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Proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass Lewis) recently released their United States policy recommendations for the 2018 proxy season. This update discusses some key highlights of the changes to those recommendations.
|ISS topics||Glass Lewis topics|
Poison pills - Discourages companies from adopting or making adverse changes to poison pill plans, except in certain limited circumstances
ISS believes that poison pills, if misused, may serve to entrench management and negatively affect long-term share value. Boards should seek timely shareholder approval or ratification of poison pills or amendments of existing pills that have not been previously approved, and boards that fail to do so will draw a negative ISS recommendation. However, shorter-term pills (those with terms of less than one year) are generally viewed as being less onerous, and ISS believes they can be useful tools to maximize value in the face of opportunistic offers. Adoption or maintenance of any pill with a term of more than one year should be approved by shareholders. This updated policy will be applied at companies that have existing non-shareholder approved pills.
For short-term pills, ISS will continue to conduct a case-by-case analysis, with special emphasis on the board’s disclosed rationale for adopting the plan without a shareholder vote. Other factors may also be examined. For instance, a commitment by the board to subject extensions or renewals of poison pills to shareholder votes would provide reassurance to investors that their interests are being considered.
Excessive director pay - Discourages awarding excessive non-employee director compensation in the absence of mitigating factors
The 2017 Board Study conducted by ISS found that the median non-employee director (NED) pay in the S&P 1500 has risen every year since 2012. The growth in pay has led to increased investor interest in the structure of the NED compensation packages. Some investors have challenged allegedly excessive compensation packages in court or made boardroom compensation an issue in proxy contests. Numerous companies have introduced proposals requesting shareholder approval of NED compensation programs and/or compensation limits to NED equity award programs.
In response, ISS has introduced a policy that discourages directors from approving excessive NED pay without compelling rationale. ISS is looking for companies that are “cases of extreme outliers relative to peers and the broader market.” The new policy will not directly impact vote recommendations in 2018. However, in future years, negative recommendations will be made if a pattern of excessive NED compensation is identified during consecutive years.
Say-on-pay and say-on-frequency – ISS is recommending votes against compensation committee members of companies that did not include their say-on-pay or say-on-frequency ballot items where required
In 2017, companies who held their initial say-on-frequency votes in 2011 were once again required to include it on their ballot in 2017, as the frequency issue needs to be put to a shareholder vote at least once every six years under the SEC’s rules. Many companies inadvertently omitted it, and ISS has been requesting that such companies add it back to the agenda if required. ISS recommended against say-on-pay resolutions or, in the absence of such resolution, against members of their compensation committees, if companies that missed the requirement did not refile or amend their proxy statements. There was no adverse vote recommendation if the company failed to timely present a frequency proposal but maintained an annual frequency. Further, companies that become subject to the say-on-pay requirements (former EGCs for example) but fail to add the proposals may receive a negative recommendation for the compensation committee.
Board gender diversity - ISS highlights boards with zero female directors
In the 2017-2018 Governance Principles Survey conducted by ISS, 69% of investors stated that they consider the absence of female directors on a public company’s board to be problematic. Many of these respondents further indicated that it would be appropriate to engage with the company on this issue if that were the case. While the ISS policy will not use the lack of gender diversity as a factor in its vote recommendations on directors, ISS will identify where a board has zero female directors.
Pay for performance - Updates the quantitative pay-for-performance evaluation methodology
ISS updated its policies to reflect the incorporation of the Relative Financial Performance Assessment into the US quantitative pay-for-performance evaluation methodology. The Relative Financial Performance Assessment compares the company's rankings to an ISS selected peer group with respect to CEO pay and certain financial performance metrics (varying depending on industry), each measured over a three year period. Specific details of the mechanics of the quantitative screening methodology will be provided in an updated ISS white paper.
Board responsiveness to low say-on-pay – Clarified the factors ISS considers when evaluating board responsiveness to say-on-pay results
ISS clarified the factors used to assess the robustness of board responsiveness to low say-on-pay proposals (those that receive less than 70% of votes cast). First, ISS’s evaluation of the breadth of shareholder engagements may consider the timing and frequency of engagements, as well as whether independent directors participated in engagement efforts. Second, in assessing whether subsequent changes are in fact responsive to that feedback, ISS will consider the summary disclosure of the feedback received from shareholders at these meetings. Finally, ISS will consider the quality of any changes made in response to the feedback.
Climate change disclosure proposals – ISS now recommends voting for shareholder proposals requesting that a company disclose information on the financial, physical, or regulatory risks related to climate change.
Gender pay gap disclosure proposals - Encourages case-by-case votes on shareholder proposals for reports on a company’s pay data by gender
In recent years, shareholders have filed proposals requesting that companies report the existence of gender pay gaps and any measures being taken to rectify such gaps. Proponents are expected to continue to engage companies and file shareholder proposals on this issue. ISS will recommend votes on a flexible case-by-case approach to this issue taking into account current company policies, disclosures on diversity, compensation philosophy, fair and equitable compensation practices, recent company litigation, controversy or litigation related to gender pay gap issues, and peer reporting. According to ISS’s 2017-2018 Policy Application Survey, 60% of investor respondents agreed that companies should disclose their gender pay gap information, while 67% of non-investor respondents disagreed.
Classified boards – ISS further discourages companies from adopting boards with classified structures
Some states, including Iowa and Indiana, have corporate laws requiring companies to adopt classified boards, unless the company opts out of such requirement. Shareholders often lack the ability to deviate from staggered board term structures, since shareholder proposals that contradict state laws can be challenged at the SEC and kept off the ballot. Under its Governance Failures policy, ISS has been recommending against the classified boards of certain companies in Indiana and Iowa that have not opted out of laws in those states that require classified boards. This revision codifies this stance.
Pledging - Since 2013, ISS has been recommending against members of the risk oversight committee or the full board where a significant amount of pledged company stock raises concerns. ISS expressly codified what has been ISS’s policy since 2013.
Board gender diversity – Glass Lewis will recommend votes against the nominating committee chair in 2019 if a board lacks gender diversity
The 2018 guidelines added a discussion of how Glass Lewis considers the issue of gender diversity on company boards. As with previous years, Glass Lewis will continue to closely review the composition of boards and may note instances where they lack gender diversity. In 2018, Glass Lewis will not make voting recommendations solely on the basis of board diversity; rather, it will be one of many factors in the evaluation of companies’ oversight structures. However, beginning in 2019, Glass Lewis will recommend voting against the nominating committee chair of a board that has no female members, as well as against other nominating committee members if warranted. In making voting recommendations, Glass Lewis will review a company’s disclosure of its diversity considerations, its stated rationale for not having any female board members, and its plans to address the lack of diversity.
Dual class voting structures - Discourages dual-class voting structures where such structures will not be in the best interests of common shareholders
The 2018 guidelines added a discussion of how Glass Lewis considers dual-class share structures in analyzing a company’s governance. Glass Lewis believes that such structures are usually not in the best interests of common shareholders and that allowing one vote per share generally operates as a safeguard for minority shareholders.
Board responsiveness - Encourages board responsiveness after significant negative shareholder voting on management proposals or significant support for shareholder proposals
Due to changing investor sentiment, Glass Lewis clarified that the board generally has an imperative to respond to negative shareholder votes on a proposal at an annual meeting of more than 20% of votes cast (rather than 25%), particularly in the case of a compensation or director election proposal. For companies where voting control is held through a dual-class share structure with disproportionate voting and economic rights, Glass Lewis will carefully examine the level of approval or disapproval attributed to unaffiliated shareholders when determining whether board responsiveness is warranted. Additionally, Glass Lewis believes that the board should be appropriately responsive to shareholder proposals supported by a majority of unaffiliated shareholders.
Virtual meetings - Clarifies its recommendations regarding virtual shareholder meetings and requires enhanced disclosure by 2019 if companies hold virtual-only meetings
As a growing number of companies have elected to hold shareholder meetings by virtual means only, Glass Lewis believes that such technology may complement traditional meetings by expanding shareholder participation, but virtual meetings may also hinder shareholders’ ability to communicate with management. In 2018, Glass Lewis will not make voting recommendations solely on the basis that a company holds virtual-only meetings. Glass Lewis will look for assurance in a company’s proxy statement that attendees of virtual meetings will have the same rights and opportunities to participate as in-person attendees. Beginning in 2019, however, Glass Lewis will generally recommend voting against members of the governance committee of boards that plan to hold virtual-only shareholder meetings if such plans are not disclosed.
Director commitments - The 2018 guidelines clarify Glass Lewis’s approach to evaluating outside commitments of directors who serve in executive roles other than CEO. When determining whether to apply the limit of two total public company board memberships for executives (besides the membership at their own company). Glass Lewis will evaluate the duties and responsibilities of their executive roles, as well as the company’s disclosure regarding their time commitments to outside roles.
CEO pay ratio – Glass Lewis added a discussion of the CEO pay ratio disclosure required beginning in 2018 and Glass Lewis will include the ratio as a data point in its reports. While the pay ratio may provide additional insight in assessing a company’s pay practices, Glass Lewis will not use it as a determinative factor in its voting recommendations at this time.
Pay for performance - The 2018 guidelines clarify Glass Lewis’s pay-for-performance grading system. Consistent with previous years, the pay-for-performance grades guide Glass Lewis’s evaluation of compensation committee effectiveness, and it generally recommends voting against compensation committee members at companies with consistently failing grades. Note that a “C” in the Glass Lewis grade system identifies companies where the pay and performance percentile rankings relative to peers are generally aligned.
Proxy access fix-it proposals – Glass Lewis will recommend votes for proposals seeking to amend provisions of the existing proxy access bylaws if they directly address unnecessarily restrictive proxy access provisions and oppose proposals where existing proxy access bylaws generally conform to market practice.
Climate change proposals – Glass Lewis will generally recommend in favor of shareholder proposals requesting companies in energy and extraction that have increased risk from climate change considerations disclose information related to their climate change scenario analyses and other climate change-related considerations.
Companies in the aviation industry should reassess how their business intersects with government employees.
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