Institutional Shareholder Services (ISS) and Glass Lewis recently released their 2023 policy updates; ISS published its compensation and equity plan FAQs for 2023 as well. The ISS update documents and FAQs and the Glass Lewis updates are available here and here, respectively.
In this alert, we spotlight nine of the most high-impact ISS and Glass Lewis 2023 policy updates affecting U.S. company boards of directors, executives and shareholders.
ISS Updates
Severance Payments and Voluntary Departures
The Update: ISS will more uniformly recommend that shareholders vote against companies that provide severance payments to departing executives when the termination is not clearly disclosed as involuntary, e.g., a termination without cause or resignation for good reason.
What You Need to Know: This update codifies ISS’ existing practice; however, its express inclusion in ISS’ policy for 2023 may lead to more negative recommendations on this basis. Companies should consider framing departures to suggest some active role of the board in the departure or at least be mindful of the potential consequences of providing severance arrangements when disclosing an executive’s departure as a voluntary resignation or retirement.
New Hires and Transition Payments
The Update: ISS announced in its 2023 compensation FAQs that it will scrutinize inducement compensation and make-whole grants unless the company provides adequate disclosure of the magnitude and structure of the award.
What You Need to Know: ISS has long scrutinized new-hire compensation arrangements; up to now, a company could generally satisfy ISS if it included a statement in its proxy that a new hire’s elevated compensation was largely due to a performance-based inducement award or a make-whole award designed to offset forfeited equity or pension values. This update indicates that ISS wants to see more detailed disclosure of these awards in order to mitigate concerns about pay magnitude.
Value-Adjusted Burn Rate
The Update: As it announced last year, ISS will begin using Value-Adjusted Burn Rate in its equity plan evaluations in 2023.
What You Need to Know: In the simplest terms, ISS is inverting its burn rate calculation, replacing its full-value award multiplier with an option divisor to reflect the difference in value between types of equity awards. ISS will value full-value awards using a company’s trailing stock price and will value options and stock appreciation rights (SARs) using a Black-Scholes calculation. As a result, ISS’ burn rates and benchmarks will be substantially lower for all companies.
Equity Plan Scoring Thresholds
The Update: ISS announced in its FAQs that it’s increasing the scores required to pass its Equity Plan Scorecard and receive favorable votes on equity plan proposals. The passing score thresholds — out of 100 — will now be: 59 for S&P 500 companies, 57 for Russell 3000 companies and 55 for other U.S. companies.
What You Need to Know: With these updates, ISS will likely recommend against a slightly higher number of equity plan proposals. As a result, ISS will fall further out of alignment with shareholder voting patterns. In 2022, ISS recommended against 43 percent of equity plan proposals largely due to a company failing the Equity Plan Scorecard; meanwhile, shareholders have voted down only 1 percent of equity plan proposals this year.
Unequal Voting Rights
The Updates: All companies with multiple classes of common stock with unequal voting rights are now subject to negative director recommendations from ISS regardless of when they went public. ISS has also instituted a 5 percent de minimis exception to the unequal voting rights policy for superior-voting shares, but it may only target certain directors instead of the full board.
What You Need to Know: This is a sizable expansion of ISS’ policy. The Council of Institutional Investors tracks dual-class companies, and there are 183 dual-class companies that went public before 2015 when ISS’ original policy went into effect — more than the 170 that went public from 2015 through 2021.
Officer Exculpation
The Update: ISS will recommend director and officer indemnification, liability protection and exculpation proposals on a case-by-case basis and will consider the company’s disclosed rationale for such change.
What You Need to Know: Following amendments to the Delaware General Corporation Law in August 2022 to permit companies to limit or eliminate personal liability of officers for breaches of the fiduciary duty of care, eight companies have placed exculpation proposals on the shareholder ballot for their 2022 meetings. The proxy advisory firms have generally supported these proposals; each firm has only opposed one, ISS at Sinclair Broadcast Group and Glass Lewis at Guidewire Software. A solid rationale detailing the need for an exculpation provision is fundamental to garner proxy advisor support.
Glass Lewis Updates
Board Diversity
- At Russell 3000 companies, Glass Lewis will generally recommend against the nominating committee chair of a board that is not at least 30 percent gender-diverse.
- At Russell 1000 companies, Glass Lewis will generally recommend against the nominating committee chair if the board does not have at least one director from an underrepresented community or the company does not provide disclosure of board demographics and skills.
What You Need to Know: Glass Lewis will rely solely on self-identified demographic information as disclosed in company proxy statements. It defines underrepresented community as Black, African American, North African, Middle Eastern, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaskan Native or who self-identifies as gay, lesbian, bisexual or transgender. Glass Lewis may refrain from recommending that shareholders vote against directors when boards have provided a sufficient rationale or plan to address the lack of diversity on the board, including a timeline to appoint additional directors from an underrepresented community, i.e., generally by the next annual meeting.
Shareholder Proponent Disclosure
The Update: Glass Lewis will now generally recommend voting against the chair of the governance committee if a company does not identify the lead proponent of a shareholder proposal. Further, disclosure of the proponents’ ownership levels and engagement will help Glass Lewis assess the company’s responsiveness.
What You Need to Know: Companies are voluntarily disclosing shareholder proponents more often than they did a few years ago. In 2022, the proponent was undisclosed in 5.7 percent of voted shareholder proposals, down from 6.5 percent in 2017.
Long-Term Incentives
The Update: Glass Lewis will raise concerns in its analysis of executive pay programs that provide less than half of an executive’s long term incentive awards that are subject to performance-based vesting conditions.
What You Need to Know: Smaller companies will be impacted the most by this update. Glass Lewis does not consider plain-vanilla options to be performance-based. Glass Lewis had previously considered 33 percent to be an acceptable proportion of performance-based long-term incentives. It may refrain from giving a negative director recommendation in the absence of other significant issues with the program’s design or operation, but reducing the portion of long-term incentives that is performance-based may lead to a negative recommendation.
Other Notable Updates
We have addressed a few of the most notable updates from ISS and Glass Lewis.
ISS has additional updates relating to its pay-for-performance quantitative screening, board gender diversity at non-Russell 3000 companies, climate accountability at Climate Action 100+ companies, quorum requirements racial equity audits, fee-shifting provisions, shareholder proposals on environmental, social and governance (ESG) metrics in compensation programs, racial equity audits and political activities.
Glass Lewis has further updates on board oversight of ESG and cybersecurity issues, overboarding by executive chairmen and shareholder proposals on racial equity audits.
Next Steps
For questions about these updates, ESG ratings, developments in best practices and market norms, or for any other inquiries, including support in modeling the impact of these updates in advance of 2023 shareholder meetings, please contact the authors or write to [email protected].
Learn more about Aon’s Digital Business Insights (DBI) platform and how it can help your business navigate the topics contained within this alert by reaching out to Laura Davidson or Shana Gotlieb.