal, such as lack of emission reduction targets, lack of details information on future capital expenditures and lack of clarity.

Shareholder Voice on ESG Reporting. Glass Lewis notes that in Spain and Switzerland, companies now have to prepare non-financial reports on an annual basis (including topics such as environmental, social, and employment-related matters), which are subject to a shareholder vote. Glass Lewis asks respondents about circumstances in which shareholders should consider voting against a company’s non-financial reporting.

B Corporation Structures. Respondents are asked whether companies should consider changing their corporate form to become B Corporations due to the structure’s high standards for topics such as employee benefits and charitable giving to supply chain practices.

Sustainability Reporting. Glass Lewis asks respondents whether it is reasonable for a company’s statutory financial auditor to be tasked with providing sustainability reporting assurance in markets where assurance of sustainability reporting is mandatory.

Executive Compensation

Make-Whole Grants. As Glass Lewis discusses, companies will sometimes agree to provide grants to compensate for awards that an executive must forfeit upon leaving their current employer, known as a “make-whole” grant. Respondents are asked about the level of detail on the forfeited amounts and make-whole awards a company should include in its disclosure, such as the value and terms of the award.

Extended Time-Vested Awards. Glass Lewis notes that some companies advocate for granting extended time-based vesting periods (typically at least five years) without performance conditions. Glass Lewis asks respondents their preference on these awards, such as whether long-term vesting requirements make performance conditions unnecessary, support of time-based awards, and the importance of performance-based equity.

Workplace Safety. Glass Lewis cites workplace safety as a common component of executives’ annual bonus opportunities. When safety performance is poor, payouts are generally decreased by a certain range. Therefore, Glass Lewis asks how and whether annual bonus payouts should be impacted when overall safety performance has improved but the company records a fatality for which it may be at fault.

Equity Incentive Plans with Low Support. Binding shareholder approval is required for equity incentive plans in most markets. Glass Lewis asks respondents the appropriate way to escalate a situation in which an equity incentive plan/equity award received significant shareholder dissent but was nevertheless implemented without modification. Suggestions include voting against executive pay proposals and compensation committee members.

CEO Perquisites. Glass Lewis notes that the annual value of CEO perquisites has dramatically increased (a 28% increase since pre-pandemic years). Glass Lewis asks respondents their opinion on how and whether perquisites should be considered in voting.

Employee Pay Level. Glass Lewis asks respondents whether they agree that the median employee pay level should be disclosed, regardless of applicable regulatory reporting requirements.

Executive Pay Gap. Multiple factors were noted to contribute to the executive pay gap between companies of similar market capitalization. This includes voting structure, influence of investor bodies, influence of regulators and governments, incentive award types and structures, influence of competition and retention on benchmarking and granting practices, and cultural perception of pay equity and excessive compensation. Respondents are asked to indicate the magnitude of each factor’s influence on the pay gap.

Global Pay Benchmarking. Glass Lewis asks respondents to determine situations in which the need to attract and retain executive talent are valid for increasing overall pay opportunity. Respondents are also asked to rate their agreement with statements regarding pay such as “higher pay opportunity generally drives higher shareholder returns” and “pay should be benchmarked against market peers only.” Other questions relating to the uptick in U.S. executive pay quantum, inappropriate attributes within a compensation peer group, and investor perspectives on companies benchmarking their global peers are included in the survey as well.

Escalation of Pay Concerns. Investors are asked how they escalate their concerns on executive pay, including whether they are more inclined to escalate these concerns when a proposal is advisory or binding.

Shareholder Rights

Virtual Only Meetings. Glass Lewis asks respondents whether they believe it is acceptable for companies to hold virtual-only shareholder meetings at which in-person attendance is not permitted.

Exclusive Forum. Respondents are asked about shareholder involvement in jurisdictional issues, such as exclusive forum provisions and whether it is appropriate for companies to adopt exclusive forum provisions without shareholder approval.

Redomestication. Respondents are asked about which factors they consider important when evaluating a reincorporation in another jurisdiction.

Inadequate Voting Item Information. Glass Lewis asks respondents about their general approach to voting on a proposal where a company does not disclose sufficient information for shareholders to make an informed decision about whether to vote against, abstaining from voting or following the board’s recommendation).

Shareholder Proposal Considerations. Glass Lewis asks investors specifically how important certain factors are when analyzing and voting on a shareholder proposal, including: (1) the text of the resolution; (2) the supporting statement of the resolution; and (3) the identity of the proponent. Those who find the identity of the proponent “very important” or “somewhat important” are asked the importance of information about the proponent, including media reports and the dollar values of the shares held by the proponent.

Advisory Management Proposals; Shareholder Dissent Respondents are asked about their expectations when an advisory management proposal such as a proposal to amend the certificate of incorporation in connection with a merger does not receive majority support from shareholders. For example, Glass Lewis asks about the level of dissent considered to be significant enough to warrant a response, and whether there are different expectations for a company’s response when a proposal is advisory rather than binding.

Multijurisdictional Governance Practices

Standards Applicable to Cross-Border Issuers. Glass Lewis notes that companies traded in multiple jurisdictions, or that trade in a jurisdiction that is different from their country of incorporation will typically adhere to one governance standard, frequently their home country’s standards and practices. Glass Lewis asks what governance regime multijurisdictional companies should be held, including the country of incorporation, primary country of trade, the regime with the higher standards, or where the company’s clients, operations and employees are primarily located.