A new year brings policy changes from proxy voting advisers Glass Lewis and Institutional Shareholder Services (ISS). In particular, ISS is offering a fresh perspective on independent chair resolutions, while Glass Lewis has readjusted its stance on companies seeking no-action requests.
Take your seat
“Perhaps the most pertinent issue is the ISS policy clarification on independent chair shareholder proposals,” Bill Ultan, managing director at consultancy firm Morrow Sodali, told Activist Insight Online in an interview.
When deciding whether to support independent chair proposals, ISS will now give “substantial weight” to a more streamlined checklist of factors, including a host of performance and governance issues, such as whether a company has mostly independent directors, the “presence of non-independent directors on key board committees,” and whether there is any “evidence that a board has failed to address material risks facing the company.” ISS will also examine whether boards have overseen “material governance failures.”
Although ISS noted these factors would be considered alongside the “scope and rationale” of a proposal, the update is “likely to lead ISS to support more of those resolutions,” Ultan said.
The new policy comes after investors “strongly favored incorporating factors,” into how the proxy adviser weighs independent chair resolutions, which “remain among the most common” propositions at annual meetings, according to ISS.
As of December 11, 2019, 36.6% of S&P 500 chairmen are independent, compared with 46.7% of Russell 3000 chairmen, according to Activist Insight Governance.
The decision to consider whether a board “failed to address material risks” at a company is reminiscent of ISS backing Majority Action’s push for an independent chair at Dominion Energy in April in response to the board’s risky strategy and shareholder returns.
No-action, no vote
One policy change from Glass Lewis is the adviser’s stance on companies seeking no-action requests from the Securities and Exchanges Commission (SEC). The new stance seeks to maintain a level of transparency between the board and the shareholders it represents.
The updated policy is a reaction to the SEC’s September guidance regarding no-action requests from issuers that want to exclude shareholder proposals. The SEC has long decided whether to offer, refuse, or abstain from giving no-action relief but announced in September that it would now give some verdicts orally, rather than in writing.
The change could leave companies unsure of how to proceed, especially now Glass Lewis says it expects a company to only omit a shareholder proposal when the SEC has “explicitly concurred” with a company’s argument. If the SEC declines to comment on a proposal, the adviser expects such issues to “be included in a company’s proxy filings,” and will likely recommend against governance committee members that exclude proposals without the agreement of the regulator.
Glass Lewis has advised that where the SEC has ”verbally permitted a company to exclude a shareholder proposal,” the adviser expects companies to “provide some disclosure” on the reasoning given by the regulator.
From January to November 2019, 225 companies disclosed no-action requests, according to Proxy Insight. Since the introduction of the new guidance on November 21, 53 out of 66 companies applying for no-action requests received verbal replies from the SEC, according to a February 3 filing from the regulator.
In June, when pharmaceutical company Mylan asked the SEC for permission to remove a shareholder proposal encouraging discussion on a more stringent clawback provision, Glass Lewis advised shareholders to withhold their votes against some directors at the company’s annual meeting. This year, it will take a more forthright stance, recommending a vote against the company’s governance committee.
ISS’ policy on no-action requests remains unchanged. The adviser will continue to recommend shareholders vote against directors at companies that omitted proposals without a court ruling or SEC approval.