Proxy advisers Institutional Shareholder Services (ISS) and Glass Lewis weigh in on how they will apply their proxy voting policies during the 2020 proxy season against the backdrop of COVID-19.
Against the backdrop of the COVID-19 pandemic, proxy advisers Institutional Shareholder Services (ISS) and Glass Lewis weighed in on how they will apply their proxy voting policies during the 2020 proxy season.
Both believe their current policies position them to respond to governance-related questions arising from the pandemic, while acknowledging the need for pragmatism and flexibility, and a case-by-case approach. On executive pay, the advisers caution companies not to make changes without sufficient rationale and real-time disclosure.
ISS’s guidance advises companies to provide real-time disclosure on pay program changes and warns against quick decisions to adjust incentive plan goals or reprice options. It also confirms the proxy adviser is open to virtual-only shareholder and board meetings during the pandemic.
Changes to performance metrics, goals, and targets.
Option repricing/exchange. If boards reprice or exchange options without shareholder approval, ISS may recommend voting against directors. If boards seek shareholder approval of a repricing / exchange, ISS will apply its case-by-case approach of generally recommending against a repricing within one year of a precipitous drop in the company’s stock price. Other features ISS will flag include:
In recognition that shareholder meetings may be postponed or held virtually:
Board meeting attendance
ISS is open to alternatives to in-person attendance at board and committee meetings with adequate explanation. Disclosures should be sensitive to privacy concerns with respect to directors’ health, while giving shareholders adequate information to make informed voting decisions.
Director and senior management changes
ISS will take a flexible approach if companies need to fill board or senior management vacancies due to an individual’s incapacity or to add critical expertise due to the pandemic. The proxy adviser will adjust its policies (e.g., on overboarding and board independence and diversity) as appropriate.
Like ISS, Glass Lewis published general guidance on the impact of the pandemic on its standard proxy research approach. But Glass Lewis’s guidance is more in the nature of a warning against executive pay changes and poor governance planning as follows:
Glass Lewis will take a dim view of executive pay changes that are inconsistent with the challenges workers are experiencing. The proxy adviser is most likely to support changes that “take a proportional approach to the impacts on shareholders and employees”. Glass Lewis warns against “maintaining or even increasing executive compensation levels” and cautions that trying to make executives whole is a “certainty for proposals to be rejected and boards to get thrown out—and an open invitation for activists and lawsuits onto a company’s back for years to come”.
Glass Lewis’s updated virtual meeting policy indicates support for virtual meetings through June 30, 2020, provided the company discloses its rationale (e.g., COVID-19). Companies holding virtual-only meetings after June 30, 2020, should include “robust” proxy disclosure on shareholder participation consistent with the proxy adviser’s standard policy.
Board composition and effectiveness
Glass Lewis acknowledges that the crisis will test succession planning and present significant risks for boards and management teams that lack age and gender diversity. The proxy adviser also notes there may be reduced director attendance rates and reduced effectiveness of board meetings and decision making with remote meetings.
Much of the proxy advisers’ guidance on executive compensation and governance is consistent with the approach Mercer recommends companies take in making pay and governance decisions during the pandemic and economic downturn:
Demonstrate good governance
Communicate and disclose
The global pandemic and economic downturn have created challenges for companies in many industries, and affected a variety of stakeholders — including executives, rank-and-file employees, and shareholders. When shareholders and proxy advisers engage with companies and vote proxies, they will assess whether company responses to the crisis balance profitability and sustainability, and take into account broader workforce and community concerns. Against this backdrop, companies should be forthright in explaining the rationale for pay and governance decisions.
Note: Mercer is not engaged in the practice of law, accounting or medicine. Any commentary in this article does not constitute and is not a substitute for legal, tax or medical advice. Readers of this article should consult a legal, tax or medical expert for advice on those matters.