ISS and Glass Lewis Issue 2024 Proxy Voting Guidelines

As companies begin preparing for the 2024 proxy season, Institutional Shareholder Services Inc. (ISS) and Glass Lewis, the leading providers of corporate governance solutions and proxy advisory services, recently issued updated benchmark policies (proxy voting guidelines) for the 2024 proxy season. The ISS Proxy Voting Guidelines, which may be found here, apply to shareholder meetings convened on or after February 1, 2024. The Glass Lewis 2024 Benchmark Policy Guidelines, which may be found here, apply to shareholder meetings convened on or after January 1, 2024.

The updated proxy voting guidelines generally focus on board accountability and oversight considerations and address topics such as climate accountability, board diversity, shareholder rights, corporate governance standards, executive compensation and social issues. The following summarizes each firm’s 2024 proxy voting guidelines for the United States. Readers are encouraged to read each firm’s more detailed guidelines and to confer with your contact at Akin regarding any questions you may have or if you require additional information.

At the outset, we note that both firms have made limited changes to their proxy voting guidelines year-over-year.¹ In fact, ISS did not make any significant changes or updates in its 2024 proxy voting guidelines; however, it did clarify its approach to shareholder proposals that seek ratification of certain executive severance arrangements. In addition, ISS has issued an updated series of frequently asked questions (FAQs) that clarify the firm’s approach on a handful of matters. Glass Lewis’s 2024 updates are more extensive; however, the updates generally extend the firm’s approach in its 2023 voting.

ISS – Summary of 2024 Proxy Voting Guidelines (United States)

• As noted, ISS’s 2024 proxy voting guidelines only include one update relevant to U.S. companies. The update represents a codification of the case-by-case approach ISS takes when analyzing shareholder proposals requiring that executive severance arrangements or payments be submitted to shareholders for ratification. According to the publication, as updated, the policy “(i) harmonizes the factors used to analyze both regular termination severance as well as change-in-control related severance (golden parachutes) and (ii) clarifies the key factors considered in such case-by case analysis.” In connection with such analysis, factors considered by ISS include, but are not limited to:
  • Whether a company’s existing severance or change-in-control agreements include problematic features (e.g., excessive severance entitlements, single triggers, excise tax gross-ups, etc.).
  • Whether there are any existing limits on cash severance payouts or policies that require shareholder ratification of severance payments exceeding a certain level.
  • Whether the company has experienced any recent severance-related controversies.
  • Whether the proposal is overly prescriptive, such as requiring shareholder approval of severance that does not exceed market norms.

As noted above, ISS also released updated FAQs that should be consulted in relation to the specific topics covered therein. Appendix A includes hyperlinks to the updated FAQs and sets forth the questions that are new or have been materially updated.

Glass Lewis – Summary of 2024 Proxy Voting Guidelines (United States)

• Material Weaknesses: Glass Lewis issued new guidance regarding its approach to material weaknesses. The firm expresses its belief that “it is the responsibility of audit committees 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.” If (a) a material weakness is reported without disclosing a remediation plan or (b) a material weakness has been ongoing for more than one year and a company fails to disclose an updated remediation plan that outlines progress made toward remediating such material weakness, then Glass Lewis will consider recommending that shareholders vote against all members of an audit committee that were serving when the company identified the material weakness in question.
• Cyber Risk Oversight: Citing new cybersecurity rules issued by the U.S. Securities and Exchange Commission (SEC) that went into effect in September 2023, in its 2024 proxy voting guidelines, Glass Lewis notes that “[g]iven the continued regulatory focus on and the potential adverse outcomes from cyber-related issues, it is our view that cyber risk is material for all companies.” On that basis, if a company has not been materially affected by a cybersecurity incident, then Glass Lewis “will generally not make voting recommendations on the basis of a company’s oversight or disclosure concerning cyber-related issues.” That said, if a company experiences a cybersecurity incident that results in 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, in cases where a company has been materially affected by a cybersecurity incident or cyber-attack, Glass Lewis expects that shareholders of such a company should reasonably expect periodic updates from the company disclosing the company’s progress in resolving and remediating the impact of the incident (or incidents) in question. Glass Lewis may recommend voting against “appropriate” directors if it determines a board’s “oversight, response or disclosures concerning cybersecurity related issues to be insufficient” or if a company fails to provide shareholders with adequate disclosures regarding such incidents. 

• Board Oversight of Environmental and Social Issues: While Glass Lewis has not changed its overall approach to this issue—i.e., that boards develop and implement clear oversight of environmental and social (E&S) issues—the firm has updated its expectations regarding how companies demonstrate that they satisfy such expectations. Specifically, because oversight of E&S issues is considered to be of particular importance, Glass Lewis expects that companies will formally designate and codify oversight of these issues in the charters or governing instruments of the board committees charged with overseeing such issues. The firm indicates that it will examine a company’s board committee charters and governing instruments to evaluate whether “the company has codified a meaningful level of oversight of and accountability for a company’s material environmental and social impacts.”
• Board Accountability for Climate-Related Issues: Glass Lewis has updated its guidance regarding board accountability for climate-related issues, including the application of such guidance. During 2023, this guidance applied to companies with the largest and most significant greenhouse gas (GHG) emissions. During 2024, Glass Lewis is extending application of the guidance to companies in the S&P 500 index “operating in industries where the Sustainability Accounting Standards Board (SASB) has determined that the companies’ GHG emissions represent a financially material risk.” In addition, the guidance also will apply to companies where “emissions or climate impacts, or stakeholder scrutiny thereof, represent an outsized, financially material risk.” Glass Lewis indicates that it also will assess whether (a) disclosures made by these companies align with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD)² and (b) companies have made clearly defined disclosures regarding board-level oversight of climate-related issues. If Glass Lewis determines that such disclosures are absent or significantly inadequate, then it may consider recommending voting against relevant directors.
• Clawback Provisions: Glass Lewis’s updated guidance on clawback policies appears to be more fulsome than the requirements recently adopted by the New York Stock Exchange (NYSE) and Nasdaq. Specifically, in addition to satisfying applicable listing requirements, Glass Lewis believes that effective clawback policies should enable companies to recoup incentive-based compensation when evidence exists regarding “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 been reflected in incentive payments or where recovery is warranted.” This recoupment authority should be authorized irrespective of whether an executive officer was terminated with or without cause. If a company determines not to exercise its ability to recoup any such compensation, then it should disclose the rationale for any such determination, as well as alternative remedies it may have adopted in lieu thereof (e.g., exercising negative discretion on future compensation payments).
• Executive Ownership Guidelines: Companies should, in Glass Lewis’s opinion, ensure that the interests of executive leadership align with the long-term interests of shareholders by adopting and enforcing minimum share ownership rules for such officers. The firm has, accordingly, updated its guidance regarding executive stock ownership. The Compensation Discussion and Analysis (CD&A) section of a company’s proxy statement should include clear disclosures regarding a company’s executive stock ownership requirements, including how different types of equity awards are treated when determining whether an executive’s stock ownership levels satisfy applicable requirements. In addition, Glass Lewis believes that when determining such ownership levels, “counting unearned performance-based full value awards and/or unexercised stock options is inappropriate.” If a company includes these awards when calculating ownership levels, then the CD&A disclosures also should include a fulsome account regarding the rationale for doing so.
• Proposals for Equity Awards for Shareholders: When a shareholder proposal seeks approval for an individual equity award, Glass Lewis will view favorably provisions requiring a non-vote or abstention by a shareholder if such shareholder will be the recipient of the equity award in question. Those types of provisions address potential conflicts of interest issues and also provide “disinterested shareholders with more meaningful say over the proposal.” In these situations, Glass Lewis seems particularly concerned with curbing the ability of a shareholder to materially influence a vote when the shareholder in question will be the recipient of the equity award.
• Net Operating Loss (NOL) Pills: Glass Lewis notes that NOL poison pills, and in particular “acting in concert”³ provisions, have the potential to “disempower shareholders and insulate the board and management.” Relatedly, Glass Lewis believes that such provisions raise a question as to the actual intent of the pill. On that basis, when considering a management proposal to add an NOL pill to a charter, Glass Lewis will now view negatively whether the proposed pill includes an acting in concert provision and whether the pill is triggered or implemented upon the filing of a Schedule 13D by a shareholder or whether there is other evidence of shareholder hostility or activism in relation to the pill.
• Control Share Statutes: Certain states, including Delaware, have adopted so-called “control share acquisition statutes” as an anti-takeover defense for certain companies, including closed-end investment companies. These statutes can operate to prevent changes in control by placing voting limits on the voting rights of a person who acquires ownership of “control shares.”⁴Glass Lewis believes that control share statutes “disenfranchise shareholders by reducing their voting power to a level less than their economic interest and effectively function as an anti-takeover device.” On that basis, the firm will generally recommend voting (a) against charter amendment proposals that seek to add control share provisions and (b) for proposals to opt out of these statutes unless doing so would facilitate the consummation of a takeover that is not in the best interests of shareholders. Underlying the Glass Lewis position is a belief that all shareholders should have an opportunity to vote all of their shares and that anti-takeover measures can preclude shareholders from receiving a buy-out premium for their stock in applicable circumstances. Additionally, when a closed-end fund received a buyout offer from a public suitor and relied on a control share statute as a defense during the immediately prior year, then Glass Lewis will generally recommend voting against the chair of the nominating and governance committee, subject to there being a “compelling rationale” as to why the proposed acquisition was not in the best interests of shareholders.

In addition to the foregoing, Glass Lewis issued a series of clarifications for existing policies for 2024, including the following:

• Board Responsiveness: When determining whether a shareholder proposal has received significant opposition relative to management’s recommendation, Glass Lewis has clarified that the 20% opposition threshold equates to 20% or more of votes that are cast either as “against” and/or “abstain.” Glass Lewis similarly modified its guidance on “Company Responsiveness for Say-on-Pay Opposition” in terms of determining which votes (i.e., “against” or “abstain”) count toward the 20% threshold.
• Interlocking Directorships: When evaluating interlocking directorships, Glass Lewis has clarified that it evaluates interlocking relationships on a case-by-case basis, citing as examples interlocks with close family members of executives or within group companies.
• Board Gender Diversity: When making voting recommendations implicating board diversity issues, Glass Lewis has clarified that it carefully reviews company disclosures regarding gender diversity considerations and may not recommend voting against certain directors when a board has disclosed an adequate rationale or a plan to address the lack of gender diversity on the board. Such disclosures should include a timeline (e.g., by the next annual meeting or as soon as reasonably practicable) for the appointment of additional gender diverse directors.
• Underrepresented Community Diversity: When making voting recommendations implicating underrepresented community diversity issues, Glass Lewis has clarified that it carefully reviews company disclosures regarding these diversity considerations and may not recommend voting against certain directors when a board has disclosed an adequate rationale or a plan to address the lack of diversity on the board. Such disclosures should include a timeline (e.g., by the next annual meeting or as soon as reasonably practicable) for the appointment of additional diverse directors. In addition, Glass Lewis has replaced its reference to individuals who self-identify as gay, lesbian, bisexual or transgender with an individual who self-identifies as a member of the LGBTQIA+ community.
• Non-GAAP to GAAP Reconciliation Disclosure: If a company uses non-Generally Accepted Accounting Principles (GAAP) metrics in incentive compensation programs, then Glass Lewis believes clear reconciliations to GAAP results should be provided. If significant adjustments were applied to performance results when calculating incentive payouts, the proxy statement should include a thorough, detailed discussion of such adjustments so that shareholders can reconcile the difference between the non-GAAP result used to determine the incentive payout in relation to the reported GAAP results. Glass Lewis states that failing to provide shareholders with this disclosure will impact its assessment of executive pay disclosures and may be a factor when making recommendations on say-on-pay.
• Pay-Versus-Performance Disclosure: Glass Lewis may use pay-versus-performance disclosures mandated by the SEC as part of its supplemental quantitative assessments supporting its primary pay-for-performance grade. Glass Lewis indicates that the “compensation actually paid” data presented disclosures, as well as other factors (both quantitative and qualitative), may result in Glass Lewis recommending a vote in favor of a say-on-pay proposal, even if the firm has identified a disconnect between pay and performance from its proprietary pay-for-performance model.

APPENDIX A – UPDATED FAQs PUBLISHED BY ISS

As indicated, ISS has released updated FAQs that should be consulted in relation to the specific topics covered therein. The updated FAQs are excerpted below.

• Compensation Policies: An updated version of its “United States - Compensation Policies - Frequently Asked Questions” was released in December 2023 and may be found here. The following specific FAQs have been updated:
  • Question 17: Will any of the pay-for-performance quantitative screens change for 2024?⁵
  • Question 34: When will ISS consider company actions taken in response to ISS’s identification of pay-related concerns?
  • Question 41: How does ISS evaluate disclosure of adjustments to metric results, including non-GAAP metrics in incentive pay programs?
  • Question 51: How does ISS distinguish between problematic CIC severance arrangements and incentive awards that are payable upon a CIC transaction?
• Procedures & Policies (Non-Compensation): An updated version of the “United States - Procedures & Policies (Non-Compensation) - Frequently Asked Questions” was released in July 2023 and may be found here. It includes updates to the following questions:
  • Question 15: Who are considered “Strategic Shareholders” in the Ownership & Control Overview and in the Detailed Ownership Profile?
  • Question 24: Why are many smaller companies adopting special supervoting shares?
  • Question 53: Will ISS take into consideration a director’s transitioning on or off a board?
  • Question 77: What is a deadhand or slowhand provision, and which companies’ poison pills have them?
  • Question 78: Does having classes of stock with different voting rights impact companies’ inclusion in market indices?
  • Question 81: Removal of Shareholder Discretion on Classified Boards - which companies are impacted?
  • Question 92: An executive has hedged company stock. How does ISS view such a practice?
• Equity Compensation Plans: An updated version of its “United States - Equity Compensation Plans - Frequently Asked Questions” was released in December 2023 and may be found here. The following specific FAQs have been updated:
  • Question 30: What changes were made to the EPSC⁶ framework for 2024?
  • Question 32: How do the EPSC models differ?
  • Appendix: 2024 Value-Adjusted Burn Rate Benchmarks
• Cross-Market Policies:⁷ An updated version of its “United States - Cross-Market Policies - Frequently Asked Questions” was released in December 2023 and may be found here. The following specific FAQs have been updated:
  • Question 21: If the focus of a foreign proposal is limited to non-executive director pay, will ISS align the foreign proposal’s vote recommendation to the MSOP recommendation/pay-for-performance evaluation?
  • Question 27: How will ISS evaluate compensation proposals for companies that recently transitioned from FPI to U.S. Domestic issuer status?

^{1 Because ISS and Glass Lewis have adopted relatively light changes to their respective proxy voting guidelines for 2024, our summary of their 2023 Proxy Voting Guidelines may be helpful and can be found here.}

^{2 In July 2023, the Financial Stability Board (FSB) announced that the work of the TCFD “has been completed” and asked the IFRS Foundation to assume responsibility for monitoring progress on companies’ climate-related disclosures from the TCFD. Contemporaneously with that announcement, the International Sustainability Standards Board (ISSB), which was formed by the IFRS Foundation in November 2021, published its inaugural ISSB Standards – IFRS S1 and IFRS S2 – which “fully incorporate the recommendations of the TCFD” and represent the “culmination of the work of the TCFD.” These standards are intended to “provide for a global baseline of sustainability-related disclosures worldwide, including capacity building and monitoring progress towards the broad use of high-quality disclosures.” The announcement states that companies can continue to use TCFD recommendations if they choose or are required to do so and that the TCFD’s recommendations provide a good baseline for companies as they transition to the ISSB Standards. A comparison of the IFRS S2 and TCFD standards may be found here.}

^{3 “Acting in concert” provisions in an NOL pill “broaden the definition of beneficial ownership to prohibit parallel conduct, or multiple shareholders party to a formal or informal agreement collaborating to influence the board and management of a company, and aggregate the ownership of such shareholders towards the triggering threshold.”}

^{4 For these purposes, “‘control shares’ are shares of stock equal to or exceeding specified percentages of company voting power, and a control share statute prevents shares in excess of the specified percentage from being voted, unless: (i) the board approves them to be voted; or (ii) the holder of the ‘control shares’ receives approval from a supermajority of ‘non-interested’ shareholders.”}

^{5 In relation to this specific FAQ and the quantitative screens it uses, ISS refers readers to its “Pay-for-Performance Mechanics” white paper, which may be found here.}

^{6 “EPSC” means “Equity Plan Scorecard”.}

^{7 ISS’s “Cross-Market Policies” FAQ provides information regarding “ISS’ application of cross-market policies and approach to analyzing cross-market companies” (i.e., companies that are listed in the United States, but incorporated and/or listed in another jurisdiction). ISS notes that applying its guidelines in these scenarios involves “difficult policy questions” and additional layers of “complexity and challenges for shareholders to determine the market perspective to be used in their voting decisions.” ISS acknowledges that these scenarios are frequently fact-specific and require the firm to balance various factors including consistency in application and transparency for stakeholders.}