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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 7 minutes read

Proxy advisory firms provide perspective and guidance in light of the impact of COVID-19

On March 23, 2020, Glass Lewis issued its perspective on the impact the COVID-19 pandemic has had, and will continue to have, on environmental, social and governance issues (which can be found here). On April 8, 2020, Institutional Shareholder Services Inc. (ISS) also issued much awaited guidance in light of the pandemic, recognizing that the impact of COVID-19 has severely limited business operations, and will continue to do so for an unpredictable period of time (which can be found here). 

Both proxy advisory firms recognized and acknowledged the uncertainties faced by issuers and shareholders in the wake of COVID-19, and stated that they will rely on the existing flexibility in their voting guidelines and use their discretion in the application of certain of their voting policies in light of current circumstances. 

This article briefly highlights some of the key takeaways from the perspective and guidance that the two proxy advisory firms have issued.

Compensation issues

Both Glass Lewis and ISS recognized that many issuers have announced changes to their executive compensation programs in light of the impact of COVID-19, and many more are expected to do the same. While Glass Lewis bluntly stated that executives should not expect to be worth as much as they were prior to the pandemic and that they generally are not supportive of increasing or even maintaining executive compensation levels, ISS took a more measured approach to its guidance and specifically addressed two main topics – changes in metrics/shift in goals or targets and option repricing. 

Changes in metrics/shift in goals or targets/use of discretion

As we previously discussed in our post regarding the impact of COVID-19 on performance-based awards (which can be found here), many public companies are considering whether and how to adjust outstanding performance-based awards in light of the outbreak, as well as how to structure performance goals for new awards in this time of uncertainty. In this regard, the recent Glass Lewis and ISS guidance sheds some light on how such adjustments may be received by shareholders and the advisory firms.

While recognizing that board and compensation committee decisions to adjust 2020 compensation programs would normally be analyzed and addressed in next year’s public disclosures, ISS specifically encouraged boards and committees to provide contemporaneous disclosures of the underlying rationale for such adjustments in order to provide shareholders with insight into such decisions on a current basis. 

Although ISS recommended such disclosures in the context of short-term compensation, when addressing the application of its benchmarking voting policies to adjustments to outstanding long-term compensation awards, ISS stated that adequate shareholder disclosure of the adjustments will be a factor that it considers. 

However, ISS noted that its policies are generally not supportive of mid-performance period adjustments to long-term compensation awards. It will look at such changes on a case-by-case basis to determine if directors exercised appropriate discretion and provided adequate disclosure. 

With respect to structural changes to long-term compensation plans in light of the current market and impact of COVID-19, ISS noted that it will assess such changes under the structure of its existing benchmark policy framework, under which it evaluates equity plan proposals based on their projected cost, general features and the issuer’s historical grant practices.

Glass Lewis stated that it will assess the reasonableness of proposed changes and outcomes by considering whether they are consistent and in proportion to the impact on employees and shareholder interests. On executive compensation, Glass Lewis said that it expects boards to proactively seek changes that align with employee and shareholder experiences, noting specifically that the result may be that “executives might need to take a pay cut.” 

Glass Lewis also cautioned that issuers attempting to make their executives whole at the expense to shareholders and other employees, even those taking a “business as usual approach” to executive compensation, would not only risk that such proposals would be rejected, but would also provide an open invitation for activists and lawsuits for years to come. 

Glass Lewis did indicate, however, that it will afford more discretion to an issuer with a good historical track record with respect to governance and the use of board discretion.

Option repricing and other equity adjustments

ISS also specifically noted that it will apply its existing case-by-case approach with respect to recommendations in connection with repricing, replacing, exchanging, canceling or re-granting “out-of-the-money” stock options. 

In connection with any such repricing, ISS will examine whether: 

  1. the design is shareholder value neutral (i.e. a value for value exchange); 
  2. surrendered options are added back to the equity plan reserve;
  3. replacement awards immediately vest; and
  4. executive officers and directors are excluded from the repricing. 

Notwithstanding current circumstances, the typical ISS negative recommendation approach will continue to apply to any such repricing that occurs within one year of a precipitous drop in the issuer’s stock price. In addition, if the board attempts to reprice stock options without seeking shareholder approval, ISS will apply its benchmark policy board accountability provisions.

Glass Lewis stated that the market can expect an increase in shareholder concerns regarding repricings, as well as in connection with dilution, burn rates and changing in vesting periods.

Director/senior management considerations

ISS’ general policy is to recommend against or withhold votes on directors who attend less than 75 percent of the aggregate board and committee meetings, without an acceptable reason disclosed. 

Because, in the United States, directors are permitted to attend meetings by remote communication, ISS has not signaled any changes to the application of its voting guidelines which already count remote participation in board and committee meetings toward meeting attendance. 

Nonetheless, we expect that if a director is unable to participate in board or committee meetings even through remote means and does not meet the 75 percent threshold for meeting attendance for coronavirus-, or other illness-related reasons, adequate disclosures by the company should be helpful in avoiding negative vote recommendations. 

In markets in which telephonic or electronic participation is not permitted, ISS’ guidance clarified that, in exercising its discretion, ISS will consider the adequacy of disclosures that provide explanations about alternative forms of attendance. In addition, ISS acknowledged that when disclosing attendance records, companies should balance the need for director privacy with sufficient information for ISS and shareholders to make informed judgments about the director’s level of attendance. 

ISS also addressed situations in which companies will need to quickly replace directors due to illness or incapacity or appoint directors to management roles on an interim basis. ISS noted the existing flexibility in its guidelines with respect to its evaluation of director independence, overboarding and board diversity and other attributes and confirmed that it would provide case-by-case consideration to voting recommendations based on disclosures by the company regarding the changes to the composition of the board. Similarly, ISS confirmed that it would exercise its discretion on a case-by-case basis in evaluating board members who have been appointed to senior executive roles on an interim basis to fill vacancies created by executive disability or incapacity of an existing member of the management team.

Glass Lewis’ guidance was decidedly more maudlin, citing that it sees the biggest risks at companies with boards, and to a lesser extent senior management, with a lack of age and gender diversity due to the higher risk COVID-19 poses to men older than 65. In addition, it cautioned about the knock-on effects a sick or incapacitated director can have on the multiple company boards on which the director serves. 

Glass Lewis highlights that this crisis is a pressure test on a company’s existing succession planning and board refreshment processes. In this respect, Glass Lewis believes the good governance practices of companies and boards in place during stable times will serve to prepare those companies to a greater degree and put those companies in a position to recover more quickly, than companies without such practices.

Shareholder meetings

Glass Lewis noted that most companies had received all shareholder proposals significantly before the scope and scale of the pandemic became understood. As a result, shareholder proposals will not reference or be shaped by issues related to the pandemic, although voting decisions will be shaped by the risks and perceived impact to a company’s business that have emerged over the last six weeks. 

In particular, Glass Lewis cautioned that some issues that are the basis of a shareholder proposal may not continue to make sense (or as much sense) in the middle of a crisis and accordingly it may be impractical to ask a crisis-stricken company to devote time and resources to actions or reports that distract from mission-critical concerns squarely in shareholders’ interests. Accordingly, it intends to rely on the flexibility its existing case-by-case approach provides to apply the appropriate discretion and pragmatism to each proposal.

With respect to shareholder meetings, we have discussed the considerations for companies in holding or switching to a virtual meeting here. Both ISS and Glass Lewis recognize the potential need for virtual meetings in light of public health concerns, and encourage companies to disclose the reason for a virtual meeting (e.g. the relationship to the COVID-19 pandemic) and endeavor to provide shareholders with meaningful participation opportunities and rights. 

Prior to this year, Glass Lewis recommended against or withhold on governance committee members at companies that held virtual-only shareholder meetings without robust disclosure regarding shareholder rights and opportunities regarding meeting participation. This year, Glass Lewis will generally refrain from recommending against or withhold votes on governance committee members if a company discloses its rationale for holding a virtual-only meeting and cites COVID-19 as a factor. Glass Lewis encouraged companies to state whether they intend to resume holding in-person or hybrid meetings under normal circumstances.

Because ISS does not have a policy to recommend votes against companies who hold “virtual-only” meetings in most jurisdictions, including the United States, no changes are necessary to their policy guidelines. In the limited number of jurisdictions where the ISS policy historically discouraged “virtual-only” meetings ISS will alter the application of that policy and refrain from making negative vote recommendations. 

At companies that will hold “virtual-only” meetings, ISS encourages companies to disclose the reasons for their decision (i.e. that it is related to the COVID-19 pandemic) and to provide meaningful participation rights. ISS noted that companies are encouraged to commit to returning to in-person or hybrid meetings as soon as practicable.

Poison pills

In response to COVID-19 and significant market volatility and depressed stock prices for many companies as compared to only a few weeks ago, there has been a lot of attention on the advisability of proactive poison pill adoption. ISS and Glass Lewis both released guidance updating their existing policies regarding the adoption of a poison pill. 

See our post here for more information about considerations regarding poison pills and what steps boards should take in the COVID-19 era, including considerations with respect to proxy advisory firms and institutional investors.


united states, americas, covid-19, corporate governance, executive compensation, benefits, compensation