iss and glass lewis release policy updates for the 2016 ... · preparing for the 2016 proxy season...

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December 1, 2015

SIDLEY UPDATE

ISS and Glass Lewis Release Policy Updates for the 2016 Proxy Season

Key Dates

November 23, 2015 ISS QuickScore 3.0 reports and data verification now available

Until December 11, 2015

Companies with annual meetings scheduled to be held between February 1, 2016 and September 15, 2016 may notify ISS of any changes to their self-selected peer companies for purposes of benchmarking CEO compensation in 2015

Mid-December 2015 Anticipated release of ISS proxy voting policy FAQs and full set of ISS proxy voting summary guidelines

January 31, 2016 Deadline for S&P 500 companies holding meetings between March 1 and June 30, 2016 to elect to receive draft proxy voting reports by registering contact details with ISS (annual registration encouraged by ISS)

Institutional Shareholder Services (ISS) and Glass Lewis have each released updates to their proxy voting policies for the 2016 proxy season.1 The policy updates will apply to shareholder meetings held on or after February 1, 2016 (ISS) or January 1, 2016 (Glass Lewis). This Sidley Update summarizes the policy updates applicable to U.S. companies and discusses their practical implications. It also provides guidance about preparing for the 2016 proxy season in light of ISS and Glass Lewis deadlines and developments. The Appendix highlights the various circumstances in which ISS and Glass Lewis may recommend votes against a director in an uncontested election held during the 2016 proxy season.

Topics Key Policy Updates for 2016

ISS and Glass Lewis

Overboarded Directors

ISS:

Non-CEO Directors – Issue negative vote recommendations against individual directors who sit on more than five (down from six) public company boards; serving on more than five boards will be noted as a concern in 2016 but will not lead to adverse vote recommendations until 2017

CEO Directors – No change to current policy; continue to issue negative vote recommendations against individual directors who are public company CEOs who sit on more than two public company boards besides their own (adverse vote recommendations apply only at outside boards)

SIDLEY UPDATE

Glass Lewis:

Non-Executive Officer Directors – Recommend votes against individual directors who sit on more than five (down from six) public company boards

Executive Officer Directors – Recommend votes against individual directors who are executive officers of public companies who sit on more than two (down from three) public company boards (adverse vote recommendations apply only at outside boards)

Overboarding under the revised Glass Lewis policies will be noted as a concern in 2016 but will not lead to adverse vote recommendations until 2017

ISS

Unilateral Bylaw/Charter Amendments Adversely Impacting Shareholders

Generally issue negative vote recommendations against individual directors, committee members or the entire board if the board unilaterally amends the company’s bylaws or charter in a way that adversely impacts shareholders, considering specified factors

• ISS will recommend case-by-case on director nominees at subsequent annual meetings following the amendment until the adverse provision is reversed or ratified by shareholders; ISS generally will recommend votes against director nominees in subsequent years if the unilateral amendment classified the board, established supermajority vote requirements to amend the bylaws or charter or eliminated the shareholders’ right to amend the bylaws

For newly public companies – Generally issue negative vote recommendations against individual directors, committee members or the entire board if the company or board adopts bylaw or charter provisions adverse to shareholders’ rights prior to or in connection with the IPO, considering specified factors

• Mitigating factors include (i) rationale, (ii) the ability of shareholders to change the governance structure in the future, (iii) whether the company has a declassified board and (iv) whether the company has publicly committed to put the provision to a shareholder vote within three years of the IPO

• ISS will recommend case-by-case on director nominees post-IPO until the provision is reversed or ratified by shareholders

Proxy Access Nominations

Generally will continue to evaluate proxy access nominees on a case-by-case basis using the same criteria used to evaluate director nominees in contested elections

Under its revised policy, ISS may consider additional relevant factors with respect to proxy access nominees, including “those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether or not there are more candidates than board seats)”

Executive Compensation at Externally Managed Issuers (EMIs)

Added “Insufficient Executive Compensation Disclosure by Externally Managed Issuers (EMIs)” to the list of “problematic pay practices” that generally will result in an adverse vote recommendation on the say-on-pay proposal

• Refers to an EMI’s failure to provide sufficient disclosure to enable shareholders to reasonably assess the EMI’s executive compensation programs and practices

SIDLEY UPDATE

Shareholder Proposals Relating to Executive Equity Retention

Expanded its policy with respect to shareholder proposals asking companies to adopt executive equity retention policies to apply more generally, thereby eliminating the need for the previous separate policy addressing proposals requesting 75% net share retention

When analyzing executive equity retention proposals on a case-by-case basis, ISS clarified that it will strongly consider retention ratio and holding period duration among other specified factors

Shareholder Proposals Relating to Environmental and Social Issues

ISS updated its policies with respect to shareholder proposals relating to:

• Animal welfare

• Pharmaceutical pricing, access to medicines and prescription drug reimportation

• Climate change/greenhouse gas emissions

Glass Lewis

Conflicting Management and Shareholder Proposals

Will consider the following factors when making vote recommendations with respect to conflicting management and shareholder proposals:

• Nature of the underlying issue

• Benefit to shareholders from implementation of the proposal

• Materiality of the differences between the terms of the proposals

• Appropriateness of the provisions given the company’s shareholder base, corporate structure and other relevant circumstances

• The company’s overall governance profile, including its responsiveness to previous shareholder proposals and adoption of progressive shareholder rights provisions

Exclusive Forum Provisions

Pre-IPO Adoptions – Will no longer recommend votes against the governance committee chair if a company adopts an exclusive forum provision in its charter or bylaws in connection with an IPO; will weigh such provision along with other governance practices that unduly limit shareholder rights according to Glass Lewis including supermajority vote requirements, a classified board or a fee-shifting bylaw

Will continue to recommend votes against the governance committee chair if a company adopts an exclusive forum provision in the past year without shareholder approval other than in connection with an IPO, spin-off or merger

Nominating Committee Role in Board Composition

New policy – Glass Lewis may consider recommending votes against the nominating committee chair where the board’s failure to ensure that the board consists of directors with relevant experience has contributed to a company’s poor performance

Environmental and Social Risk Oversight

New policy – Glass Lewis will recommend votes against directors responsible for risk oversight if the board or management has failed to sufficiently identify and manage a material environmental or social risk that did or could negatively affect shareholder value

Compensation Updates

Highlighted certain factors it will consider when analyzing one-time and transitional awards and noted that sign-on arrangements and make-whole payments should be clearly disclosed

Added minor clarifications to the factors it will consider when analyzing the qualitative aspects of equity compensation plans and noted that significant changes in plan terms should be clearly disclosed

SIDLEY UPDATE


Glass Lewis will now analyze shareholder proposals seeking reports on greenhouse gas emissions and adoption of a reduction goal on a case-by-case basis considering specified factors, including (i) the company’s industry, (ii) material fines, lawsuits or reputational damage related to environmental issues at the company, and (iii) whether the company’s peers disclose their greenhouse gas emissions and reduction goals

Glass Lewis also updated its policies with respect to shareholder proposals relating to:

• Equal employment opportunity policies

• Holy Land Principles

• Pharmaceutical pricing

ISS Policy Updates


ISS considers a director who sits on what ISS considers to be an excessive number of public company boards to be “overboarded,” and that such directors may be unable to devote sufficient time and energy to board responsibilities in order to be effective representatives of shareholders’ interests.2

ISS’ current policy is to issue negative vote recommendations against directors who are not CEOs of public companies who sit on more than six public company boards. For the 2017 proxy season, ISS will issue negative vote recommendations against directors who are not CEOs of public companies who sit on more than five public company boards.

ISS has implemented a one-year transition period during which time ISS will include cautionary language in its proxy advisory research reports if a non-CEO director is serving on more than five public company boards, but will not issue an adverse vote recommendation solely because a director would be considered overboarded under the revised policy (but not under the current policy).

ISS has not revised its director overboarding policy with respect to directors who are sitting public company CEOs. ISS will continue to issue negative vote recommendations against such directors who sit on the boards of more than two public company boards besides their own.3 The adverse vote recommendations will continue to apply only at the CEO’s outside boards.

Practical Implications

According to ISS, under its previous policy, between July 1, 2014 and June 30, 2015, approximately 21 non-CEO directors were considered overboarded. Under the revised policy, ISS anticipates that 61 non-CEO directors would be considered overboarded.4 The one-year transition period should provide an opportunity for directors to reevaluate and potentially reduce their board commitments in order to avoid an adverse vote recommendation from ISS and give companies an opportunity to engage with shareholders and craft appropriate disclosure around why a particular director should continue to serve on the board notwithstanding a negative recommendation.

SIDLEY UPDATE

Unilateral Bylaw/Charter Amendments Adversely Impacting Shareholders

For 2016, ISS has updated its policy with respect to bylaw and charter amendments made by the board without shareholder approval that materially diminish shareholders’ rights or that could adversely impact shareholders. Under the revised policy, ISS will evaluate such unilateral amendments differently based on whether they were made before or after the company completed its initial public offering.

If a company or its board adopt provisions in the company’s bylaws or charter that are adverse to shareholders’ rights prior to or in connection with the company’s IPO, ISS will generally issue adverse vote recommendations for individual directors, committee members or the entire board (except new nominees, who will be considered on a case-by-case basis), considering the following factors:

• The level of impairment of shareholders’ rights caused by the provision;

• The rationale for adopting the provision;

• The provision’s impact on the ability to change the governance structure in the future (e.g., supermajority vote requirements);

• Whether the company has a declassified board; and

• Whether the company has made a public commitment to put the provision to a shareholder vote within three years of the date of the IPO.

ISS will recommend case-by-case on director nominees at annual meetings following completion of the IPO until the adverse provision is either reversed or is ratified by shareholders.

For non-IPO companies, if a board unilaterally amends the company’s bylaws or charter in a manner that materially diminishes shareholders’ rights or that could otherwise adversely impact shareholders, ISS will generally issue adverse vote recommendations against individual directors, committee members or the entire board (except new nominees, who will be considered on a case-by-case basis), considering the following factors, which are the same as under the current policy:

• The rationale for adopting the amendment without shareholder ratification;

• The company’s disclosure of any significant engagement with shareholders regarding the amendment;

• The level of impairment of shareholders’ rights caused by the amendment;

• The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;

• The company’s ownership structure;

• The company’s existing governance provisions;

• The timing of the amendment in connection with a significant business development; and

• Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.

SIDLEY UPDATE

The revised policy provides that ISS will recommend case-by-case on director nominees at subsequent annual meetings until the adverse amendment is either reversed or is ratified by a shareholder vote, and that ISS will generally recommend against director nominees (except new nominees, who will be considered on a case-by-case basis), if the board’s unilateral action:

• Classified the board;

• Adopted supermajority vote requirements to amend the bylaws or charter; or

• Eliminated shareholders’ ability to amend the bylaws.


The revised policy provides guidance to pre-IPO boards as to the vote recommendations the directors can expect from ISS at the first post-IPO annual meeting and subsequent annual meetings. While IPO companies should continue to adopt governance structures that are appropriately tailored for each company and its best interests, pre-IPO boards should be aware of the governance practices that ISS will likely take issue with and potential mitigating factors. The revised policy applies to “newly public companies” and, therefore, would presumably also be relevant in the context of a spin-off.

A company may wish to seek shareholder approval if the board plans to amend its bylaws or charter to classify the board and/or adopt supermajority vote requirements–bearing in mind that ISS is likely to recommend against such proposals–in light of adverse vote recommendations potentially following director nominees for years after a unilateral amendment.

Proxy Access Nominations

ISS has revised its policy to clarify how it will evaluate proxy access nominees. In general, ISS will evaluate proxy access nominees on a case-by-case basis using the same analytical framework and criteria that it uses to evaluate director nominees in proxy contests, namely:

• Long-term financial performance of the target company relative to its industry;

• Management’s track record;

• Background to the contested election;

• Nominee qualifications and any compensatory arrangements;

• Strategic plan of dissident slate and quality of critique against management;

• Likelihood that the proposed goals and objectives can be achieved (both slates); and

• Stock ownership positions.

Under its revised policy, ISS may consider additional relevant factors when evaluating proxy access nominees, including “those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether or not there are more candidates than board seats).”

SIDLEY UPDATE


We do not expect this policy update to have any practical effect for the 2016 proxy season because, as noted by ISS, it is unlikely that there will be many (or perhaps any) proxy access nominees in 2016.

Policies Relating to Other Survey Topics Unchanged – At Least For Now

ISS’ annual policy survey5 launched in August 2015 addressed the impact of a board’s adoption of a proxy access provision that contains material restrictions not included in a majority-approved shareholder proxy access proposal. In particular, survey respondents were asked what types of restrictions should be viewed as sufficiently problematic to potentially warrant adverse vote recommendations against directors. For details on the survey results, see our Sidley Update last published on November 4, 2015. ISS has stated that it will release FAQs in mid-December 2015 that will provide details on which proxy access provisions ISS considers overly restrictive.

The following other topics were addressed with respect to U.S. companies in the annual policy survey, but ISS did not solicit comment on draft policy updates relating to them or address them in its 2016 updates:

• Net operating loss poison pills

• Equity compensation of non-employee directors

• Use of adjusted metrics such as non-GAAP measures in incentive programs

• Independence cooling-off period for former executives and professional service providers

• Controlled companies

• Use of financial metrics and financial ratios to assess capital allocation decisions, share buybacks and board stewardship

Finally, ISS did not change its policy on director tenure in the 2016 updates. That topic was discussed in ISS’ long-term benchmark consultation launched in February 2014 and is a factor considered by ISS when calculating a company’s QuickScore governance rating. It remains a subject that may be addressed in a future proxy voting policy change.

Executive Compensation at Externally Managed Issuers

Externally managed issuers (EMIs) are required to hold periodic, advisory say-on-pay votes like other public companies. In the typical EMI structure, executives are compensated by the external manager, not the EMI, and the external manager is reimbursed by the EMI through a management fee. ISS has expressed concern that this structure leads to a lack of transparency surrounding how executives at EMIs are compensated. ISS has identified approximately 60 EMIs in the United States (typically, but not always REITs) and claims that most currently provide limited or no disclosure on executive compensation arrangements with the external manager.6 By adopting a new policy on the subject, ISS hopes to align executive compensation with shareholder interests and also provide shareholders sufficient information to make an informed vote on say-on-pay proposals at EMIs.

http://www.sidley.com/~/media/update-pdfs/is-proxy-access-inevitable.pdf

SIDLEY UPDATE

In its policy updates, ISS has added “Insufficient Executive Compensation Disclosure by Externally Managed Issuers (EMIs)” to its list of “problematic pay practices” that generally will result in adverse vote recommendations on say-on-pay proposals. Accordingly, ISS will recommend against a say-on-pay proposal in cases where the EMI has failed to provide sufficient disclosure to enable shareholders to make a reasonable assessment of compensation arrangements for the EMI’s named executive officers. As with other problematic pay practices, if there is no say-on-pay proposal on the ballot, ISS will issue an adverse vote recommendation with respect to the compensation committee members, the compensation committee chair, or the entire board, as appropriate.


EMIs should consider providing additional disclosure of compensation arrangements between their executives and the external manager to enable ISS to perform its pay-for-performance analysis, and avoid a negative recommendation against say-on-pay proposals.

Shareholder Proposals Relating to Executive Equity Retention

ISS streamlined its policy with respect to shareholder proposals asking companies to adopt policies requiring senior executive officers to retain a portion of their net shares acquired through compensation plans. In particular, ISS clarified that the retention ratio is a factor to be considered every time it analyzes an executive equity retention proposal, thereby eliminating the need for a separate policy that previously addressed certain proposals seeking a policy requiring retention of 75% of net shares.

Under the revised policy, ISS will take the following factors into account when analyzing executive equity retention proposals on a case-by-case basis:

• The percentage/ratio of net shares required to be retained;

• The time period required to retain the shares;

• Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness of such requirements;

• Whether the company has any other polices aimed at mitigating risk taking by executives;

• Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding period/retention ratio or the company’s existing requirements; and

• Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus.


While the revised policy is easier to understand than the previous version, we do not expect it to have a substantive impact on ISS vote recommendations with respect to shareholder proposals relating to executive equity retention.

SIDLEY UPDATE


Animal Welfare

Under its previous policy, ISS generally would recommend in favor of shareholder proposals seeking a report on the company’s animal welfare standards, taking into account specified factors. ISS expanded its policy to also cover shareholder proposals seeking a report on a company’s animal welfare-related risks. When evaluating animal welfare shareholder proposals, ISS added controversies (in addition to fines and litigation) related to the company’s treatment of animals to the list of factors it will consider, and made clear that it will examine whether there are any recent significant fines, litigation or controversies related to the company’s suppliers.

Pharmaceutical Pricing, Access to Medicines and Prescription Drug Reimportation

ISS added two factors that it will consider in its case-by-case analysis of shareholder proposals requesting that a company report on its product pricing or access to medicine policies: (i) the potential for regulatory risk exposure and (ii) recent significant controversies, litigation or fines at the company. ISS indicated that the purpose of these additions is to codify ISS’ current practice.

Climate Change/Greenhouse Gas Emissions

Under its previous policy, ISS generally would recommend in favor of shareholder proposals requesting that a company disclose information on the impact of climate change on its operations and investments, considering specified factors. ISS revised this policy to clarify that it will support proposals seeking disclosure of “financial, physical or regulatory risks” related to climate change that could impact a company’s operations and investments.

Updates to ISS’ Equity Plan Scorecard FAQs

On November 20, 2015, ISS released updates to the FAQs on its Equity Plan Scorecard (EPSC) policy for evaluating equity compensation plans, which are effective for shareholder meetings held on or after February 1, 2016:7

• Renamed the “IPO” model “Special Cases” to cover not only IPO companies, but also companies that recently emerged from bankruptcy or any company that discloses less than three years of equity grant data

• Added a new Special Cases model including Grant Practice factors except Burn Rate and Duration that will apply to Russell 3000/S&P 500 companies and identified the maximum pillar scores for that model

• Renamed the “Automatic Single-Trigger Vesting” Plan Features factor “CIC Equity Vesting,” with the following scoring levels:

o Full points if plan provides for: (i) with respect to outstanding time-based awards, either no accelerated vesting or accelerated vesting only if awards are not assumed/converted; and (ii) with respect to performance-based awards, either forfeiture or termination of outstanding awards or vesting based on actual performance as of the change in control (CIC) and/or on a pro-rata basis for time elapsed in ongoing performance period(s)

SIDLEY UPDATE

o No points if plan provides for: automatic accelerated vesting of time-based awards or payout of performance-based awards above target level

o Half points if plan provides for any other vesting terms related to a CIC

• Increased the holding period from 12 months to either 36 months or until employment termination in order to earn full points under the Post-Vesting/Exercise Holding Period Plan Feature; a 12-month holding period will now only accrue half of full points

• Clarified that a burn rate in excess of the benchmark may result in negative points

• Explained that when estimating the potential cost of a plan with “evergreen” funding (i.e., the plan provides for automatic funding additions, typically on an annual basis), ISS will include a projection of the future share additions based on the disclosed formula, which may result in a very high plan cost estimate

• Added an FAQ explaining how ISS will evaluate flexible share plans and fungible share pools

• Adjusted certain factor scores per ISS’ proprietary scoring model. No change has been made to the fundamental scoring approach: 53 out of a maximum 100 total potential points is required to “pass” the EPSC model and receive a favorable recommendation from ISS (absent egregious factors). However, ISS has clarified that in cases where a proposal will not increase plan cost and positive aspects or changes being made outweigh any negative amendments, ISS may support the plan regardless of the EPSC score.

Glass Lewis Policy Updates


Like ISS, Glass Lewis revised its policy on directors who sit on what Glass Lewis considers to be an excessive number of public company boards.

Glass Lewis’ current policy on director overboarding is to recommend votes against individual directors who:

• Serve on a total of more than six public company boards or

• Are executive officers of public companies who serve on a total of more than three public company boards–will recommend votes against only at their outside boards.

Glass Lewis’ updated director overboarding policy is to recommend votes against individual directors who:

• Serve on a total of more than five public company boards or

• Are executive officers of public companies who serve on a total of more than two public company boards–will recommend votes against only at their outside boards.

Like ISS, Glass Lewis has implemented a one-year transition period until 2017, during which time Glass Lewis will note in its reports if a director would be considered overboarded under the updated policy, but will not issue an adverse vote recommendation solely because a director was considered overboarded under the updated policy (but not under the current policy).

SIDLEY UPDATE


As discussed above with respect to ISS’ updated policy on director overboarding, this policy update could impact a significant number of directors. During the one-year transition period, directors should reevaluate their directorships and determine whether to step down from any boards in order to avoid negative recommendations. If any directors will potentially trigger the revised policy, companies should engage with shareholders on this topic and consider how best to disclose why a particular director should continue to serve on the board notwithstanding a negative recommendation.

Conflicting Management and Shareholder Proposals

Glass Lewis announced a new policy identifying the factors it will consider when making vote recommendations with respect to conflicting management and shareholder proposals, including:

• The nature of the underlying issue;

• The benefit to shareholders from implementation of the proposal;

• The materiality of the differences between the terms of the conflicting proposals;

• The appropriateness of the provisions in the context of a company’s shareholder base, corporate structure and other relevant circumstances; and

• A company’s overall governance profile and, specifically, its responsiveness to shareholders as evidenced by its response to previous shareholder proposals and its adoption of “progressive shareholder rights provisions,” which Glass Lewis has not defined.


Exchange Act Rule 14a-8(i)(9) permits a company to exclude a shareholder proposal that “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.” As discussed in a previous Sidley Update, the SEC Staff recently issued new guidance on Rule 14a-8(i)(9) that makes clear that a company will generally not be able to exclude a shareholder proposal by putting forth a management proposal on the same topic but with different terms. Accordingly, it is possible that the number of conflicting proposals on annual meeting ballots could increase in the 2016 proxy season.

Exclusive Forum Provisions

Glass Lewis updated its policy with respect to exclusive forum provisions such that it will no longer recommend that shareholders vote against the governance committee chair if a company adopts an exclusive forum provision in its charter or bylaws in connection with an IPO. Under those circumstances, Glass Lewis will weigh the exclusive forum provision in conjunction with other governance practices that Glass Lewis considers unduly limit shareholder rights including supermajority vote requirements, a classified board or a fee-shifting bylaw.

Glass Lewis has not updated its policy of recommending votes against the governance committee chair if a company adopts an exclusive forum provision without shareholder approval in the past year other than in connection with a spin-off, merger or IPO.

http://www.sidley.com/news/10-23-2015-corporate-governance-update

SIDLEY UPDATE


Exclusive forum provisions continue to gain momentum, particularly after amendments to the Delaware General Corporation Law took effect in August 2015 authorizing such provisions. The updated policy with respect to IPO companies may contribute to a further increase in the rate at which IPO companies include exclusive forum provisions in their governance documents. Because Glass Lewis’ policy remains unchanged with respect to non-IPO companies, such companies will still have to consider the risk of an adverse vote recommendation against the governance committee chair at the first annual meeting post-adoption among the various factors to be considered in deciding whether or not to adopt such a provision.

Nominating Committee Role in Board Composition

Glass Lewis has added a new policy whereby it may consider recommending that shareholders vote against the chair of the nominating committee where the board’s failure to ensure that the board consists of directors with relevant experience has contributed to a company’s poor performance. The policy suggests that the board would fulfill this duty “either through periodic director assessment or board refreshment.”


Although it is unclear what circumstances would cause Glass Lewis to enforce this new policy, companies may wish to expand the proxy statement disclosure about their board evaluation processes (and any other board refreshment mechanisms) to demonstrate that the nominating committee regularly assesses the overall skills and experience represented on the board.

Environmental and Social Risk Oversight

Under a newly codified policy, Glass Lewis will recommend that shareholders vote against directors responsible for risk oversight if the board or management has failed to sufficiently identify and manage a material environmental or social risk that did or could negatively affect shareholder value. In making its vote recommendations, Glass Lewis will consider the nature of the risk and its potential impact on shareholder value.

Compensation Updates

In its updated policies, Glass Lewis highlighted some of the specific factors it uses to evaluate one-time and transitional awards, and detailed its expectations regarding the disclosure of such awards. In particular, Glass Lewis expects companies to clearly disclose any sign-on arrangements, including an explanation of the payments and the process for determining their amounts, and the details of and basis for any “make-whole” payments provided to executives in exchange for forfeiting awards from a previous employer. When evaluating the appropriateness of severance or sign-on arrangements, Glass Lewis may consider the executive’s regular target compensation levels or the sums paid to other executives, including the person who previously served in the position.

Glass Lewis also added minor clarifications regarding the quantitative and qualitative factors it uses to analyze equity compensation plans. Specifically, when considering the qualitative aspects of a plan, Glass Lewis:

• Will closely review the choice and use of, and difficulty in meeting, the awards’ performance metrics and targets, if any;

SIDLEY UPDATE

• May take into account a company’s size and operating environment in assessing the severity of concerns or the benefits of certain changes; and

• May consider a company’s executive compensation practices in certain situations, as applicable.

Finally, Glass Lewis noted its expectation that significant changes to the terms of a plan be clearly identified and explained for shareholders.


Greenhouse Gas Emissions

Glass Lewis will analyze shareholder proposals requesting that companies report their greenhouse gas emissions and adopt a reduction goal for such emissions on a case-by-case basis considering the following factors that have been added to its policy for 2016:

• The industry in which the company operates;

• Whether there is a lack of robust risk management of environmental issues as evidenced by material fines, lawsuits or reputational damage; and

• Whether a company’s peers have provided disclosure concerning their greenhouse gas emissions and future reduction goals.

Glass Lewis noted that managing and mitigating carbon emissions is particularly important at companies operating in carbon- or energy-intensive industries, including the following: basic materials, integrated oil and gas, iron and steel, transportation, utilities and construction.

Equal Employment Opportunity Policies

Glass Lewis has adopted a new policy whereby it may recommend supporting reasonable shareholder proposals seeking the establishment of an equal employment opportunity policy, or enhancement of an existing policy, if there is evidence of discriminatory treatment of employees that the company failed to address, which resulted in a decrease in shareholder value.

Holy Land Principles

The Holy Land Principles were established to promote fair employment practices in “the Holy Land” (defined to encompass Israel/Palestine, the West Bank, the Gaza Strip and East Jerusalem) in an effort to address economic disparity between Israelis and Palestinians. In evaluating shareholder proposals requesting adoption of the Holy Land Principles, Glass Lewis has adopted a new policy pursuant to which it will examine the following factors:

• A company’s current equal employment opportunity policy;

• The extent to which the company has been subject to protests, fines or litigation with a material economic impact resulting from discrimination in the workplace; and

• Any evidence of the company’s specific record of labor concerns in the Holy Land.

SIDLEY UPDATE

Pharmaceutical Pricing

Under its current policy, Glass Lewis generally recommends against shareholder proposals requesting that companies adopt policies of price restraint on their branded pharmaceuticals in order to ensure that their drugs are affordable. Under its updated policy, Glass Lewis will consider on a case-by-case basis shareholder proposals requesting increased disclosure of risks associated with drug pricing.

Guidance in Preparing for the 2016 Proxy Season

Companies may wish to review and become familiar with the various circumstances in which ISS and Glass Lewis may recommend a negative vote in uncontested director elections (set forth in the Appendix), or on other proposals that may be included in their proxy statements. Companies may also wish to contact their analysts at ISS shortly after filing the proxy statement to discuss any issues that could potentially trigger an unfavorable vote recommendation.

In addition to the steps discussed above, we recommend that companies:

• Provide updates, if any, to self-selected compensation peer groups

o If the company (i) is in the Russell 3000 or Russell MicroCap Index, (ii) has an annual meeting scheduled to be held between February 1, 2016 and September 15, 2016 and (iii) made changes to its peer group used to set compensation for the fiscal year that will be disclosed in the next proxy statement (i.e., for 2015 compensation decisions), notify ISS of updates to their self-selected peer companies for purposes of CEO compensation benchmarking until December 11, 2015 (8PM EST)

A company’s self-selected compensation peer companies are a key input to ISS’ peer selection process. However, ISS made clear in its Peer Group Selection Methodology FAQs8 that there are instances in which a company’s self-selected peer may not appear in the ISS peer group, such as when it does not meet the applicable size constraints or inclusion would lead to an overrepresentation of a particular industry within the ISS peer group

Companies should take advantage of the opportunity to indicate any changes to their self-selected peer groups since their last proxy disclosure. Companies can submit peer company updates using the online form available here; companies that submit peer company updates must send a confirmation email to [email protected] including an electronic copy of the submitted list in PDF format on company letterhead

ISS will conduct a separate peer submission process in mid-2016 for companies with annual meetings scheduled to be held after September 15, 2016

o For its pay-for-performance analysis, Glass Lewis uses the top 15 peers from a peer group generated by Equilar based on a company’s self-disclosed peer group and the strength of connection between peer companies (i.e., one-way vs. reciprocal connections). Equilar updates its market-based peers twice yearly in January and June. Companies in the Russell 3000 Index

http://www.issgovernance.com/u-s-company-peer-group-feedback

mailto:[email protected]

SIDLEY UPDATE

that plan on filing an updated peer group in their 2016 proxy statements may submit updates to their peer groups on file with Equilar by December 31, 2015 using the form available here

• Verify data used by the proxy advisory firms in developing their reports

o Glass Lewis initiated an Issuer Data Report (IDR) service in 2015 allowing companies to review a an IDR comprising the key data points used by Glass Lewis in developing its report on the company’s annual meeting. IDRs do not contain Glass Lewis’ analysis or voting recommendations. IDRs are distributed by email to participating companies approximately three to four weeks prior to the annual meeting, and they generally have 24-48 hours to review the IDR and suggest corrections. Participation was limited for 2015, but Glass Lewis indicated that it expects to expand IDR availability for 2016. No details have been provided as to which companies may participate for 2016 but, in 2015, the IDR service was only available to U.S. companies listed on the NYSE or NASDAQ with annual meetings between March 1 and June 30, 2015 that requested an IDR by January 31, 2015. For more information, see the “Issuer Data Report” page on Glass Lewis’ website, which includes a link for companies to request an email notification when IDRs are next available

• Carefully review draft “preview” and/or final proxy voting reports relating to the company–with input from outside counsel and compensation consultants, as appropriate–and notify the relevant proxy advisory firm of any errors as soon as possible

o S&P 500 companies that have registered with ISS to receive draft reports have a very narrow time window in which to correct any data errors or to otherwise engage with ISS on any issues; companies that are not in the S&P 500 generally do not receive access to draft reports

S&P 500 companies may participate in the voting recommendation preview process by registering contact details9 with ISS before ISS’ deadline, which is January 31, 2016 for meetings held between March 1 and June 30, 2016; for meetings outside of this timeframe contact information must be provided at least 30 business days prior to the meeting. ISS requests that companies provide this information every year

Draft reports are typically sent approximately 19-28 days prior to the annual meeting but may be as close as 14 days during the height of proxy season

All comments and corrections are due in writing generally within 24-48 hours, or less as specified in the cover letter accompanying the draft report

o Companies may report a data discrepancy in a Glass Lewis report through the “Report a Discrepancy” page on Glass Lewis’ website; because Glass Lewis bases its analysis entirely on publicly available information, a company must precisely identify where within the company’s public disclosure Glass Lewis can find and verify the correct information with which to revise its report

http://insight.equilar.com/app/peer_update/index.jsp

http://www.glasslewis.com/issuer/issuer-data-report/

http://www.glasslewis.com/issuer/issuer-data-report/

http://www.glasslewis.com/issuer/report-discrepancy/

http://www.glasslewis.com/issuer/report-discrepancy/

SIDLEY UPDATE

• Review the composition of the board and the company’s corporate governance and compensation practices for potential vulnerabilities under ISS and Glass Lewis policy updates (for example, in relation to director overboarding) and decide what action, if any, to take in light of this assessment

• Develop outreach tactics to engage with key institutional investors on governance-related matters, especially if the company had a majority-supported shareholder proposal at its last annual meeting that has not been implemented, and/or relatively low support for “say-on-pay” (less than 70% of votes cast)

• Review corporate governance and compensation disclosure included in last year’s proxy statement, and make improvements where appropriate

If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or

Holly J. Gregory Partner [email protected] +1 212 839 5853

John P. Kelsh Partner [email protected] +1 312 853 7097

Thomas J. Kim Partner [email protected] +1 202 736 8615

Rebecca Grapsas Counsel [email protected] +1 212 839 8541

Claire H. Holland Special Counsel [email protected] +1 312 853 7099

Sidley Corporate Governance and Executive Compensation Practice Lawyers in Sidley’s Corporate Governance and Executive Compensation practice regularly advise corporate management, boards of directors and board committees on a wide variety of corporate governance matters, including shareholder activism and engagement, fiduciary duties, board oversight responsibilities, board investigations and special committees, SEC disclosure, legal compliance, corporate responsibility, board evaluation, board and committee structures and issues arising under Sarbanes-Oxley and Dodd-Frank. Our advice relates to the procedural aspects as well as the legal consequences of corporate and securities transactions and other corporate actions, including takeover defenses, proxy contests, SEC filings and disclosure issues, stock option issues and general corporate law matters. Our broad client base allows us to provide advice regarding best practices and trends in such matters as directors’ and officers’ responsibilities, board and committee practices, disclosure controls and procedures, internal controls, executive compensation and other matters.

To receive Sidley Updates, please subscribe at www.sidley.com/subscribe.

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SIDLEY UPDATE

1 ISS, 2016 Americas Proxy Voting Guidelines Updates (Nov. 20, 2015), available here; Glass Lewis, 2016 Proxy Paper Guidelines: United States (Nov. 13, 2015), available here; and Glass Lewis, 2016 Proxy Season Proxy Paper Guidelines: Shareholder Initiatives (Nov. 2015), available here. 2 ISS noted that the Public Company Governance Survey conducted by the National Association of Corporate Directors (NACD) for 2014-2015 revealed that average annual director time commitment has increased by 46 percent in nine years, from 190 hours in 2005 to 278 hours in 2014. Glass Lewis referred to the NACD’s Public Company Governance Survey for 2015-2016 indicating that a director spends approximately 248 hours per year serving on one board. 3 Although all of a CEO’s subsidiary boards will be counted as separate boards, ISS will not recommend a withhold vote from the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent, but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationship. 4 See ISS, 2016 Benchmark Policy Consultation, Proposed Draft Policy Change Relating to Director Overboarding (Oct. 26, 2015), available here. 5 A complete copy of the survey is available here.

6 See ISS, 2016 Benchmark Policy Consultation, Proposed Draft Policy Change Relating to Compensation at Externally-Managed Issuers (Oct. 26, 2015), available here.

7 ISS, 2016 U.S. Equity Plan Scorecard–Frequently Asked Questions (Nov. 20, 2015), available here. 8 ISS, 2016 U.S. Proxy Voting Policies and Procedure –Frequently Asked Questions on Peer Group Selection Methodology (Nov. 18, 2015), available here. 9 Company contact information can be provided using the form available here.

http://www.issgovernance.com/file/policy/2016-americas-policy-updates.pdf

http://www.glasslewis.com/assets/uploads/2015/11/GUIDELINES_United_States_20161.pdf

http://www.glasslewis.com/assets/uploads/2015/11/2016-SHP-Guidelines.pdf

http://www.issgovernance.com/file/policy/us-overboarding.pdf

http://www.issgovernance.com/file/publications/2016-iss-policy-survey.pdf

http://www.issgovernance.com/file/policy/us-emi.pdf

http://www.issgovernance.com/file/policy/faq-on-iss-us-equity-plan-scorecard-methodology.pdf

http://www.issgovernance.com/file/faq/uspeergroupfaq_20151118final.pdf

http://www.issgovernance.com/iss-draft-review-process-u-s-issuers/

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Appendix

Circumstances That May Trigger ISS and Glass Lewis Negative Vote Recommendations in Uncontested Director Elections

ISS and Glass Lewis have identified several circumstances that may trigger a negative vote recommendation in uncontested director elections at shareholder meetings of U.S. companies held during the 2016 proxy season. These circumstances are outlined below. Changes from ISS and Glass Lewis proxy voting policies in effect for the 2015 proxy season are noted in italics.

Topic ISS Glass Lewis

Circumstances That May Trigger Negative Vote Recommendations

Affected Directors1 Circumstances That May Trigger Negative Vote Recommendations2

Affected Directors3

Governance and Anti-Takeover Provisions Unilateral

Bylaw / Charter

Amendments

• Board amendment of the company’s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders, considering the following factors: o The board’s rationale for adopting the

amendment without shareholder ratification;

o Disclosure by the company of any significant engagement with shareholders regarding the amendment;

o The level of impairment of shareholders’ rights caused by the amendment;

o The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;

o The company’s ownership structure; o The company’s existing governance

provisions; o The timing of the amendment in

connection with a significant business development; and

o Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.

Individual Directors, Committee Members or the Entire Board (except new nominees who will be considered on a “case-by-case” basis)

Amendments Generally: • Board amendment of the company’s

governing documents to reduce or remove important shareholder rights, or to otherwise impede the ability of shareholders to exercise such rights, without shareholder approval

• Examples:

o The elimination of the ability of shareholders to call a special meeting or to act by written consent;

o An increase to the ownership threshold required for shareholders to call a special meeting;

o An increase to vote requirements for charter or bylaw amendments;

o The adoption of provisions that limit the ability of shareholders to pursue full legal recourse–such as bylaws that require arbitration of shareholder claims or “fee-shifting” or “loser pays” bylaws;

o The adoption of a classified board structure; and

o The elimination of the ability of shareholders to remove a director without cause.

Governance Committee Chair or Governance Committee Members

A-2




Affected Directors3

• Examples of materially adverse unilateral amendments: o Authorized capital increases that do not

meet ISS’ Capital Structure Framework; o Board classification to establish staggered

director elections; o Director qualification bylaws that disqualify

shareholders’ nominees or directors who could receive third-party compensation;

o Fee-shifting bylaws that require a suing shareholder to bear all costs of a legal action that is not 100% successful;

o Increasing the vote requirement for shareholders to amend charter/bylaws;

o Removing a majority vote standard and substituting plurality voting;

o Removing or restricting the right of shareholders to call a special meeting (raising thresholds, restricting agenda items); and

o Removing or materially restricting the shareholder’s right to act in lieu of a meeting via written consent.

• Examples of unilateral amendments generally not

considered materially adverse (considered on a case-by-case basis): o Advance notice bylaws that set customary

and reasonable deadlines; o Director qualification bylaws that require

disclosure of third-party compensation arrangements; and

o Exclusive forum provisions (if the venue is the company’s state of incorporation).

• Case-by-case on director nominees in subsequent years until the adverse amendment is reversed or submitted to a binding shareholder vote, except that ISS will generally recommend against in subsequent years if the directors: o Classified the board; o Adopted supermajority vote requirements

to amend the bylaws or charter; or o Eliminated shareholders’ ability to amend

the bylaws.

Director Compensation Bylaws: • Board adopts without shareholder approval

provisions in its charter or bylaws that, through rules on director compensation, may inhibit the ability of shareholders to nominate directors

Fee-Shifting Bylaws: • Board adopts a fee-shifting bylaw without

shareholder approval or prior to IPO Exclusive Forum Provision: • When during the past year the board adopted

an exclusive forum provision without shareholder approval outside of a spin-off, merger or IPO

• If the board is currently seeking shareholder approval of an exclusive forum provision pursuant to a bundled bylaw amendment rather than as a separate proposal

Governance Committee Members Governance Committee Members Nominating/Governance Committee Chair

A-3




Affected Directors3

IPO Governance

• For newly public companies, if, prior to or in connection with the company’s public offering, the company or board adopted bylaw or charter provisions adverse to shareholders’ rights, considering the following factors: o The level of impairment of shareholders’

rights caused by the provision; o The company’s or the board’s rationale

for adopting the provision; o The provision’s impact on the ability to

change the governance structure in the future (e.g., limitations on shareholder rights to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter);

o The ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure; and

o Whether the company has made a public commitment to put the provision to a shareholder vote within three years of the date of the IPO.

• Case-by-case on director nominees in

subsequent years until the amendment is reversed or submitted to a vote of public shareholders

Individual Directors, Committee Members or the Entire Board (except new nominees who will be considered on a “case-by-case” basis)

• When a board adopts an anti-takeover provision (e.g., poison pill or classified board) preceding an IPO and the board (i) did not also commit to submit the anti-takeover provision to a shareholder vote within 12 months of the IPO or (ii) did not provide a sound rationale for adopting the anti-takeover provision (such as a sunset for the pill of three years or less)

Entire Board

Poison Pills • A poison pill has a dead-hand or modified dead-hand feature, in which case a negative vote recommendation will be made every year until the feature is removed

• The board adopts a poison pill with a term of more than 12 months or renews any existing pill including a pill with a term of 12 months or less without shareholder approval (a commitment or policy that puts a newly adopted pill to a binding shareholder vote may potentially offset a negative vote recommendation)

• The company maintains a poison pill that was not approved by shareholders (ISS will review annually for companies with classified boards and at least once every three years for companies with declassified boards)

Entire Board (except new nominees who will be considered on a “case-by-case” basis)

• When a poison pill with a term of longer than one year was adopted without shareholder approval within the prior 12 months

• If the board has, without seeking shareholder approval, and without adequate justification, extended the term of a poison pill by one year or less in two consecutive years

Entire Board

• If a poison pill with a term of one year or less was adopted without shareholder approval, and without adequate justification

Governance Committee Members

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Affected Directors3

• The board makes a “material adverse change” to an existing poison pill without shareholder approval

• On a “case-by-case” basis: the board adopts a poison pill with a term of 12 months or less without shareholder approval, taking into account: o The date of the pill’s adoption relative to the

date of the next meeting of shareholders (i.e., whether the company had time to put the pill on the ballot for shareholder ratification given the circumstances);

o The company’s rationale; o The company’s governance structure and

practices; and o The company’s track record of

accountability to shareholders. Director Competence/Commitment

Director Attendance

• A director attends less than 75% of the aggregate of his/her board and committee meetings for the period of service (or missed more than one meeting, if the director’s total service was three or fewer meetings), unless the absence was due to medical issues/illness or family emergencies, and the reason for such absence is disclosed in the proxy statement or other SEC filing

• If the proxy disclosure is unclear and insufficient to determine whether the director attended at least 75% of board and committee meetings during the period of service

Individual Directors • A director fails to attend a minimum of 75% of the aggregate of his/her board and applicable committee meetings (not applicable if a director has served for less than one full year or if the proxy discloses that the director missed meetings due to serious illness or other extenuating circumstances)

Individual Directors (except those who have served less than one full year)

Director Overboarding

• A director who sits on more than six public company boards

• Beginning in 2017: A director who sits on more than five public company boards

• A director who is CEO of a public company who sits on boards of more than two public companies besides CEO’s own board (the negative vote recommendation will not apply to the boards of controlled subsidiaries (>50% ownership) of the CEO’s own board); at outside boards and <50% subsidiaries, ISS will review case-by-case, considering: o Structure of the parent subsidiary relationship

(e.g., holding company); o Similarity of business lines between the parent

and subsidiary;

Individual Directors • A non-executive director who sits on more than six public company boards

• Beginning in 2017: A non-executive director who sits on more than five public company boards

• A director who is an executive officer of any public company who sits on more than two public company boards besides the executive officer’s own board

• Beginning in 2017: A director who is an executive officer of any public company who sits on more than one public company board besides his/her own board

Individual Directors

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Affected Directors3

o Percentage of subsidiary held by the parent company; and

o Total number of boards on which he/she serves. • Boards of subsidiaries with publicly-traded stock

count as separate boards Audit

Committee Overboarding

• Any audit committee member who sits on more than three public company audit committees, unless he/she is a retired CPA, CFO, controller or has similar experience, in which case the limit is four committees

Audit Committee Members

Service at Other

Companies

• Egregious actions related to service on other boards that raise substantial doubt about the director’s ability to effectively oversee management and serve the best interests of shareholders at any company

Individual Directors, Committee Members or the Entire Board

• Director who has served on boards or as an executive of companies with records of poor performance, inadequate risk oversight, excessive compensation, audit- or accounting-related issues, and/or other indicators of mismanagement or actions against the interests of shareholders, considering, among other factors: o Length of time passed since the incident

giving rise to the concern; o Shareholder support for the director; o The severity of the issue; o The director’s role (e.g., committee

membership); o Director tenure at the company; o Whether ethical lapses accompanied the

oversight lapse; and o Evidence of strong oversight at other

companies • A director who is also the CEO of a company

where a serious and material restatement has occurred after the CEO had previously certified the pre-restatement financial statements

• A director who has received two against recommendations from Glass Lewis for identical reasons within the prior year at different companies


• Any compensation committee member who has served on the compensation committee of at least two other public companies that have consistently failed to align pay with performance and whose oversight of compensation at the company in question is suspect

Compensation Committee Members

A-6




Affected Directors3

Late Section 16 Filings

• A director who belatedly filed a significant Form 4 or 5, or who has a pattern of late filings if the late filing was the director’s fault

Individual Directors (case-by-case)

Inadequate Number of Committee Meetings

• The nominating and/or governance committee did not meet during the year

• The compensation committee did not meet during the year

• The audit committee did not meet at least four times during the year

Applicable Committee Chair

Board Leadership, Size, Composition and Structure Independent

Board Leadership

• When the board chairman is not independent and an independent lead or presiding director has not been appointed

• When the independent lead or presiding director is rotated among directors from meeting to meeting

Governance Committee Chair

Board Size • When there are more than twenty board members

Nominating/Governance Committee Members

• When there are less than five board members Nominating/Governance Committee Chair

Insufficient Board

Independence

• The full board is less than majority independent All Inside Directors and Affiliated Outside Directors

• Where more than one-third of the members of the board are inside or affiliated directors, Glass Lewis will recommend votes against some of the inside and/or affiliated directors to reach the two-thirds independence threshold

Individual Inside and/or Affiliated Directors

Lack of Key Committees

• The company lacks an audit, compensation or nominating committee so that the full board functions as that committee

• The company lacks a formal nominating committee (even if the board attests that independent directors fulfill the functions of such a committee)

All Inside Directors and Affiliated Outside Directors


Key Committees Not Entirely Independent

• A director is an “inside” or affiliated outside director serving on the audit, compensation or nominating committee

Individual Directors • Any inside or affiliated director seeking appointment to an audit, compensation, nominating, or governance committee, or who has served in that capacity in the past year

• Compensation committee members who are not independent based on Glass Lewis standards


Audit Committee

Size and Composition

• If the audit committee does not have a financial expert or the committee’s financial expert does not have a demonstrable financial background sufficient to understand the financial issues unique to public companies

• If the committee has less than three members

Audit Committee Chair

A-7




Affected Directors3

Waiver of Term/Age

Limits

• If the board waives its term/age limits unless sufficient explanation is provided (e.g., consummation of a merger)

Nominating and/or Governance Committee Members

Lack of Relevant

Experience

• Where the board’s failure to ensure the board has directors with relevant experience, either through periodic director assessment or board refreshment, has contributed to a company’s poor performance

Nominating Committee Chair

Other Governance-Related Matters Poor

Performance, Account-

ability and Oversight

• The board lacks accountability and oversight, coupled with sustained poor performance of the company relative to peers measured by one-year and three-year total shareholder returns in the bottom half of a Russell 3000 company’s four-digit Global Industry Classification Group (ISS will take into consideration the company’s five-year total shareholder return and operational metrics); ISS will consider “problematic” the following governance practices: o A classified board structure; o A supermajority vote requirement; o A plurality vote standard in uncontested

director elections or majority vote standard for director elections with no carve-out for contested elections;

o Inability of shareholders to call special meetings or act by written consent;

o A dual-class capital structure; and/or o A non-shareholder approved poison pill

Entire Board (except new nominees who will be considered on a “case-by-case” basis)

• If, for the last three years, the company’s performance has been in the bottom quartile of the sector and the directors have not taken reasonable steps to address the poor performance

Entire Board

Governance Failures

• Material failures of governance, stewardship, risk oversight (examples include bribery, large or serial fines or sanctions from regulatory bodies, significant adverse legal judgments or settlements, any hedging of company stock, or significant pledging of company stock), or fiduciary responsibilities at the company


• When a company has disclosed a sizable loss or writedown, and the risk committee contributed to the loss through poor oversight

Risk Committee Members

• Where a company maintains a significant level of financial risk exposure but fails to disclose any explicit form of board-level risk oversight (committee or otherwise)

Chairman of the Board (but not Chairman/CEO except in egregious cases)

• Under extraordinary circumstances, failure to replace management as appropriate

• Where the board or management has failed to sufficiently identify and manage a material environmental or social risk that did or could negatively impact shareholder value

Audit or Risk Committee Members or Other Directors Responsible for Oversight of Such Risks

• Particularly egregious actions by the company relating to the mismanagement of corporate funds through political donations or lobbying activities

Governance Committee Chair or Other Responsible Directors

A-8




Affected Directors3

Lack of Board Responsive-

ness

• Failure to adequately respond to a shareholder proposal that received approval by a majority of votes cast in the previous year, taking into account: o Disclosed outreach efforts by the board to

shareholders in the wake of the vote; o Rationale provided in the proxy statement for

the level of implementation; o The subject matter of the proposal; o The level of support for and opposition to the

resolution in past meetings; o Actions taken by the board in response to the

majority vote and its engagement with shareholders;

o The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and

o Other factors as appropriate.

Individual Directors, Committee Members or the Entire Board on a “case-by-case” basis

• When the board failed to implement a shareholder proposal relating to important shareholder rights that received support from a majority of the votes cast (excluding abstentions and broker non-votes) (e.g., proposals to declassify the board, adopt majority voting to elect directors or permit shareholders to call a special meeting); in determining whether a board has sufficiently implemented such a proposal, Glass Lewis will examine the quality of the right enacted or proffered by the board for any conditions that may unreasonably interfere with the shareholders’ ability to exercise the right (e.g., overly restrictive procedural requirements for calling a special meeting)

Governance Committee Members

• When the board failed to respond appropriately after at least 25% of shareholders (excluding abstentions and broker non-votes) voted against the recommendation of management on a director’s election, a management proposal or a shareholder proposal, Glass Lewis will examine the underlying issue and the lack of appropriate response may be a contributing factor to a future recommendation against a director nominee

Individual Directors or the Entire Board

• When the compensation committee failed to implement a shareholder proposal regarding a compensation-related issue, if the proposal received the affirmative vote of a majority of the voting shares, and if a reasonable analysis suggests the compensation committee should have taken steps to implement the request


• At the previous board election, any director received more than 50% negative votes of the votes cast and the company failed to address the underlying issues that caused these high negative votes


• When a director received a greater than 50% against vote the prior year and the director was not removed and the issues that raised shareholder concern were not corrected o Also see discussion of 25% threshold in box

directly above

Nominating Committee Chair

• The board failed to act on takeover offers where the majority of shares were tendered


A-9




Affected Directors3

Exclusion of Shareholder

Proposal

• Omission from the proxy statement/ballot of a properly submitted shareholder proposal without obtaining any of: o Voluntary withdrawal of the proposal by the

proponent; o No-action relief from the SEC; and o A U.S. District Court ruling that it can

exclude the proposal from its ballot.


Bundling of Proxy

Proposals

• If the company bundles disparate proposals into a single proposal


Conflicts of Interest /

Related Party Transactions

• A CFO who is on the board • A director, or a director who has an immediate

family member, providing material consulting or other material professional services to the company

• A director, or a director who has an immediate family member, engaging in airplane, real estate, or similar deals, including perquisite-type grants, amounting to more than US$50,000 in payments from the company

• Interlocking directorships of CEOs or other top executives who serve on each other’s boards


• An inside director who simultaneously serves as a director and as an employee of the company and who derives a greater amount of income as a result of affiliated transactions with the company rather than through compensation paid by the company (i.e., salary, bonus, etc. as a company employee)


• When the committee nominated or renominated an individual who had a significant conflict of interest or whose past actions demonstrated a lack of integrity or inability to represent shareholder interests

Nominating Committee Members

• When for two consecutive years the company provides what Glass Lewis considers to be “inadequate” related party transaction disclosure (i.e., the nature of such transactions and/or the monetary amounts involved are unclear or excessively vague, thereby preventing a shareholder from being able to reasonably interpret the independence status of multiple directors above and beyond what the company maintains is compliant with SEC or applicable stock exchange listing requirements)


A-10




Affected Directors3

Compensation-Related Matters Lack of

Responsive-ness:

Say-on-Pay

• The board failed to respond adequately to a previous say-on-pay vote that received the support of less than 70% of votes cast, taking into account: o The company’s response, including: Disclosure of engagement efforts with

major institutional investors regarding the issues that contributed to the low level of support;

Specific actions taken to address the issues that contributed to the low level of support;

Other recent compensation actions taken by the company;

o Whether the issues raised are recurring or isolated;

o The company’s ownership structure; and o Whether the support level was less than 50%,

which would warrant the highest degree of responsiveness.

Compensation Committee Members and potentially the Entire Board (except new nominees who will be considered on a “case-by-case” basis)

• When the committee failed to address shareholder concerns following majority shareholder rejection of the say-on-pay proposal in the previous year, including where the proposal was approved but there was a significant shareholder vote (i.e., greater than 25% of votes cast) against the say-on-pay proposal in the prior year; lack of appropriate response where shareholder support was significant may be a contributing factor to a future recommendation against the compensation committee chair or all compensation committee members; Glass Lewis expects the compensation committee to provide some level of response to a significant vote against, including engaging with large shareholders to identify their concerns; in the absence of evidence that the board is actively engaging with shareholders and responding accordingly, Glass Lewis may recommend holding compensation committee members accountable for failing to adequately respond to shareholder opposition, giving careful consideration to the level of shareholder protest and the severity and history of compensation problems

Compensation Committee Members and/or Compensation Committee Chair

Problematic Compen-

sation Practices

• In the absence of a say-on-pay vote or in egregious situations if: o There is a significant misalignment

between CEO pay and company performance under ISS’ pay-for-performance analysis


• Members who are up for election and served at the time of poor pay-for-performance (e.g., a company receives an F grade in Glass Lewis’ pay-for-performance analysis) when shareholders are not provided with a say-on-pay vote


• If the company received two D grades in consecutive years in Glass Lewis’ pay-for-performance analysis, and if during the past year the company performed the same as or worse than its peers

• Where the CD&A provides insufficient or unclear information about performance metrics and goals, where the CD&A indicates that pay is not tied to performance, or where the compensation committee or management has excessive discretion to alter performance terms or increase amounts of awards in contravention of previously defined targets

Compensation Committee Chair

A-11




Affected Directors3

• In the absence of a say-on-pay vote or in egregious situations if: o The board exhibits a significant level of poor

communication and responsiveness to shareholders on compensation issues raised previously;

o The company fails to submit one-time transfers of stock options to a shareholder vote;

o The company fails to fulfill the terms of a burn rate commitment made to shareholders;

o The company maintains significant “problematic pay practices,” such as: Repricing or replacing of underwater stock

options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options)

Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting

New or extended agreements that provide for:

- CIC payments exceeding three times base salary and average/target/most recent bonus;

- CIC severance payments without involuntary job loss or substantial diminution of duties (“single” or “modified single” triggers);

- CIC payments with excise tax gross-ups (including “modified” gross-ups).

Incentives that may motivate excessive risk-

taking such as: - Multi-year guaranteed bonuses; - A single or common performance

metric used for short- and long-term plans;

- Lucrative severance packages; - High pay opportunities relative to

industry peers; - Disproportionate supplemental

pensions; or - Mega annual equity grants that provide

unlimited upside with no downside risk

Options backdating


• When the company entered into excessive employment agreements and/or severance agreements

• When performance goals were lowered when employees failed or were unlikely to meet original goals, or performance-based compensation was paid despite goals not being attained

• When excessive employee perquisites and benefits were allowed

• When the company repriced options or completed a “self tender offer” without shareholder approval within the past two years

• When vesting of in-the-money options is accelerated

• When option exercise prices were backdated • When option exercise prices were spring-

loaded or otherwise timed around the release of material information

• When the company has engaged in bullet-dodging where there has been a pattern of granting options at or near historic lows

• When a new employment contract is given to an executive that does not include a clawback provision and the company had a material restatement in the recent past, especially if the restatement was due to fraud

• When the compensation committee has approved large one-off payments

• The inappropriate, unjustified use of discretion by the compensation committee


A-12




Affected Directors3

Problematic pay practices that may result in a negative vote recommendation on a case-by-case basis:

• Egregious employment contracts (contracts

containing multi-year guarantees for salary increases, non-performance based bonuses, or equity compensation)

• Overly generous new-hire package for new CEO (excessive “make whole” provisions without sufficient rationale or any problematic pay practices)

• Abnormally large bonus payouts without justifiable performance linkage or proper disclosure (includes performance metrics that are changed, canceled or replaced during the performance period without adequate explanation of the action and the link to performance)

• Egregious pension/SERP (supplemental executive retirement plan) payouts (inclusion of additional years of service not worked that result in significant benefits provided in new arrangements or inclusion of performance-based equity or other long-term awards in the pension calculation)

• Excessive perquisites (perquisites for former and/or retired executives (e.g., lifetime benefits, car allowances, personal use of corporate aircraft, or other inappropriate arrangements), extraordinary relocation benefits, including any home loss buyouts, or excessive amounts of perquisites compensation)

• Excessive severance and/or change in control (CIC) provisions: o CIC payments exceeding three times base

salary plus target/average/last paid bonus o New or materially amended arrangements

that provide for CIC payments without loss of job or substantial diminution of job duties (single-triggered or modified single-triggered where an executive may voluntarily leave for any reason and still receive the CIC severance package)

A-13




Affected Directors3

o New or materially amended employment or severance agreements that provide for an excise tax gross-up (modified gross-ups would be treated in the same manner as full gross-ups)

o Excessive payments upon an executive’s termination in connection with performance failure

o Liberal CIC definition in individual contracts or equity plans which could result in payments to executives without an actual CIC occurring

• Tax reimbursements (excessive reimbursement of income taxes on executive perquisites or other payments (e.g., related to personal use of corporate aircraft, executive life insurance, bonus, restricted stock vesting, secular trusts, etc.))

• Dividends or dividend equivalents paid on unvested performance shares or units

• Internal pay disparity (excessive differential between CEO total pay and that of the next highest-paid named executive officer)

• Repricing or replacing of underwater stock options/stock appreciation rights without prior shareholder approval (including cash buyouts, option exchanges and certain voluntary surrender of underwater options where shares surrendered may be subsequently re-granted)

• Insufficient executive compensation disclosure by externally-managed issuers (EMIs)

• Other pay practices that may be deemed problematic but are not covered in any of the above categories

• Any director who approved or allowed the backdating of options where a company granted backdated options to an executive who is also a director


• When options were backdated, there were material weaknesses in internal controls, there was a resulting restatement, and disclosures indicate there was a lack of documentation with respect to the option grants


A-14




Affected Directors3

Failure to Include Say-

on-Pay Proposal at Frequency Desired by

Shareholders

• The board implemented a say-on-pay vote on a less frequent basis than the frequency that received the majority of votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency


• When no say-on-pay frequency received a majority and the board implements a say-on-pay vote on a less frequent basis than the frequency that received a plurality of the votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency, taking into account: o The board’s rationale for selecting a frequency

that is different from the frequency that received a plurality;

o The company’s ownership structure and vote results;

o ISS’ analysis of whether there are compensation concerns or a history of problematic compensation practices; and

o The previous year’s support level on the company’s say-on-pay proposal.


Failure to Include Say-

on-Pay Proposal

When Expected

• In the absence of clearly disclosed and compelling rationale, failure to provide a say-on-pay vote in the year that the company stated it would

Compensation Committee Members and potentially the Entire Board

Audit-Related Matters Poor

Accounting Practices

• Poor accounting practices which rise to a level of serious concern (such as fraud, misapplication of GAAP, and material weaknesses identified in Sarbanes-Oxley Section 404 (internal control over financial reporting) disclosures) are identified, taking into consideration the practices’ severity, breadth, chronological sequence and, duration, and the company’s efforts at remediation or corrective actions

Audit Committee Members and potentially the Entire Board

• When material accounting fraud occurred at the company

• When annual and/or multiple quarterly financial statements had to be restated and (i) the restatement involves fraud or manipulation by insiders; or (ii) the restatement is accompanied by an SEC inquiry or investigation; or (iii) other special circumstances

• If the company repeatedly fails to file its financial reports in a timely fashion (e.g., two or more quarterly or annual financial statements filed late within the last five quarters)


A-15




Affected Directors3

• When it has been disclosed that a law enforcement agency has charged the company and/or its employees with a violation of the Foreign Corrupt Practices Act

• When the company has aggressive accounting policies and/or poor disclosure or lack of sufficient transparency in its financial statements

• When, since the last annual meeting, the company has reported a material weakness that has not yet been corrected, or, when the company has an ongoing material weakness from a prior year that has not yet been corrected

Problematic Non-Audit

Fees

• Non-audit fees paid to the auditor are excessive (e.g., non-audit fees are greater than audit fees plus audit-related fees plus tax compliance/preparation fees)


• If the non-audit fees or tax fees exceed audit plus audit-related fees in either the current year or the prior year

• All who served on the committee at the time of the audit, if audit and audit-related fees total one-third or less of the total fees billed by the auditor


• When tax and/or other fees are greater than audit and audit-related fees paid to the auditor for more than one year in a row


• Where non-audit fees include fees for tax services (including, but not limited to, such things as tax avoidance or shelter schemes) for senior executives of the company


Excessively Low Audit

Fees

• When audit fees are excessively low, especially when compared with other companies in the same industry


Other Problematic

Audit-Related Practices

• The company receives an adverse opinion on its financial statements from its auditor


• When there is a disagreement with the auditor and the auditor resigns or is dismissed (e.g., the company receives an adverse opinion on its financial statements)

• Where the auditor has resigned and reported that a section 10A letter has been issued


• There is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company or its shareholders to pursue legitimate legal recourse against the audit firm


• If the contract with the auditor specifically limits the auditor’s liability to the company for damages


• When the committee reappointed an auditor that Glass Lewis no longer considers to be independent for reasons unrelated to fee proportions


A-16




Affected Directors3

Failure to Include Auditor

Ratification on the Ballot

• If the company failed to put auditor ratification on the ballot for shareholder approval


1 Where the board is classified and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a negative vote recommendation is not up for election, ISS may hold any or all appropriate nominees, except new nominees, accountable.

2 Except in egregious cases and as set forth herein with respect to certain anti-takeover provisions and fee-shifting bylaws, Glass Lewis will not issue negative vote recommendations against directors on the basis of corporate governance best practices (e.g., board independence, committee membership and structure, meeting attendance, etc.) at a company that completed an IPO within the past year. 3 Where the recommendation is to vote against a committee chair and the chair is not up for election because the company has a classified board, Glass Lewis will note the concern with regard to the committee chair but will not recommend voting against the other members of the relevant committee who are up for election. Note that Glass Lewis applies certain exceptions to its policies to controlled companies and newly public companies.

iss and glass lewis release policy updates for the 2016 ... · preparing for the 2016 proxy season...

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