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A Fresh Take

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

| 9 minutes read

2024 Proxy Advisor Guidelines: What Companies Need to Know Heading into the 2024 Proxy Season

The two most influential proxy advisor firms, Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass Lewis), updated their annual voting policies for annual shareholder meetings in 2024.  Both proxy advisory firms’ voting guidelines are currently in effect, with ISS’ effective for shareholder meetings on or after February 1, 2024, and Glass Lewis’ effective for shareholder meetings on or after January 1, 2024. In a departure from prior years, ISS had minimal changes to its voting policies this year with updates only to executive compensation related matters. Glass Lewis, by comparison, took a substantially more expansive approach, focusing on revisions related to executive compensation, cybersecurity considerations and climate and ESG oversight issues for 2024.   

Policy changes on executive incentives, compensation & equity ownership.

Executive compensation was the focus of Glass Lewis’ 2024 updates.  Dominant themes in this year’s compensation-related updates from Glass Lewis related to tightening of pre-existing pay governance principles in areas such recoupment policies and executive ownership guidelines, as well as enhanced disclosure of incentive payments based on non-GAAP metrics. Meanwhile, the sole voting policy update from ISS came in the form of a move to case-by-case evaluation of shareholder proposals relating to executive severance, alongside more general updates covered in its compensation related FAQs and other resources detailing its pay-for-performance evaluation methodology.

Clawback provisions

Glass Lewis’ updated guidelines state that effective clawback policies should go beyond the new minimum NYSE and Nasdaq listing requirements, which relate solely to recoupment of erroneously paid compensation arising from material financial misstatements.  Glass Lewis expects clawback policies authorize companies to recoup incentive compensation from executives 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, regardless of whether the executive is terminated with or without cause.  The guidelines do not state whether there will be a direct impact on Say-on-Pay vote recommendations if a company fails to adopt such a broader policy.  However, Glass Lewis notes that if a company ultimately refrains from pursuing recoupment, it will be expected to provide sufficient rationale for doing so and also explain any alternative remediation measures (such as the exercise of negative discretion on future payments), which will be evaluated on a case-by-case basis.  While ISS’ guidelines do not address misconduct, ISS (by withholding credit in its Governance QualityScore and Equity Plan Scorecard) and Glass Lewis continue to express an expectation that recoupment policies provide for recovery of both time-based and performance-based awards.  

Executive severance payments and terminations

ISS continues to place increased focus on disclosure regarding severance payments in connection with executive terminations and directs companies to disclose both the type of termination occurring under an applicable employment agreement as well as the provision by which such payments are made.  ISS’ 2024 Compensation Policies FAQ notes its view that excessive payments made to executives in connection with an apparent voluntary resignation or retirement will be regarded as a “problematic pay practice” that may lead to an adverse Say-on-Pay recommendation.  The FAQ cautions against disclosure indicating an executive “stepped down” or that the executive and the board have “mutually agreed” on departure, positing that such statements do not enable investors to fully evaluate severance payments.

Meanwhile, ISS’ sole change to its voting policy updates for 2024 revised an existing policy on shareholder proposals seeking to require that executive severance agreements be submitted for shareholder ratification.  Aiming to harmonize its analysis of both regular termination severance as well as change-in-control related (“golden parachute”) severance, ISS will now recommend voting case-by-case on all such shareholder proposals.  Previously, ISS generally recommended a yes vote to shareholder ratification of ordinary severance, unless the proposal required shareholder approval prior to entering employment contracts.  Factors ISS said it will consider in this case-by-case analysis for both ordinary severance and change-in-control related severance include whether the company’s severance or change-in-control agreements in place have problematic features (such as excessive severance entitlements, single triggers, excise tax gross-ups), whether there are existing limits on cash severance payouts which require shareholder ratification of payments exceeding a certain level, whether there have been any recent severance-related controversies and the degree of prescriptiveness to the shareholder ratification vote (i.e., does the proposal require shareholder approval even if the severance does not exceed market norms). 

Executive ownership guidelines

Glass Lewis formalized its expectation that companies should adopt and enforce minimum share ownership rules for named executive officers, with disclosure of the ownership requirements in the Compensation Discussion & Analysis section of the annual proxy statement.  For 2024, Glass Lewis has indicated that companies should not count performance-based full value awards or unexercised options under their ownership guidelines without a clear rationale for doing so.  ISS has historically taken a more stringent stance by withholding credit under its Governance QualityScore unless unearned performance awards and unexercised options are excluded.

Impact of pay-versus-performance disclosure

As companies approach the second proxy season in which Pay-versus-Performance (PvP) disclosure will be included under Item 402(v) of Regulation S-K, Glass Lewis has revised its guidelines to note that PvP disclosure may be used as part of its supplemental quantitative assessments supporting its primary pay-for-performance grade.  ISS has not included a policy statement on how PvP disclosures may be used.

Non-GAAP incentive plan adjustment  

Glass Lewis has clarified that adjustments from GAAP to non-GAAP figures in the determination of executive performance metrics may be considered in its assessment of the effectiveness of a company’s pay-for-performance strategy. Under its analysis, companies will be expected to include detailed discussions of such adjustments to enable shareholders to reconcile GAAP to non-GAAP results and the corresponding impact on incentive payouts.  ISS also added a more direct FAQ similarly noting that disclosure in the annual proxy statement of line-item reconciliation to GAAP results, when possible, is considered a best practice. In addition, if adjustments materially increase incentive payouts, companies should carefully explain the board’s rationale in approving such an adjustments. Under both regimes the absence of such disclosures may adversely impact recommendation of the Say-on-Pay vote.  Notably, ISS FAQ’s further state that implementation of adjustments that appear to insulate executives from performance failures (particularly at companies with a quantitative pay-for-performance misalignment) will be viewed negatively.

Compensation takeaways

  • Continue to evaluate existing clawback policies in connection with the compensation committee’s annual risk-assessment, considering whether broader policies may be appropriate.
  • Regularly review and evaluate incentive program metrics, and, if applicable, discuss a framework for addressing non-GAAP adjustments in light of anticipated uncertainties.
  • Actively plan for anticipated executive transitions and departures in connection with succession planning, and carefully consider disclosures related to any severance or similar payments.

Incident response

Cybersecurity risk oversight

In conjunction with the new Securities and Exchange Commission (SEC) final rules requiring the reporting of material cybersecurity incidents on Form 8-K, Glass Lewis expanded its consideration of cyber risk oversight for companies that have material cyber incidents.  In those instances, Glass Lewis will be focusing on the cybersecurity oversight, response and disclosures, including the expectation that periodic updates be communicated to shareholders regarding progress on resolution and remediation. Factors that Glass Lewis expects to be disclosed non-exhaustively include details regarding the timing of fully restored information systems, the timing of a return to normal operations, resources provided for affected stakeholders and any other relevant information until full remediation is achieved.  This expectation goes beyond the requirements of the new Item 1.05 ofForm 8-K, which generally requires description of the material impacts of the incident rather than the remediation plan.  While there is an expectation of significant and on-going disclosure, Glass Lewis acknowledges that certain types of information are not appropriate for disclosure, including specific or technical details that could aid the cyberattacker. Rather, Glass Lewis focuses disclosure as a measure to address affected stakeholders.  Any perceived deficiency in oversight, response or disclosure could result in recommendations against votes for “appropriate directors.”  

Material weakness

Glass Lewis focuses on a new approach to material weaknesses, emphasizing that it believes the audit committee has the responsibility to ensure disclosure of remediation plans with sufficient detail and timely remediation efforts. For material weaknesses ongoing for more than one year, Glass Lewis expects annually updated remediation plan disclosure that include sufficiently detailed information regarding the steps necessary to resolve the material weakness, with specific annual disclosure on the steps completed and remaining open action items.  Failure to disclose a remediation plan, or material weaknesses ongoing for more than a year without annually updated remediation plan disclosure, will result in Glass Lewis considering recommending against all members of a company’s audit committee that served at the time the material weakness was identified.  Glass Lewis is silent on impacts for new audit committee members that served during the pendency of a greater than one-year remediation process.

Incident response takeaways

  • The existence of a cybersecurity incident or material weakness triggers additional scrutiny from Glass Lewis, and to some extent, having an incident occur despite best-in-class governance measures pre-incident will not prevent negative vote recommendations.
  • Glass Lewis is particularly focused on periodic disclosure updates regarding resolution, which is not as prescribed an expectation as for cybersecurity incidents as material weaknesses.  The timing, tone, content and substantive disclosure regarding remediation are significant factors for Glass Lewis’ consideration.
  • Assigning director responsibility is significant for Glass Lewis when there is an incident, whether cybersecurity or material weakness. While it is easier to define the scope of responsibility for a material weakness to the audit committee, Glass Lewis does not provide clarification on who they deem to be an appropriate director for cybersecurity incident purposes.  Presumably Glass Lewis will evaluate whether a committee is delegated with cybersecurity oversight, whether any directors are cybersecurity experts, and other relevant factors in its analysis, including the company’s disclosure regarding its oversight processes.  These considerations add further pressure on companies to appropriately design and structure cybersecurity oversight in a manner that is appropriate for the company and considers relevant skills and experience.  

Governance Considerations

Glass Lewis clarified that for both board responsiveness considerations and say-on-pay, when considering a 20% threshold of shareholders that vote against management or say-on-pay, respectively, the 20% threshold includes both votes against and abstentions.  While the 20% threshold is consistent with prior treatment, the clarification that Glass Lewis treats abstentions as an “against” vote is a new development.  

Board’s role in oversight and accountability for climate and other environmental and social issues

Glass Lewis expanded its expectations for climate-related issues from what it considered the “largest, most significant emitters” to the entire S&P 500 index operating in industries where the Sustainability Accounting Standards Board (SASB) determined that the company’s greenhouse gas emissions represent a financially material risk (which industries Glass Lewis specifies as generally applicable in its policy).  This policy will apply regardless of whether a company reports in alignment with SASB or discloses that the risk is material for the company.  The expanded policy will also be applied to companies that Glass Lewis believes emissions, climate impacts or stakeholder scrutiny of such impacts represent an outsized and financially material risk, but the universe of these companies is undefined. 

Glass Lewis will assess two aspects of disclosure under its policies.  First, it will consider the adequacy of a company’s disclosures as compared with the recommendations from the Task Force on Climate-related Financial Disclosures.  Second, it will review whether clearly defined board-level oversight responsibility for climate-related issues exists and is disclosed.  In instances where Glass Lewis finds disclosures in either of these two areas to be lacking, it may recommend against the chair of the committee or board charged with oversight of climate-related issues.  In the absence of such oversight (or the disclosure of such oversight), the chair of the governance committee may receive a negative voting recommendation.

For other environmental and social risks and issues, Glass Lewis clarified that it expects companies to formally delegate oversight through the appropriate committee charter or otherwise specified in appropriate governance documents. Specification of oversight solely in a company’s annual proxy statement will not satisfy the new expectations. Glass Lewis’ policies already noted that a failure to provide sufficient oversight disclosure risks against votes for the governance committee chair, which is likely to be applied to the governing document expectations, as well.

Environmental and social takeaways

  • There is a shift from a focus solely on governance policies, improvements over time and disclosure to layering on codification of board oversight into formal governance documents, as well as a focus on identification of directors tasked with environmental and social oversight responsibilities.   
  • As with cybersecurity oversight discussed above, Glass Lewis is likely to evaluate a company’s own oversight disclosure and director skills when considering which directors may be subject to negative voting recommendations, but the absence of specification will not prevent Glass Lewis from selecting directors to receive a negative voting recommendation.
  • As with other environmental and social voting policies from proxy advisory firms and institutional investors, companies can expect that the voting and disclosure policies applicable to a subset of companies will continue to expand in future years.  As a result, it is prudent for companies in all indices to understand the expectations on climate-related disclosure and oversight.

It is noted that considerations for companies in this post are not one-size-fits-all and the appropriateness of implementing or amending any policies or disclosure is anticipated to be a facts and circumstances analysis, considering a holistic review of company practices, principles driving the practice, strategic aims and shareholder engagement, among other factors. 


corporate governance, executive compensation, cybersecurity, employment