COMPENSATION IN CONTEXT
GLASS LEWIS ISSUES 2016 BENCHMARK GUIDELINES
November 18, 2015
On November 13, 2015, Glass, Lewis & Co., LLC (“Glass Lewis”) released their 2016 Benchmark Guidelines for the U.S. market as part of their annual formal update process. Glass Lewis updated its voting guidelines in five catergories that apply to the 2016 proxy season:
(i) “Overboarding” guidelines have been tightened;
(ii) Evaluation of exclusive forum provisions in pre-IPO companies have been revised;
(iii) New framework has been added to assess conflicting management and shareholder proposals;
(iv) Poor performance as a result of missing director assessment and board refreshment processes may generate negative recommendations; and
(v) Directors may be held responsible for the failure to identify material social and environmental risks.
Glass Lewis has also further elaborated on two items related to compensation without changing its policy application: (i) guidance has been provided to disclosures for transitional and one-off awards; and (ii) methodology of equity plans evaluation has been clarified further.
In detail, the 2016 Glass Lewis Benchmark Guidelines are as follows:
1. Director Overboarding
Previously, Glass Lewis recommended shareholders vote AGAINST executive officers of public companies who serve on more than three boards in total and non-executive directors who serve on more than six boards in total.
Glass Lewis revised its guidelines to tighten those thresholds and will now recommend AGAINST public company executive officers who serve on more than two boards in total and non-executive directors who serve on more than five boards in total. A grace period for issuers has been provided and voting recommendations for the 2016 proxy season will rely on the previous thresholds. Beginning in 2017, the new thresholds will be applied.
2. Exclusive Forum Provisions
Previously, Glass Lewis recommended shareholders vote AGAINST the Chair of the Nominating/Governance Committee for issuers including exclusive forum provisions in their by-laws or charter in connection with an IPO.
Glass Lewis will no longer automatically vote AGAINST the Nominating/Governance Committee Chair, but instead take a case-by-case approach weighing the exclusive forum provision against other factors that may unduly limit shareholder rights (e.g. supermajority vote requirement, classified board, fee shifting by-law). This does not change Glass Lewis’ stance for the adoption of exclusive forum provisions outside of spinoff, merger, or IPO situations.
3. Conflicting Management and Shareholder Proposals
Glass Lewis amended its guidelines to reflect that conflicting management and shareholder proposals will be evaluated based on:- The nature of the underlying issue;
- The benefit to shareholders from implementation of the proposal;
- The materiality of the differences between the terms of the shareholder proposal and management proposal;
- The appropriateness of the provisions in the context of a company’s shareholder base, corporate structure and other relevant circumstances; and
- A company’s overall governance profile and, specifically, its responsiveness to shareholders as evidenced by a company’s response to previous shareholder proposals and its adoption of progressive shareholder rights provisions.
4. Nominating Committee Performance: Director Assessment and Board Refreshment
Glass Lewis has updated its guidelines to recommend AGAINST the Chair of the Nominating Committee for a subject company’s poor performance as a result of the board’s failure to ensure directors with relevant experience, either through periodic director assessment or board refreshment, are appointed.
5. Environmental and Social Risk Oversight
Glass Lewis has codified its position for cases 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. In those cases, Glass Lewis will recommend that shareholders vote AGAINST directors responsible for risk oversight in consideration of the nature of the risk and the potential effect(s) on shareholder value.
In addition to the above, Glass Lewis also clarified two items relating to compensation:
(i) Further guidance has been provided with regards to disclosures surrounding transitional and one-off awards:
Glass Lewis clarified that sign-on arrangements at the executive level should be clearly disclosed and accompanied by meaningful explanation of the payments and process by which the amounts are reached. Basis for “make-whole” payments should also be provided. Glass Lewis will also consider target levels of compensation and compensation paid to other executives (including predecessor pay) in evaluating whether or not the payments are appropriate; and
(ii) Evaluation of equity-based compensation plans has been further elaborated:
For equity-based compensation plans, Glass Lewis further elaborated on the quantitative and qualitative assessments in providing recommendations for equity plans.
