On November 16, 2023, Glass Lewis & Co. (Glass Lewis) released its 2024 U.S. Benchmark Policy Guidelines (U.S. Guidelines), effective for shareholder meetings on or after January 1, 2024. The U.S. Guidelines include several key updates, which are summarized below. In addition, Glass Lewis released its 2024 Shareholder Proposals & ESG-Related Issues Benchmark Policy Guidelines (ESG Guidelines), which include an update to Glass Lewis’ overall approach to environmental and social issues, summarized below.
Guidelines Relating to Election of Directors
Cyber Risk Oversight. In July 2023, the SEC approved final rules that require current disclosure of material cybersecurity incidents and annual disclosure regarding a company’s cybersecurity risk management, strategy, and governance. In light of these new rules, Glass Lewis is updating its approach to cyber risk oversight. In the absence of material cybersecurity incidents, Glass Lewis will generally refrain from making voting recommendations on the basis of a company’s oversight or disclosure of cyber-related issues. However, Glass Lewis believes that cybersecurity risks are material for all companies. Therefore, if a material cybersecurity incident has “caused significant harm to shareholders,” then Glass Lewis “will closely evaluate the board’s oversight of cybersecurity as well as the company’s response and disclosures.” In addition, where “the company has been materially impacted by a cyber-attack,” Glass Lewis believes companies should provide periodic updates to their shareholders on the “ongoing progress towards resolving and remediating the impact of the cyber-attack[,]” and Glass Lewis may recommend voting against appropriate directors if it finds that the board’s oversight, response, or disclosures concerning cybersecurity-related issues are insufficient or are not provided to shareholders.
Board Oversight of Environmental and Social (E&S) Issues. Glass Lewis is updating its approach to board oversight of E&S risks, stating that it believes oversight of E&S risks “should be formally designated and codified in the appropriate committee charters or other governing documents.” Consistent with its policy last year, Glass Lewis will generally recommend voting against the chair of the governance committee of the board at a Russell 1000 company that does not explicitly disclose the board’s role in oversight of E&S issues. In addition, Glass Lewis will continue to track board-level oversight of E&S issues at all Russell 3000 companies, as well as at companies where Glass Lewis has identified material oversight concerns. When evaluating the board’s role in oversight of E&S issues, Glass Lewis “will examine committee charters and governing documents to determine if the company has codified and maintained a meaningful level of oversight of and accountability for a company’s material [E&S] impacts.”
Board Accountability for Climate-Related Issues. Glass Lewis is expanding its policy on board accountability for climate-related issues beyond companies whose GHG emissions represent a financially material risk (e.g., companies identified by groups including Climate Action 100+) to include companies in the S&P 500 index operating in industries where the Sustainability Accounting Standards Board (SASB) has determined that such companies’ GHG emissions represent a financially material risk, as well as companies where Glass Lewis believes emissions or climate impacts, or stakeholder scrutiny thereof, represent an outsized, financially material risk.
Glass Lewis’ guidance continues to call for clear and comprehensive disclosure about climate-related risks and opportunities, in line with disclosure recommendations by the Task Force on Climate-Related Financial Disclosures. Glass Lewis will also assess whether the company has disclosed explicit and clearly defined board oversight responsibilities for climate-related issues. In the absence of either or both of these disclosures, Glass Lewis may recommend voting against the chair of the committee responsible for oversight of climate-related issues, or if no committee has express oversight, the chair of the governance committee, and may extend its negative voting recommendation to additional members of the responsible committee where the committee chair is not standing for election due to a classified board, or based on other factors, such as the company’s size, industry and overall governance profile.
This updated policy has also been added to the ESG Guidelines.
Standards for Assessing the Audit Committee – Material Weaknesses. Glass Lewis is updating its approach with respect to companies that report material weaknesses, stating that it believes that audit committees are responsible “to ensure that material weaknesses are remediated in a timely manner and that companies disclose remediation plans that include detailed steps to resolve a given material weakness.” Accordingly, Glass Lewis will consider recommending votes against all audit committee members who served since the date of the last annual meeting if, since the last annual meeting, the company has reported a material weakness that has not been remediated and has not disclosed a remediation plan, or where a material weakness has been ongoing for more than a year and the company has not disclosed an updated remediation plan.
Other Clarifying Updates. In addition to the key updates to guidelines relating to election of directors discussed above, Glass Lewis is providing clarifications to its existing policies relating to board responsiveness, interlocking directorships, and board diversity, including revising its definition of “underrepresented community director” to mean an individual who self-identifies as a member of the LGBTQIA+ community.
- Board responsiveness. Glass Lewis clarifies that its policy with respect to circumstances where “20% or more of shareholders vote contrary to management” does not apply to votes for a shareholder proposal, and also clarifies that “voting contrary to management” means votes cast as AGAINST and/or ABSTAIN.
- Interlocking directorships. Glass Lewis notes that it will evaluate, on a case-by-case, other types of interlocking relationships, such as interlocks with close family members of executives or within group companies and interlocks among non-insiders (i.e., multiple directors serving on the same boards at other companies), for evidence of a pattern of poor oversight.
- Board diversity. Glass Lewis clarifies that when making voting recommendations based on board diversity (or lack thereof), Glass Lewis will review a company’s disclosure of its diversity considerations and may refrain from recommending votes against directors when boards have provided a sufficient rationale or plan to address the lack of diversity on the board, including a timeline (generally by the next annual meeting or as soon as reasonably practicable) of when the board intends to appoint diverse directors.
Guidelines Relating to Say-on-Pay Recommendations
Clawback Provisions. In June 2023, the SEC approved the clawback-related listing standards proposed by the NYSE and Nasdaq, which listing standards became effective on October 2, 2023. Glass Lewis is updating its approach to clawback provisions to account for the new listing standards. In addition to satisfying the new listing standards, Glass Lewis believes clawback policies should also include “the ability to claw back variable incentive payments (whether time-based or performance-based) when there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure, or a material operational failure, the consequences of which have not already been reflected in incentive payments and where recovery is warranted.”
In addition, where a company does not follow through with recovery, Glass Lewis will assess the appropriateness of this determination and expects a “thorough, detailed discussion of the company’s decision not to pursue recoupment and, if applicable, how the company has otherwise rectified the disconnect between the executive pay outcomes and negative impacts of their actions on the company[.]” The absence of this disclosure may impact Glass Lewis’ overall recommendation for the say-on-pay vote.
Executive Ownership Guidelines. Glass Lewis is including a new discussion of its approach to executive ownership guidelines, stating that companies should facilitate the alignment between shareholder and executive interests “through the adoption and enforcement of minimum executive share ownership requirements.” In addition, companies should clearly disclose these requirements in the CD&A section of the proxy statement, including “how the various types of outstanding equity awards are counted or excluded from the ownership level calculation.” Glass Lewis may view the addition of unearned performance-based full value awards or unexercised stock options in the ownership calculation “without a cogent rationale” as problematic.
Other Clarifying Updates. In addition to the key updates to guidelines relating to say-on-pay recommendations discussed above, Glass Lewis is providing clarifications to its existing policies relating to non-GAAP disclosure, pay versus performance disclosure, and company responsiveness to say-on-pay opposition.
- Short-Term Incentives and Long-Term Incentives – Non-GAAP to GAAP Reconciliation Disclosure. Glass Lewis is expanding its discussion of short-term and long-term incentives stating that it “believes that in circumstances where significant adjustments were applied to performance results, [a] thorough, detailed discussion of adjustments akin to a GAAP-to-a-non-GAAP reconciliation and their impact on payouts within the proxy statement is warranted.” The absence of this disclosure will impact Glass Lewis’ assessment of the quality of the disclosure and may impact its overall say-on-pay voting recommendation.
- Pay for Performance – Pay-Versus-Performance Disclosure. Glass Lewis is updating its pay for performance analysis to indicate that in cases where a company receives a “D” or “F” from its proprietary pay-for-performance model, supplemental quantitative factors including analyses of “compensation actually paid” data from the company’s pay versus performance disclosures may be considered (among other factors) in Glass Lewis’ vote recommendation.
- Company Responsiveness for Say-on-Pay Opposition. Glass Lewis clarifies its policy with respect to circumstances where companies receive a significant level of shareholder opposition to a say-on-pay proposal to mean circumstances when “more than 20% of votes on the proposal are cast as AGAINST and/or ABSTAIN.” [Emphasis added.]
The U.S. Guidelines also include updates relating to proposals for equity awards for shareholders with large company holdings (i.e., where the shareholder’s vote can materially affect whether the proposal passes or fails), net operating loss pills, and control share statutes.
In its ESG Guidelines, Glass Lewis is updating its overall approach to E&S issues, adding a new discussion relating to engagement between shareholders and companies. When making a recommendation on a shareholder proposal, Glass Lewis will review “publicly available disclosures made by both the company and shareholder proponents concerning engagement between the two parties.” In cases “where there is compelling disclosure that either party has failed to engage in good faith,” Glass Lewis “may take such information into account when making recommendations on these resolutions.” In addition, Glass Lewis believes “that companies should make a concerted effort to provide disclosure in their proxy statements concerning their engagements with their broader shareholder base on issues raised by shareholder proposals.” When making recommendations on shareholder proposals, Glass Lewis may take into account “a company’s disclosure of its engagement efforts on related topics” in its analysis and recommendations particularly “where companies receive repeat shareholder proposals” and such proposals have received significant shareholder support.