POLICY Flashcards
1
Q
What is an independent director?
A
An independent director has no material financial, familial or other current relationships with the company, its executives, or other board members, except for board service and standard fees paid for that service. Relationships that existed within three to five years before the inquiry are usually considered “current” for purposes of this test.
2
Q
What is an affiliated director?
A
An affiliated director has, (or within the past three years, had) a material financial, familial or other relationship with the company or its executives, but is not an employee of the company. This includes directors whose employers have a material financial relationship with the company. In addition, we view a director who either owns or controls 20% or more of the company’s voting stock, or is an employee or affiliate of an entity that controls such amount, as an affiliate.
3
Q
Why a five year look back?
A
A five-year standard is more appropriate, in our view, because we believe that the unwinding of conflicting relationships between former management and board members is more likely to be complete and final after five years. However, Glass Lewis does not apply the five-year look-back period to directors who have previously served as executives of the company on an interim basis for less than one year.
4
Q
Why do we view 20% shareholders as affiliates
A
We view 20% shareholders as affiliates because they typically have access to and involvement with the management of a company that is fundamentally different from that of ordinary shareholders. More importantly, 20% holders may have interests that diverge from those of ordinary holders, for reasons such as the liquidity (or lack thereof) of their holdings, personal tax issues, etc.
5
Q
When does GL apply a three year look back
A
Glass Lewis applies a three-year look back period to all directors who have an affiliation with the company other than former employment, for which we apply a five-year look back.
6
Q
Definiton of material relationship
A
A material relationship is one in which the dollar value exceeds:
• $50,000 (or where no amount is disclosed) for directors who are paid for a service they have agreed to perform for the company, outside of their service as a director, including professional or other
services; or
• $120,000 (or where no amount is disclosed) for those directors employed by a professional services firm such as a law firm, investment bank, or consulting firm and the company pays the firm, not the individual, for services. This dollar limit would also apply to charitable contributions to schools where a board member is a professor; or charities where a director serves on the board or is an executive;and any aircraft and real estate dealings between the company and the director’s firm; or
• 1% of either company’s consolidated gross revenue for other business relationships (e.g., where the director is an executive officer of a company that provides services or products to or receives services or products from the company).
7
Q
Definiton of familial relationship
A
Familial relationships include a person’s spouse, parents, children, siblings, grand-
parents, uncles, aunts, cousins, nieces, nephews, in-laws, and anyone (other than domestic employees) who shares such person’s home. A director is an affiliate if: i) he or she has a family member who is employed by the company and receives more than $120,000 in annual compensation; or, ii) he or she has a family member who is employed by the company and the company does not disclose this individual’s compensation.
8
Q
Definition of “Company”
A
A company includes any parent or subsidiary in a group with the company or any
entity that merged with, was acquired by, or acquired the company.
9
Q
Inside Director
A
An inside director simultaneously serves as a director and as an employee of the
company. This category may include a board chair who acts as an employee of the company or is paid as an employee of the company. In our view, an inside director 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) faces a conflict between making decisions that are in the best interests of the company versus those in the director’s own best
interests. Therefore, we will recommend voting against such a director.
10
Q
If a company does not consider a non-employee director to be independent….
A
Glass Lewis will classify that director as an affiliate
11
Q
What is your policy for former executives of the company or merged companies who have consulting agreements with the surviving company
A
We allow a five-year grace period for former executives of the company or merged companies who have consulting agreements with the surviving company. (We do not automatically recommend voting against directors in such cases for the first five years.) If the consulting agreement persists after this five-year grace period, we apply the materiality thresholds outlined in the definition of “material.”
12
Q
How do you affiliate directors in interim management positions?
A
we believe a director who is currently serving in an interim management position should be considered an insider, while a director who previously served in an interim management position for less than one year and is no longer serving in such capacity is considered independent. Moreover, a director who previously served in an interim management position for over one year and is no longer serving in such capacity is considered an affiliate for five years following the date of his/her resignation or departure from the interim management position.
13
Q
VOTING RECOMMENDATIONS ON THE BASIS OF BOARD INDEPENDENCE
A
Glass Lewis believes a board will be most effective in protecting shareholders’ interests if it is at least two-thirds independent. Where more than one-third of
the members are affiliated or inside directors, we typically8 recommend voting against some of the inside and/or affiliated directors in order to satisfy the two-thirds threshold.
14
Q
Committee Independence policy
A
We believe that only independent directors should serve on a company’s audit, compensation, nominating, and governance committees. We typically recommend that shareholders vote against any affiliated or inside director seeking appointment to an audit, compensation, nominating, or governance committee, or who has
served in that capacity in the past year.
15
Q
Committee Independence and 20% owner
A
We will recommend voting against an audit committee member who owns 20% or more of the company’s stock, and we believe that there should be
a maximum of one director (or no directors if the committee is comprised of less than three directors) who owns 20% or more of the company’s stock on
the compensation, nominating, and governance committees.
16
Q
With a staggered board, if the affiliates or insiders that we believe should not be on the board are not up for election
A
we will express our concern regarding those directors, but we will not recommend voting against the other affiliates or insiders who are up for election just to achieve two-thirds independence. However, we will consider recommending voting against the directors subject to our concern at their next election if the issue giving rise
to the concern is not resolved.
17
Q
Independent chair policy
A
We do not recommend that shareholders vote against CEOs who chair the board. However, we typically recommend that our clients support separating the roles of chair and CEO whenever that question is posed in a proxy (typically in the form of a shareholder proposal), as we believe that it is in the long-term best interests
of the company and its shareholders. Further, where the company has neither an independent chair nor independent lead director, we will recommend voting against the chair of the governance committee.
18
Q
We typically recommend that shareholders vote against directors who have served on boards or as executives
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. We will reevaluate such directors based on
A
the length of time passed since the incident giving rise to the concern, shareholder support for the director, the severity of the issue, the director’s role (e.g., committee membership), director tenure at the subject company, whether ethical lapses accompanied the oversight lapse, and evidence of strong oversight at other companies. Likewise, we examine the backgrounds of those who serve on key board committees to ensure that they have the required skills and diverse backgrounds to make informed judgments about the subject matter for which the committee is responsible.
19
Q
We believe shareholders should avoid electing directors who have a record of not fulfilling their responsibilities
to shareholders at any company where they have held a board or executive position. We typically recommend
voting against:
A
- A director who fails to attend a minimum of 75% of board and applicable committee meetings, calculated in the aggregate.12
- A director who belatedly filed a significant form(s) 4 or 5, or who has a pattern of late filings if the late filing was the director’s fault (we look at these late filing situations on a case-by-case basis).
- 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 (the same situation must also apply at the company being analyzed).
20
Q
where a director has served for less than one full year, we will typically
A
not recommend voting against for failure to attend 75% of meetings. Rather, we will note the poor attendance with a recommendation to track this issue going forward. We will also refrain from recommending to vote against directors when the proxy discloses that the director missed the meetings due to serious illness or other extenuating circumstances.
21
Q
Furthermore, with consideration given to the company’s overall corporate governance, pay-for-performance
alignment and board responsiveness to shareholders
A
we may recommend voting against directors who served throughout a period in which the company performed significantly worse than peers and the directors have
not taken reasonable steps to address the poor performance
22
Q
As a general framework, our evaluation of board responsiveness involves a review of
A
publicly available disclosures (e.g., the proxy statement, annual report, 8-Ks, company website, etc.) released following the date of the company’s last annual meeting up through the publication date of our most current Proxy Paper. Depending on the specific issue, our focus typically includes, but is not limited to, the following:
• At the board level, any changes in directorships, committee memberships, disclosure of related party transactions, meeting attendance, or other responsibilities;
• Any revisions made to the company’s articles of incorporation, bylaws or other governance documents;
• Any press or news releases indicating changes in, or the adoption of, new company policies, business practices or special reports; and
• Any modifications made to the design and structure of the company’s compensation program, as well as an assessment of the company’s engagement with shareholders on compensation issues as discussed in the Compensation Discussion & Analysis (“CD&A”), particularly following a material vote against a company’s say-on-pay.
23
Q
when determining whether board responsiveness is warranted, With regard to companies where voting control is held through a multi-class share structure with dispropor- tionate voting and economic rights
A
we will carefully examine the level of approval or disapproval attributed to unaffiliated shareholders. Where vote results indicate that a majority of unaffiliated shareholders supported a shareholder proposal or opposed a management proposal, we believe the board should demonstrate an appropriate level of responsiveness.
24
Q
If there is no committee chair, we recommend voting against
A
the longest-serving committee member or, if the longest-serving committee member cannot be determined, the longest-serving board member serving on the committee (i.e., in either case, the “senior director”)
25
If there is no committee chair, but multiple senior directors serving on the committee
we recommend voting against both (or all) such senior directors.
26
Glass Lewis believes that a designated committee chair
maintains primary responsibility for the actions of his or her respective committee. As such, many of our committee-specific voting recommendations are against
the applicable committee chair rather than the entire committee (depending on the seriousness of the issue).
27
On the contrary, in cases where there is a designated committee chair and the recommendation is to vote
against the committee chair, but the chair is not up for election because the board is staggered,
we do not recommend voting against any members of the committee who are up for election; rather, we will note the concern with regard to the committee chair.
28
Audit committees play an integral role in overseeing
the financial reporting process because stable capital markets depend on reliable, transparent, and objective financial information to support an efficient and effective capital market process. Audit committees play a vital role in providing this disclosure to shareholders.
29
When assessing an audit committee’s performance, we are aware
that an audit committee does not prepare financial statements, is not responsible for making the key judgments and assumptions that affect the financial statements, and does not audit the numbers or the disclosures provided to investors. Rather, an audit committee member monitors and oversees the process and procedures that management and auditors perform.
30
Do we recommend against audit committee members when expertise is lacking?
We are skeptical of audit committees where there are members that lack expertise as a Certified Public Accountant (CPA), Chief Financial Officer (CFO) or corporate controller, or similar experience. While we will not necessarily recommend voting against members of an audit committee when such expertise is lacking, we are
more likely to recommend voting against committee members when a problem such as a restatement occurs and such expertise is lacking
31
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.
vote against the audit committee chair
32
when options were backdated, there is a lack of adequate controls in place, there was a resulting restatement, and disclosures indicate there was a lack of documentation with respect to the option grants
vote against All members of the audit committee
33
if the audit committee did not meet at least four times during the year.
vote against the audit committee chair
34
if the committee has less than three members
vote against the audit committee chair
35
sits on more than three public company audit committees
vote against audit committee member unless the audit committee member is a retired CPA, CFO, controller or has similar experience, in which case the limit shall be four committees, taking time and availability into consideration including a review of the audit committee member’s attendance at all board and committee meetings
36
if audit and audit-related fees total one-third or less of the total fees billed by the auditor.
vote against all members of an audit committee who are up for election and who served on the committee at the time of the audit
37
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 (in which case we also recommend against ratification of the auditor).
vote against the audit committee chair
38
fees paid to the auditor are not disclosed
vote against the audit committee chair
39
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.
Such services are prohibited by the Public Company Accounting Oversight Board (“PCAOB”).
vote against all members of an audit committee
40
reappointment of an auditor that we no longer consider to be independent for reasons unrelated to fee proportions
vote against all members of an audit committee
41
audit fees are excessively low, especially when compared
| with other companies in the same industry.
vote against all members of an audit committee
42
if the committee failed to put auditor ratification on the ballot for share-
holder approval.
vote against the audit committee chair. However, if the non-audit fees or tax fees exceed audit plus audit-related fees in either the current or the prior year, then Glass Lewis will recommend voting against the entire audit committee.
43
the auditor has resigned and reported that a section 10A
| letter has been issued.
vote against all members of an audit committee
44
material accounting fraud occurred at the com-
| pany.
vote against all members of an audit committee at a time when material accounting fraud occurred at the company
45
vote against All members of an audit committee at a time when annual and/or multiple quarterly financial state-
ments had to be restated, and any of the following factors apply
* The restatement involves fraud or manipulation by insiders;
* The restatement is accompanied by an SEC inquiry or investigation;
* The restatement involves revenue recognition;
* The restatement results in a greater than 5% adjustment to costs of goods sold, operating expense, or operating cash flows; or
* The restatement results in a greater than 5% adjustment to net income, 10% adjustment to assets or shareholders equity, or cash flows from financing or investing activities.
46
what is an exemption for number of audit committee withholds?
Glass Lewis may exempt certain audit committee members from the above threshold if, upon further analysis of relevant factors such as the director’s
experience, the size, industry-mix and location of the companies involved and the director’s attendance at all the companies, we can reasonably determine
that the audit committee member is likely not hindered by multiple audit committee commitments.
47
Auditors are required to report all potential
illegal acts to management and the audit committee unless they are clearly inconsequential in nature
48
If the audit committee or the board fails to take appropriate action on an act that has been determined to be a violation of the law
the independent auditor is required to send a section 10A letter to the SEC. Such letters are rare and therefore we believe should be taken seriously.
49
if the company repeatedly fails to file its financial reports in a timely fashion. For example, the company has filed two or more quarterly or annual financial statements late within the last five quarters.
A vote against all members of an audit committee
50
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 (FCPA).
vote against all members of an audit committee
51
when the company has aggressive accounting policies and/or poor disclosure or lack of sufficient transparency in its financial statements.
vote against all members of an audit committee
52
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 from the auditor).
vote against all members of an audit committee
53
if the contract with the auditor specifically limits the auditor’s liability to the company for damages.
vote against all members of an audit committee
54
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.
vote against all members of the audit committee who served since the date of the company’s last annual meeting, and when, since the last annual meeting
55
When a problem such as a material weakness, restatement or late filings occurs, we take into consideration, in forming our judgment with respect to the audit committee
the transparency of the audit committee report. We also take a dim view of audit committee reports that are boilerplate, and which provide little or no information or transparency to investors.
56
Compensation committees have a critical role in determining
the compensation of executives. This includes deciding the basis on which compensation is determined, as well as the amounts and types of compensation
to be paid. This process begins with the hiring and initial establishment of employment agreements, including the terms for such items as pay, pensions and severance arrangements. It is important in establishing compensation arrangements that compensation be consistent with, and based on the long-term economic performance of, the business’s long-term shareholders returns.
57
Compensation committees are also responsible for
the oversight of the transparency of compensation. This oversight includes disclosure of compensation arrangements, the matrix used in assessing pay for performance, and the use of compensation consultants.
58
In order to ensure the independence of the board’s compensation consultant, we believe the compensation committee should only engage
a compensation consultant that is not also providing any services to the company or management apart from their contract with the compensation committee. It is important to investors that they have clear and complete disclosure of all the significant terms of compensation arrangements in order to make informed decisions with respect to the oversight and decisions of the compensation committee.
59
compensation committees are responsible for oversight of internal controls over the executive compensation process. This includes
controls over gathering information used to determine compensation, establishment of equity award plans, and granting of equity awards. For example, the use of a compensation consultant who maintains a business relationship with company management may cause the committee to make decisions based on information that is compromised by the consultant’s conflict of interests. Lax controls can also contribute to improper awards of compensation such as through granting of backdated or spring-loaded options, or granting of bonuses when triggers for bonus payments have not been met.
60
if the company entered into excessive employment agreements and/or severance agreements.
vote against All members of the compensation committee (during the relevant time period)
61
the committee failed to address shareholder concerns following majority shareholder rejection of the say-on-pay proposal in the previous year.
vote against all members of a compensation committee during whose tenure the committee failed to address shareholder concerns following majority shareholder rejection of the say-on-pay proposal in the previous year. Where the proposal was approved but there was a significant shareholder vote (i.e., greater than 20% of votes cast) against the say-on-pay proposal in the prior year, if the board did not respond sufficiently to the vote including actively engaging shareholders on this issue, we will also consider recommending voting against the chair of the compensation committee or all members of the compensation committee, depending on the severity and history of the compensation problems and the level of shareholder opposition.
62
the company failed to align pay with performance if shareholders are not provided with an advisory vote on executive compensation at the annual meeting
vote against all members of the compensation committee who are up for election and served when the company failed to align pay with performance if shareholders are not provided with an advisory vote on executive compensation at the annual meeting
63
If a company provides shareholders with a say-on-pay proposal, we will initially
only recommend voting against the company’s say-on-pay proposal
and will not recommend voting against the members of the compensation committee unless there is a pattern of failing to align pay and performance
and/or the company exhibits egregious compensation practices. However, if the company repeatedly fails to align pay and performance, we will then
recommend against the members of the compensation committee in addition to recommending voting against the say-on-pay proposal.
64
For cases in which the disconnect between pay and performance is marginal and the company has outperformed its peers,
we will consider not recommending against compensation committee members In addition, if a company provides shareholders with a say-on-pay proposal, we will initially only recommend voting against the company’s say-on-pay proposal and will not recommend voting against the members of the compensation committee unless there is a pattern of failing to align pay and performance and/or the company exhibits egregious compensation practices. However, if the company repeatedly fails to align pay and performance, we will then recommend against the members of the compensation committee in addition to recommending voting against the say-
on-pay proposal.
65
performance goals were changed (i.e., lowered) when employees failed or were unlikely to meet original goals, or performance-based compensation was paid despite goals not being attained
All members of the compensation committee
66
if excessive employee perquisites and benefits were allowed.
All members of the compensation committee
67
the compensation committee did not meet during the year
The compensation committee chair
68
the company repriced options or completed a “self tender offer” without shareholder approval within the past two years
All members of the compensation committee
69
vesting of in-the-money options is accelerated
All members of the compensation committee
70
option exercise prices were backdated
All members of the compensation committee. Glass Lewis will recommend voting against an executive director who played a role in and participated in option backdating.
71
option exercise prices were spring-loaded or otherwise timed around the release of material information
All members of the compensation committee
72
new employment contract is given to an executive that does not include a clawback provision and the company had a material restatement,
especially if the restatement was due to fraud
All members of the compensation committee
73
the CD&A provides insufficient or unclear information about performance metrics and goals, where the CD&A indicates that pay is not tied to per-
formance, 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
The chair of the compensation committee
74
committee failed to implement a shareholder proposal regarding a compensation-related issue, where the proposal received the af-
firmative vote of a majority of the voting shares at a shareholder meeting, and when a reasonable analysis suggests that the compensation committee (rather than the governance committee) should have taken steps to implement the request
All members of the compensation committee
75
board has materially decreased proxy statement disclosure regarding executive compensation policies and procedures in a manner which sub-
stantially impacts shareholders’ ability to make an informed assessment of the company’s executive pay practices.
All members of the compensation committee
76
new excise tax gross-up provisions are adopted in employment agreements with executives, particularly in cases where the company previously committed not to provide any such entitlements in the future
All members of the compensation committee
77
board adopts a frequency for future advisory votes on executive compensation that differs from the frequency approved by shareholders
All members of the compensation committee
78
The nominating and governance committee is responsible for
the governance by the board of the company and its executives; selection of ob-
jective and competent board members, providing leadership on governance policies
adopted by the company, such as decisions to implement shareholder proposals that have received a majority vote. (At most companies, a single committee is charged with these oversight functions; at others, the governance and nominating responsibilities are apportioned among two separate committees.)
79
Consistent with Glass Lewis’ philosophy that boards should have diverse backgrounds and members with a breadth and depth of relevant experience, we believe that nominating and governance committees should
consider diversity when making director nominations within the context of each specific company and its industry. In our view, shareholders are best served when boards make an effort to ensure a constituency that is not only reasonably diverse on the basis of age, race, gender and ethnicity, but also on the basis of geographic
knowledge, industry experience, board tenure and culture.
80
shareholder proposal relating to important shareholder rights received support from a majority of the votes cast (excluding ab-stentions and broker non-votes) and the board has not begun to implement or enact the proposal’s subject matter
All members of the governance committee. Examples of such shareholder proposals include those seeking a declassified board structure, a majority vote standard for director elections, or a right to call a special meeting. In determining whether a board has sufficiently implemented such a proposal, we 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).
81
a shareholder resolution is excluded from the meeting agenda but the SEC has declined to state a view on whether such resolution should be excluded, or when the SEC has verbally permitted a company to exclude a shareholder proposal but there is no written record provided by the SEC about such determination and the company has not provided any disclosure concerning this no-action relief
All members of the governance committee
82
chair is not independent and an independent lead or presiding director has not been appointed
The governance committee chair,
83
when there are less than five or the whole nominating committee when there are more than 20 members on the boardThe governance committee chair, when the committee fails to meet at all during the year
In the absence of a nominating committee, the governance committee chair
84
when for two consecutive years the company provides what we consider 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).
The governance committee chair
85
If the board does not have a committee responsible for governance oversight and the board did not implement a shareholder proposal that received the requisite support, we will recommend
voting against the entire board. If the shareholder proposal at issue requested that the board adopt a declassified structure, we will recommend voting against all director nominees up for election
86
Where a compensation-related shareholder proposal should have been implemented, and when a reasonable analysis suggests that the members of the compensation committee (rather than the governance committee) bear the responsibility for failing to implement the request
we recommend that shareholders only vote against members of the compensation committee.
87
We believe that one independent individual should be appointed to serve as the lead or presiding director. When such a position is rotated among directors from meeting to meeting
we will recommend voting against the governance committee chair as we believe the lack of fixed lead or presiding director means that, effectively, the board does not have an independent board leader.
88
during the past year the board adopted a forum selection clause (i.e., an exclusive forum provision)28 without shareholder approval29, or if the board is currently seeking shareholder approval of a forum selection clause pursuant to a bundled bylaw amendment rather than as a separate proposal.
The governance committee chair
89
the board adopted, without shareholder approval, provisions in its charter or bylaws that, through rules on director compensation, may inhibit the ability of shareholders to nominate directors
All members of the governance committee
90
the board takes actions to limit shareholders’ ability to vote on matters material to shareholder rights (e.g., through the practice of excluding a shareholder proposal by means of ratifying a management proposal that is materially different from the shareholder proposal).
The governance committee chair
91
directors’ records for board and committee meeting attendance are not disclosed, or when it is indicated that a director attended less than 75% of board and committee meetings but disclosure is sufficiently vague that it is not possible to determine which specific director’s attendance was lacking.
The governance committee chair
92
detailed record of proxy voting results from the prior annual meeting has not been disclosed.
The governance committee chair
93
where the board has amended the company’s governing documents to reduce or remove important shareholder rights, or to otherwise impede the ability of shareholders to exercise such right, and has done so without seeking shareholder approval.
we may recommend that shareholders vote against the chair of the governance committee, or the entire committee
94
(BYLAW AMENDMENTS) Examples of board actions that may cause such a recommendation include:
the elimination of the ability of shareholders to call a special meeting or to act by written consent; an increase to the ownership threshold required for shareholders to call a special meeting; an increase to vote requirements for charter or bylaw amendments; 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 that require shareholder plaintiffs to pay the company’s legal expenses in the absence of a court victory (i.e., “fee-shifting” or “loser pays” bylaws); the adoption of a classified board structure; and the elimination of the ability of shareholders to remove a director without cause.
95
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
All members of the nominating committee
96
if the nominating committee did not meet during the year
The nominating committee chair
97
the chair is not independent, and an independent lead or presiding director has not been appointed
In the absence of a governance committee, the nominating committee chair. In the absence of both a governance and a nominating committee, we will recommend voting against the board chair on this basis, unless if the chair also serves as the CEO, in which case we will recommend voting against the longest-serving director.
98
A forum selection clause is
is a bylaw provision stipulating that a certain state, typically where the company is incorporated, which is most often Delaware, shall be the exclusive forum for all intra-corporate disputes (e.g., shareholder derivative actions, assertions of claims of a breach of fiduciary duty, etc.).
99
A forum selection clause limits
a shareholder’s legal remedy regarding appropriate choice of venue and related relief offered under that state’s laws and rulings
100
forum section clause exception
Glass Lewis will evaluate the circumstances surrounding the adoption of any forum selection clause as well as the general provisions contained therein.
Where it can be reasonably determined that a forum selection clause is narrowly crafted to suit the particular circumstances facing the company and/or a
reasonable sunset provision is included, we may make an exception to this policy.
101
when there are less than five or the whole nominating committee
when there are more than 20 members on the board
The nominating committee chair; In the absence of both a governance and a nominating committee, we will recommend voting against the board chair on this basis, unless if the chair also serves as the CEO, in which case we will recommend voting against the the longest-serving director
102
when a director received a greater than 50% against vote the prior
year and not only was the director not removed, but the issues that raised shareholder concern were not corrected
The nominating committee chair; Considering that shareholder discontent clearly relates to the director who received a greater than 50% against vote rather than the nominating chair, we review the severity of the issue(s) that initially raised shareholder concern as well as company responsiveness to such matters, and will only recommend voting against the nominating chair if a reasonable analysis suggests that it would be most appropriate. In rare cases, we will consider recommending against the nominating chair when a director receives a substantial (i.e., 20% or more) vote against based on the same analysis.
103
when the board has no female directors and has not provided suf-
ficient rationale or disclosed a plan to address the lack of diversity on the board.
The nominating committee chair
104
when, alongside other governance or board performance concerns,
the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board in the past five years.
The nominating committee chair ; We will not be making voting recommendations solely on this basis in 2021; however, insufficient board refreshment may be a contributing factor in our recommendations when additional board-related concerns have been identified.
105
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.
we may consider recommending shareholders vote against the chair of the nominating committee
106
Sound risk management, while necessary at all companies, is particularly important at financial firms which inherently maintain significant exposure to financial risk. We believe such financial firms should
have a chief risk officer reporting directly to the board and a dedicated risk committee or a committee of the board charged with risk oversight. Moreover, many non-financial firms maintain strategies which involve a high level of exposure to financial risk. Similarly, since many non-financial firms have complex hedging or trading strategies, those firms should also have a chief risk officer and a risk committee.
107
When analyzing the risk management practices of public companies
we take note of any significant losses or writedowns on financial assets and/or structured transactions.
108
In cases where a company has disclosed a sizable loss or writedown, and where we find that the company’s board-level risk committee’s poor oversight contributed to the loss
we will recommend that shareholders vote against such committee members on that basis.
109
in cases 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)
we will consider recommending to vote against the board chair on that basis. However, we generally would not recommend voting against a combined chair/CEO, except in egregious cases.
110
A committee responsible for risk management could be
a dedicated risk committee, the audit committee, or the finance committee, depending on a given company’s board structure and method of disclosure. At some companies, the entire board is charged with risk management.
111
Glass Lewis recognizes the importance of ensuring the sustainability of companies’ operations. We believe that insufficient oversight of material environmental and social issues can
can present direct legal, financial, regulatory and reputational risks that could serve to harm shareholder interests. Therefore, we believe that these issues should be carefully monitored and managed by companies, and that companies should have an appropriate oversight structure in place to ensure that they are mitigating attendant risks and capitalizing on related opportunities to the best extent possible.
112
Accordingly, for large-cap companies and in instances where we identify material oversight concerns, Glass Lewis will
review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of environmental and/or social issues.
113
when boards of companies in the S&P 500 index do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues.
Beginning in 2021, Glass Lewis will note as a concern.Beginning with shareholder meetings held after January 1, 2022, we will generally recommend voting against
the governance chair of a company in the aforementioned index who fails to provide explicit disclosure concerning the board’s role in overseeing these issues.
114
While we believe that it is important that these issues are overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, we believe
that companies should determine the best structure for this oversight for themselves. In our view, this oversight can be effectively conducted by specific directors, the entire board, a separate committee, or combined with the responsibilities of a key committee.
115
When evaluating the board’s role in overseeing environmental and/or social issues, we will examine
a company’s proxy statement and governing documents (such as committee charters) to determine if directors maintain a meaningful level of oversight of and accountability for a company’s environmental and/or socially-related impacts and risks.
116
In situations where we believe that a company has not properly managed or mitigated environmental or social risks to the detriment of shareholder value, or when such mismanagement has threatened shareholder value,
Glass Lewis may recommend that shareholders vote against the members of the board who are responsible for oversight of environmental and social risks.
117
In the absence of explicit board oversight of environmental and
social issues,
Glass Lewis may recommend that shareholders vote against members of the audit committee. In making these determinations, Glass Lewis will carefully review the situation, its effect on shareholder value, as well as any corrective action or other response made by the company.
118
We believe that directors should have the necessary time to fulfill their duties to shareholders. In our view, an overcommitted director
can pose a material risk to a company’s shareholders, particularly during periods of
crisis
119
director who serves as an executive officer of any public company while serving on more than two public company boards and any other director who serves on more than five public company boards
we generally recommend that shareholders vote against a director who serves as an executive officer of any public company while serving on more than two public company boards and any other director who serves on more than five public company boards.
120
Because we believe that executives will primarily devote their attention to executive duties, we generally will
not recommend that shareholders vote against overcommitted directors at the companies where they serve as an executive.
121
When determining whether a director’s service on an excessive number of boards may limit the ability of the director to devote sufficient time to board duties, we may consider
relevant factors such as the size and location of the other companies where the director serves on the board, the director’s board roles at the companies in question, whether the director serves on the board of any large privately-held companies, the director’s tenure on the boards in question, and the director’s attendance record at all companies. In the case of directors who serve in executive roles other than CEO (e.g., executive chair), we will evaluate the specific duties and
responsibilities of that role in determining whether an exception is warranted.
122
We may also refrain from recommending against certain directors if the company provides sufficient rationale for their continued board service. The rationale should
allow shareholders to evaluate the scope of the directors’ other commitments, as well as their contributions to the board including specialized knowledge of the
company’s industry, strategy or key markets, the diversity of skills, perspective and background they provide, and other relevant factors.
123
We will also generally refrain from recommending to vote against a director who serves on an excessive number of boards within
a consolidated group of companies or a director that represents a firm whose sole purpose is to manage a portfolio of investments which include the company.
124
In addition to the three key characteristics — independence, performance, experience — that we use to evaluate board members, we consider
conflict-of-interest issues as well as the size of the board of directors when
making voting recommendations.
125
We believe board members should be wholly free of
identifiable and substantial conflicts of interest, regardless of the overall level of independent directors on the board.
126
A CFO who is on the board
In our view, the CFO holds a unique position relative to financial report-
ing and disclosure to shareholders. Due to the critical importance of financial disclosure and reporting, we believe the CFO should report to the board and not be a member of it.
127
We question the need for the company to have consulting relationships with its directors. We view such relationships as
creating conflicts for directors, since they may be forced to weigh their own interests against shareholder interests when making board decisions. In addition, a company’s decisions regarding where to turn for the best professional services may be compromised when doing business with the professional services firm of one of the company’s directors.
128
A director who provides — or a director who has an immediate family member who provides — material consulting or other material professional services to the company. These services may include
legal, consulting,37 or financial services.
vote against
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vote against a director or a director who has an immediate family member, engaging in airplane, real estate, or similar deals, including perquisite-type grants from the company
amounting to more than $50,000. Directors who receive these sorts of payments from the company will have to make unnecessarily complicated decisions that may pit their interests against shareholder interests.
130
Interlocking directorships:
CEOs or other top executives who serve on each other’s boards create an
interlock that poses conflicts that should be avoided to ensure the promotion of shareholder interests above all else.
131
poison pill with a term of longer than one year was adopted without shareholder approval within the prior twelve months.
All board members who served at a time; In the event a board is clas-
sified and shareholders are therefore unable to vote against all directors, we will recommend voting
against the remaining directors the next year they are up for a shareholder vote.
132
If a poison pill with a term of one year or less was adopted without shareholder approval, and without adequate justification
we will consider recommending that shareholders vote against all members of the governance committee.
133
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
we will consider recommending that shareholders vote against the entire board
134
We will generally refrain from recommending against a director who provides consulting services for the company if the director
is excluded from membership on the board’s key committees and we have not identified significant governance concerns with the board.
135
While we do not believe there is a universally applicable optimum board size, we do believe
boards should have at least five directors to ensure sufficient diversity in decision-making and to enable the formation of key board committees with independent directors.
136
boards with more than 20 members will
typically suffer under the weight of “too many cooks in the kitchen” and have difficulty reaching consensus and making timely decisions. Sometimes the presence of too many voices can make it difficult to draw on the wisdom and experience in the room by virtue of the need to limit the discussion so that each voice may be heard.
137
at a board with fewer than five directors or more than 20 directors.
we typically recommend voting against the chair of the nominating committee (or the governance committee, in the absence of a nominating committee)
138
We believe controlled companies warrant certain exceptions to our independence standards. The board’s function is to protect shareholder interests; however
when an individual, entity (or group of shareholders party to a formal agreement) owns more than 50% of the voting shares, the interests of the majority of shareholders are the interests of that entity or individual.Consequently, Glass Lewis does not apply our usual two-thirds board independence rule and therefore we will not recommend voting against boards whose composition reflects the makeup of the shareholder population
139
We do not require that controlled companies have boards that are
at least two-thirds independent. So long as the insiders and/or affiliates are connected with the controlling entity, we accept the presence of non-independent board members.
140
(CONTROLLED COMPANY)The compensation committee and nominating and governance committees do not need
to consist solely of independent directors.
141
We believe that standing nominating and corporate governance committees at controlled companies are
unnecessary. Although having a committee charged with the duties of searching for, selecting, and nominating independent directors can be beneficial, the unique composition of a controlled company’s shareholder base makes such committees weak and irrelevant.
142
we believe that independent compensation committees at controlled companies are
unnecessary. Although independent directors are the best choice for approving and monitoring senior executives’ pay, controlled companies serve a unique shareholder population whose vot-ing power ensures the protection of its interests. As such, we believe that having affiliated directors on a controlled company’s compensation committee is acceptable. However, given that a controlled company has certain obligations to minority shareholders we feel that an insider should not serve on the compensation committee. Therefore, Glass Lewis will recommend voting against any insider (the CEO or otherwise) serving on the compensation committee.
143
Controlled companies do not need
an independent chair or an independent lead or presiding director. Although an independent director in a position of authority on the board — such as chair
or presiding director — can best carry out the board’s duties, controlled companies serve a unique shareholder population whose voting power ensures the protection of its interests.
144
board size requirements for controlled companies.
We have no board size requirements for controlled companies.
145
Despite a controlled company’s status, unlike for the other key committees, we nevertheless believe that audit committees
should consist solely of independent directors. Regardless of a company’s controlled status, the interests of all shareholders must be protected by ensuring the integrity and accuracy of the company’s financial statements. Allowing affiliated directors to oversee the preparation of financial reports could create an insurmountable conflict of interest
146
With regard to companies where voting control is held through a multi-class share structure with disproportionate voting and economic rights, we will
carefully examine the level of approval or disapproval attributed to unaffiliated shareholders when determining whether board responsiveness is warranted. Where vote results indicate that a majority of unaffiliated shareholders supported a shareholder proposal or opposed a management proposal, we believe the board should demonstrate an appropriate level of responsiveness.
147
Where an individual or entity holds between 20-50% of a company’s voting power
we believe it is reasonable to allow proportional representation on the board and committees (excluding the audit committee) based on the individual or entity’s percentage of ownership.
148
We believe companies that have recently completed an initial public offering (“IPO”) or spin-off should be allowed
adequate time to fully comply with marketplace listing requirements and meet basic corporate governance standards
149
Generally speaking, Glass Lewis refrains from making recommendations on the basis of governance standards (e.g., board independence, committee membership and structure, meeting attendance, etc.)
during the one-year period following an IPO.
150
When evaluating companies that have recently gone public, Glass Lewis will review
the terms of the applicable governing documents in order to determine whether shareholder rights are being severely restricted indefinitely. We believe boards that approve highly restrictive governing documents have demonstrated that they may subvert shareholder interests following the IPO. In conducting this evalua-
tion, Glass Lewis will consider:
1. The adoption of anti-takeover provisions such as a poison pill or classified board
2. Supermajority vote requirements to amend governing documents 3. The presence of exclusive forum or fee-shifting provisions
4. Whether shareholders can call special meetings or act by written consent
5. The voting standard provided for the election of directors
6. The ability of shareholders to remove directors without cause
7. The presence of evergreen provisions in the company’s equity compensation arrangements
8. The presence of a multi-class share structure which does not afford common shareholders voting
power that is aligned with their economic interest
151
In cases where Glass Lewis determines that the board has approved overly restrictive governing documents, we will
generally recommend voting against members of the governance committee. If there is no governance committee, or if a portion of such committee members are not standing for election due to a classified board structure, we will expand our recommendations to additional director nominees, based on who is standing for
election.
152
In cases where, preceding an IPO, the board adopts a multi-class share structure where voting rights are not aligned with economic interest, or an anti-takeover provision, such as a poison pill or classified board, we will
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generally recommend voting against all members of the board who served at the time of the IPO if the board:
(i) did not also commit to submitting these provisions to a shareholder vote at the company’s first shareholder meeting following the IPO; or (ii) did not provide for a reasonable sunset of these provisions (generally three to five years in the case of a classified board or poison pill; or seven years or less in the case of a multi-class
share structure). In the case of a multi-class share structure, if these provisions are put to a shareholder vote, we will examine the level of approval or disapproval attributed to unaffiliated shareholders when determining the vote outcome.
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153
In our view, adopting an anti-takeover device
unfairly penalizes future shareholders who (except for electing to buy or sell the stock) are unable to weigh in on a matter that could potentially negatively impact their ownership interest. This notion is strengthened when a board adopts a classified board with an infinite duration or a poison pill with a five- to ten-year term immediately prior to going public, thereby insulating management for
a substantial amount of time.
154
shareholders should also be wary of companies that adopt
supermajority voting requirements before their IPO. Absent explicit provisions in the articles or bylaws stipulating that certain policies will be phased out over a certain period of time, long-term shareholders could find themselves in the predicament of having to attain a supermajority vote to approve future proposals seeking to eliminate such policies.
155
For companies that trade on multiple exchanges or are incorporated in foreign jurisdictions but trade only in the U.S., we will apply the governance standard most relevant in each situation. We will consider a number of factors in determining which Glass Lewis country-specific policy to apply, including but not limited to:
(i) the corporate governance structure and features of the company including whether the board structure is unique to a particular market; (ii) the nature of the proposals; (iii) the location of the company’s primary listing, if one can be determined; (iv) the regulatory/governance regime that the board is reporting against; and (v) the availability and completeness of the company’s SEC filings.
156
Companies trading on the OTC Bulletin Board are not considered
“listed companies” under SEC rules and therefore not subject to the same governance standards as listed companies. However, we believe that more
stringent corporate governance standards should be applied to these companies given that their shares are still publicly traded.
157
When reviewing OTC companies, Glass Lewis will review the available disclosure relating to the shareholder meeting to determine whether shareholders are able to evaluate several key pieces of information, including:
(i) the composition of the board’s key committees, if any; (ii) the level of share ownership of company insiders or directors; (iii) the board meeting attendance record of directors; (iv) executive and non-employee director compensation; (v) related-party transactions conducted during the past year; and (vi) the board’s leadership structure and determinations regarding director independence.
158
We are particularly concerned when company disclosure lacks any information regarding
the board’s key committees. We believe that committees of the board are an essential tool for clarifying how the responsibilities of the board are being delegated, and specifically for indicating which directors are accountable for ensuring:
(i) the independence and quality of directors, and the transparency and integrity of the nominating process;
(ii) compensation programs that are fair and appropriate; (iii) proper oversight of the company’s accounting,
financial reporting, and internal and external audits; and (iv) general adherence to principles of good corporate governance.
159
In cases where shareholders are unable to identify which board members are responsible for ensuring oversight of the above-mentioned responsibilities
we may consider recommending against certain members of the board. Ordinarily, we believe it is the responsibility of the corporate governance committee to provide
thorough disclosure of the board’s governance practices. In the absence of such a committee, we believe it is appropriate to hold the board’s chair or, if such individual is an executive of the company, the longest-serving non-executive board member accountable.
160
Mutual funds, or investment companies, are
structured differently from regular public companies (i.e., operating companies). Typically, members of a fund’s advisor are on the board and management takes on a different role from that of regular public companies.
161
MF- Size of the board of directors
The board should be made up of between five and twenty directors.
162
MF- The CFO on the board
Neither the CFO of the fund nor the CFO of the fund’s registered investment advisor should serve on the board.
163
MF- Independence of the audit committee
The audit committee should consist solely of independent directors.
164
MF- Audit committee financial expert
At least one member of the audit committee should be designated as the audit committee financial expert.
165
MF-Independence of the board
We believe that three-fourths of an investment company’s board should be made up of independent directors. This is consistent with a proposed SEC rule on invest-
ment company boards. The Investment Company Act requires 40% of the board to be independent, but in 2001, the SEC amended the Exemptive Rules to require that a majority of a mutual fund board be independent. In 2005, the SEC proposed increasing the independence threshold to 75%. In 2006, a federal appeals court ordered that this rule amendment be put back out for public comment, putting it back into “proposed rule” status. Since mutual fund boards play a vital role in overseeing the relationship between the fund and its investment manager, there is greater need for independent oversight than there is for an operating company board.
166
MF-When the auditor is not up for ratification
We do not recommend voting against the audit committee if the auditor is not up for ratification. Due to the different legal structure of an investment com-
pany compared to an operating company, the auditor for the investment company (i.e., mutual fund) does not conduct the same level of financial review for each investment company as for an operating company.
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MF-Non-independent chair
The SEC has proposed that the chair of the fund board be independent.
We agree that the roles of a mutual fund’s chair and CEO should be separate. Although we believe this would be best at all companies, we recommend voting against the chair of an investment company’s nominating committee as well as the board chair if the chair and CEO of a mutual fund are the same person and the fund does not have an independent lead or presiding director. Seven former SEC commissioners support the appointment of an independent chair and we agree with them that “an independent board chair would be better able to create conditions favoring the long-term interests of fund shareholders than would a chair who is an executive of the advisor.”
168
MF-Multiple funds overseen by the same director
Unlike service on a public company board, mutual fund boards require much less of a time commitment. Mutual fund directors typically serve on dozens of other mutual fund boards, often within the same fund complex. The Investment Company Institute’s (“ICI”) Overview of Fund Governance Practices, 1994-2012, indicates that the average number of funds served by an independent director in 2012 was 53. Absent evidence that a specific director is hindered from being an effective board member at a fund due to service on other funds’ boards, we refrain from maintaining a cap on the number of outside mutual fund boards that we believe a director can serve on.
169
Glass Lewis favors the repeal of staggered boards and the annual election of directors. We believe staggered boards are
less accountable to shareholders than boards that are elected annually. Furthermore, we feel the annual election of directors encourages board members to focus on shareholder interests.
170
staggered boards are associated with
a reduction in a firm’s valuation; and (ii) in the context of hostile takeovers, staggered boards operate as a takeover defense, which entrenches management, discourages potential acquirers, and delivers a lower return to target shareholders.
171
In our view, there is no evidence to demonstrate that staggered boards
improve shareholder returns in a take-over context. Some research has indicated that shareholders are worse off when a staggered board blocks a transaction; further, when a staggered board negotiates a friendly transaction, no statistically significant difference in premium occurs
172
Additional research found that charter-based staggered boards
“reduce the market value of a firm by 4% to 6% of its market capitalization” and that “staggered boards bring about and not merely reflect this reduction in market value.”
173
A subsequent study reaffirmed that classified boards re-
| duce shareholder value, finding
“that the ongoing process of dismantling staggered boards, encouraged by
institutional investors, could well contribute to increasing shareholder wealth.”
174
Glass Lewis supports the declassification of boards and the annual election of directors.
Given our belief that declassified boards promote director accountability, the empirical evidence suggesting staggered boards reduce a company’s value and the established shareholder opposition to such a structure,
175
Glass Lewis strongly supports routine director evaluation, including
independent external reviews, and periodic board refreshment to foster the sharing of diverse perspectives in the boardroom and the generation of new ideas and business strategies.
176
we believe the board should evaluate the need for changes to board
composition based on
an analysis of skills and experience necessary for the company, as well as the results of the director evaluations, as opposed to relying solely on age or tenure limits. When necessary, shareholders can address concerns regarding proper board composition through director elections.
177
In our view, a director’s experience can be a
valuable asset to shareholders because of the complex, critical issues that boards face. This said, we recognize that in rare circumstances, a lack of refreshment can contribute to a lack of board responsiveness to poor company performance.
178
Beginning in 2021, we will note as a potential concern instances where the average tenure of
non-executive directors is 10 years or more and no new directors have joined the board in the past five years. While we will be highlighting this as a potential area of concern, we will not be making voting recommendations strictly on this basis in 2021.
179
While we understand that age limits can aid board succession planning, the long-term impact of age limits
restricts experienced and potentially valuable board members from service through an arbitrary means. We believe that shareholders are better off monitoring the board’s overall composition, including the diversity of its members, the alignment of the board’s areas of expertise with a company’s strategy, the board’s approach
to corporate governance, and its stewardship of company performance, rather than imposing inflexible rules that don’t necessarily correlate with returns or benefits for shareholders.
180
if a board adopts term/age limits, it should follow through and not waive such limits. If the board waives its term/age limits,
Glass Lewis will consider recommending shareholders vote against the nominating
and/or governance committees, unless the rule was waived with sufficient explanation, such as consummation of a corporate transaction like a merger.
181
Glass Lewis recognizes the importance of ensuring that the board is comprised of directors
who have a diversity of skills, thought and experience, as such diversity benefits companies by providing a broad range of perspectives and insights.
182
Glass Lewis closely reviews the composition of the board for representation
of diverse director candidates and will generally recommend against the nominating committee chair of a board that has no female members. Beginning in 2021, we will note as a concern boards consisting of fewer than two female directors. Beginning with shareholder meetings held after January 1, 2022, we will generally recom-
mend voting against the nominating committee chair of a board that has fewer than two female directors.
183
For boards with six or fewer total directors
our existing voting policy requiring a minimum of one female director
will remain in place.
184
diversity voting reccomenations may be extended
to additional members of the nominating committee in cases where the
committee chair is not standing for election due to a classified board, or based on other factors, including the company’s size and industry, applicable laws in its state of headquarters, and its overall governance profile.
185
when making these diversity voting recommendations
we will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending that shareholders vote against directors of
companies outside the Russell 3000 index, or when boards have provided a sufficient rationale or plan to address the lack of diversity on the board.
186
Several states have begun to encourage board diversity through legislation. For example, Companies headquartered in California are now subject to board composition requirements
Glass Lewis will recommend in accordance with board composition requirements set forth in applicable state laws when they come into effect.
187
In September 2018, Senate Bill 826 was signed into law, requiring all companies headquartered in Cali to have
at least one woman on their board by the end of 2019.
188
by the end of 2021, California companies must have at least
two women on boards of five members and at least three women on boards with six or more directors.
189
Accordingly, during the 2021 proxy season, if a company headquartered in California does not have at least one woman on its board,
we will generally recommend voting against the chair of the nominating
committee unless the company has disclosed a clear plan for addressing this issue. For meetings held after December 31, 2021, Glass Lewis will base such recommendations upon compliance with the applicable thresholds then in effect.
190
for meetings held after December 31, 2021, if a company headquartered in California does not have at least one director from anunderrepresented community on its board, or does not provide adequate
disclosure to make this determination
we will generally recommend voting against the chair of the nominating committee.
191
In September 2020, Assembly Bill 979 was signed into law, requiring companies headquartered in California to have
one director from an “underrepresented community” on their board by the end of 2021 (defined as an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender). And, by the end of 2022, California companies must have at least two such individuals on boards of five to eight members, and three such individuals on boards of nine or more members.
192
Because company disclosure is critical when measuring the mix of diverse attributes and skills of directors,
Glass Lewis will begin tracking the quality of such disclosure in companies’ proxy statements.
193
Beginning with the 2021 proxy season, we will reflect how a company’s proxy statement presents:
explicitly includes gender and/or race/ethnicity; (iii) whether the board has adopted a policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees (aka “Rooney Rule”); and (iv)
board skills disclosure. We will not be making voting recommendations solely on the basis of this assessment in 2021; however, such ratings will help inform our assessment of a company’s overall governance and may be a contributing factor in our recommendations when additional board-related concerns have been identified.
194
In lieu of running their own contested election, proxy access
would not only allow certain shareholders to nominate directors to company boards but the shareholder nominees would be included on the company’s ballot, significantly enhancing the ability of shareholders to play a meaningful role in selecting their representatives. Glass Lewis generally supports affording shareholders the right to nominate director candidates to management’s proxy as a means to ensure that significant, long-term shareholders have an ability to nominate candidates to the board.
195
Companies generally seek shareholder approval to amend company bylaws to adopt proxy access in response
to shareholder engagement or pressure, usually in the form of a shareholder proposal requesting proxy access, although some companies may adopt some elements of proxy access without prompting.
196
Glass Lewis considers several factors when evaluating whether to support proposals for companies to adopt proxy access including
the specified minimum ownership and holding requirement for shareholders to nominate one or more directors, as well as company size, performance and responsiveness to shareholders.
197
Majority voting for the election of directors is fast becoming the de facto standard in corporate board elections. In our view,
the majority voting proposals are an effort to make the case for shareholder impact on director elections on a company-specific basis.
198
While this proposal would not give shareholders the opportunity to nominate directors or lead to elections where shareholders have a choice among director candidates, if implemented, the proposal would allow
shareholders to have a voice in determining whether the nominees proposed by the board should actually serve as the overseer-representatives of shareholders in the boardroom. We believe this would be a favorable outcome for shareholders.
199
The number of shareholder proposals requesting that companies adopt a majority voting standard has
declined significantly during the past decade, largely as a result of widespread adoption of majority voting or director resignation policies at U.S. companies. In 2019, 89% of the S&P 500 Index had implemented a resignation policy for directors failing to receive majority shareholder support, compared to 65% in 2009.
200
Today, most U.S. companies still elect directors by
a plurality vote standard.
201
Under that standard, if one shareholder holding only one share votes in favor of a nominee (including that director, if the director is a shareholder),
that nominee “wins” the election and assumes a seat on the board. The common concern among companies with a plurality voting standard is the possibility that one or more directors would not receive a majority of votes, resulting in “failed elections.”
202
If a majority vote standard were implemented, a nominee would have
to receive the support of a majority of the shares voted in order to be elected. Thus, shareholders could collectively vote to reject a director they believe will not pursue their best interests.
203
Given that so few directors (less than 100 a year) do not receive
majority support from shareholders,
we think that a majority vote standard is reasonable since it will neither
result in many failed director elections nor reduce the willingness of qualified, shareholder-focused directors to serve in the future.
204
most directors who fail to receive a majority shareholder vote in favor of their election
do not step down, underscoring the need for true majority voting.
205
We believe that a majority vote standard will likely lead
to more attentive directors
206
Although shareholders only rarely fail to support directors, the occasional majority vote against a director’s election
will likely deter the election of directors with a record of ignoring shareholder interests. Glass Lewis will therefore generally support proposals calling for the election of directors by a majority vote, excepting contested director elections.
207
In response to the high level of support majority voting has garnered, many companies have
voluntarily taken steps to implement majority voting or modified approaches to majority voting. These steps range from a modified approach requiring directors that receive a majority of withheld votes to resign (i.e., a resignation policy) to actually requiring a majority vote of outstanding shares to elect directors.
208
We feel that the modified approach does not go far enough because
equiring a director to resign is not the same as requiring a majority vote to elect a director and does not allow shareholders a definitive voice in the election process. Further, under the modified approach, the corporate governance committee could reject a resignation and, even if it accepts the resignation, the corporate governance committee decides on the direc-tor’s replacement. And since the modified approach is usually adopted as a policy by the board or a board committee, it could be altered by the same board or committee at any time.
209
SEC Rule 14a-8(i)(9) allows companies to exclude shareholder proposals
“if the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.”
210
On October 22, 2015, the SEC issued Staff Legal Bulletin No. 14H (“SLB 14H”) clarifying its rule concerning the exclusion of certain shareholder proposals when similar items are also on the ballot. SLB 14H increased
increased the burden on companies to prove to SEC staff that a conflict exists; therefore, many companies still chose to place management proposals alongside similar shareholder proposals in many cases.
211
During the 2018 proxy season, a new trend in the SEC’s interpretation of this rule emerged. Upon submission of shareholder proposals requesting that companies adopt a lower special meeting threshold, several compa-
nies petitioned the SEC for no-action relief under the premise
that the shareholder proposals conflicted with management’s own special meeting proposals, even though the management proposals set a higher threshold
than those requested by the proponent. No-action relief was granted to these companies; however, the SEC stipulated that the companies must state in the rationale for the management proposals that a vote in favor of management’s proposal was tantamount to a vote against the adoption of a lower special meeting threshold.
212
In certain instances, shareholder proposals to lower an existing special meeting right threshold were excluded on the basis that
they conflicted with management proposals seeking to ratify the existing special meeting rights. We find the exclusion of these shareholder proposals to be especially problematic as, in these instances, shareholders are not offered any enhanced shareholder right, nor would the approval (or rejection) of the rati-
fication proposal initiate any type of meaningful change to shareholders’ rights.
213
In instances where companies have excluded shareholder proposals, such as those instances where special meeting shareholder proposals are excluded as a result of “conflicting” management proposals, Glass Lewis
will
take a case-by-case approach, taking into account the following issues:
• The threshold proposed by the shareholder resolution;
• The threshold proposed or established by management and the attendant rationale for the thresh-old;
• Whether management’s proposal is seeking to ratify an existing special meeting right or adopt a bylaw that would establish a special meeting right; and
• The company’s overall governance profile, including its overall responsiveness to and engagement with shareholders.
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Glass Lewis generally favors ______special meeting right.
a 10-15% ; Accordingly, Glass Lewis will generally recommend voting for management or shareholder proposals that fall within this range.
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When faced with conflicting proposals,
Glass Lewis will generally recommend in favor of the lower special meeting right and will recommend voting against the proposal with the higher threshold.
216
in instances where there are conflicting management and shareholder proposals and a company has not established a special meeting right,
Glass Lewis may recommend that shareholders vote in favor of the shareholder proposal and that they abstain from a management-proposed bylaw amendment seeking to establish a special meeting right. We believe that an
abstention is appropriate in this instance in order to ensure that shareholders are sending a clear signal regarding their preference for the appropriate threshold for a special meeting right, while not directly opposing the establishment of such a right.
217
In cases where the company excludes a shareholder proposal seeking a reduced special meeting right by means of ratifying a management proposal that is materially different from the shareholder proposal,
we will generally recommend voting against the chair or members of the governance committee.
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In other instances of conflicting management and shareholder proposals, Glass Lewis will consider the following:
* The nature of the underlying issue;
* The benefit to shareholders of implementing the proposal;
* The materiality of the differences between the terms of the shareholder proposal and management proposal;
* 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 a company’s response to previous shareholder proposals and its adoption of progressive shareholder rights provisions.
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In recent years, we have seen the dynamic nature of the considerations given by the SEC when determining whether companies may exclude certain shareholder proposals. We understand that not
all shareholder proposals serve the long-term interests of shareholders, and value and respect the limitations placed on shareholder proponents, as certain shareholder proposals can unduly burden companies. However, Glass Lewis
believes that shareholders should be able to vote on issues of material importance.
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We view the shareholder proposal process as an important part of
advancing shareholder rights and encouraging responsible and financially sustainable business practices. While recognizing that certain proposals
cross the line between the purview of shareholders and that of the board, we generally believe that companies should not limit investors’ ability to vote on shareholder proposals that advance certain rights or promote beneficial disclosure.
221
Accordingly, Glass Lewis will make note of instances where a company has
successfully petitioned the SEC to exclude shareholder proposals. If after review we believe that the exclusion of a shareholder proposal is detrimental to shareholders, we may, in certain very limited circumstances, recommend against members of the governance committee.
222
The auditor’s role as gatekeeper is crucial
in ensuring the integrity and transparency of the financial information necessary for protecting shareholder value.
223
Shareholders rely on the auditor to
ask tough questions and to do a thorough analysis of a company’s books to ensure that the information provided to shareholders is complete, accurate, fair, and that it is a reasonable representation of a company’s financial position.
224
As such, shareholders should demand an objective, competent and diligent auditor who
performs at or above professional standards at every company in which the investors hold an interest. Like directors, auditors should be free from conflicts of interest and should avoid situations requiring a choice between the auditor’s interests and the public’s interests.
225
Almost without exception, shareholders should be able to
annually review an auditor’s performance and to annually ratify a board’s auditor selection.
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Moreover, in October 2008, the Advisory Committee on the Auditing Profession went even further, and recommended that
“to further enhance audit committee oversight and auditor accountability ... disclosure in the company proxy statement regarding shareholder ratification [should] include the name(s) of the senior auditing partner(s) staffed on the engagement.”
227
As stated in the October 6, 2008 Final Report of the Advisory Committee
on the Auditing Profession to the U.S. Department of the Treasury:
“The auditor is expected to offer critical and objective judgment on the financial matters under consideration, and actual and perceived absence of conflicts is critical to that expectation. The Committee believes that auditors, investors, public companies, and other market participants must understand the independence requirements and their objectives, and that auditors must adopt a mindset of skepticism when facing situations that may compromise their independence.”
228
On August 16, 2011, the PCAOB issued a Concept Release seeking public comment on ways that auditor independence, objectivity and professional skepticism could be enhanced, with a specific emphasis on mandatory audit firm rotation. The PCAOB convened several public roundtable meetings during 2012 to further discuss such matters. Glass Lewis believes
auditor rotation can ensure both the independence of the auditor and the
integrity of the audit; we will typically recommend supporting proposals to require auditor rotation when the proposal uses a reasonable period of time (usually not less than 5-7 years), particularly at companies with a history of accounting problems.
229
On June 1, 2017, the PCAOB adopted new standards to enhance auditor reports by providing additional important information to investors. For companies with fiscal year end dates on or after December 15, 2017
reports were required to include the year in which the auditor began serving consecutively as the company’s auditor. For large accelerated filers with fiscal year ends of June 30, 2019 or later, and for all other companies with fiscal year ends of December 15, 2020 or later, communication of critical audit matters (“CAMs”) will also be required. CAMs are matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involve especially challenging, subjective, or complex auditor judgment.
230
Glass Lewis believes the additional reporting requirements are
beneficial for investors. The additional disclosures can provide investors with information that is critical to making an informed judgment about an auditor’s
independence and performance. Furthermore, we believe the additional requirements are an important step toward enhancing the relevance and usefulness of auditor reports, which too often are seen as boilerplate compliance documents that lack the relevant details to provide meaningful insight into a particular audit.
231
We generally support management’s choice of auditor except when
we believe the auditor’s independence or audit integrity has been compromised. Where a board has not allowed shareholders to review and ratify an auditor, we typically recommend voting against the audit committee chair. When there have been material restatements of annual financial statements or material weaknesses in internal controls, we usually recommend voting against the entire audit committee.
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Reasons why we may not recommend ratification of an auditor include:
1. When audit fees plus audit-related fees total less than the tax fees and/or other non-audit fees.
2. Recent material restatements of annual financial statements, including those resulting in the report-
ing of material weaknesses in internal controls and including late filings by the company where the auditor bears some responsibility for the restatement or late filing.
3. When the auditor performs prohibited services such as tax-shelter work, tax services for the CEO or CFO, or contingent-fee work, such as a fee based on a percentage of economic benefit to the company.
4. When audit fees are excessively low, especially when compared with other companies in the same industry.
5. When the company has aggressive accounting policies.
6. When the company has poor disclosure or lack of transparency in its financial statements.
7. Where the auditor limited its liability through its contract with the company or the audit contract requires the corporation to use alternative dispute resolution procedures without adequate justification.
8. We also look for other relationships or concerns with the auditor that might suggest a conflict between the auditor’s interests and shareholder interests.
9. In determining whether shareholders would benefit from rotating the company’s auditor, where relevant we will consider factors that may call into question an auditor’s effectiveness, including auditor tenure, a pattern of inaccurate audits, and any ongoing litigation or significant controversies. When Glass Lewis considers ongoing litigation and significant controversies, it is mindful that such matters may involve unadjudicated allegations. Glass Lewis does not assume the truth of such allegations or that the law has been violated. Instead, Glass Lewis focuses more broadly on whether, under the particular facts and circumstances presented, the nature and number of such lawsuits or other sig-
nificant controversies reflects on the risk profile of the company or suggests that appropriate risk mitigation measures may be warranted.
233
An auditor does not audit interim financial statements. Thus, we
generally do not believe that an auditor should be opposed due to a restatement of
interim financial statements unless the nature of the misstatement is clear from a reading of the incorrect financial statements.
234
Glass Lewis believes that poison pill plans are not generally in shareholders’ best interests. They can
reduce management accountability by substantially limiting opportunities for corporate takeovers. Rights plans can thus prevent shareholders from receiving a buy-out premium for their stock. Typically we recommend that shareholders vote against these plans to protect their financial interests and ensure that they have an opportunity to consider any offer for their shares, especially those at a premium.
235
We believe boards should be given wide latitude in directing company activities and in charting the company’s course. However,
on an issue such as this, where the link between the shareholders’ financial interests and their right to consider and accept buyout offers is substantial, we believe that shareholders should be allowed to vote on whether they support such a plan’s implementation
236
This issue is different from other matters that are typically left to board discretion.
Its potential impact on and relation to shareholders is direct and substantial.
It is also an issue in which management interests may be different from those of shareholders; thus, ensuring that shareholders have a voice is the only way to safeguard their interests.
237
In certain circumstances, we will support a poison pill that
is limited in scope to accomplish a particular objective, such as the closing of an important merger, or a pill that contains what we believe to be a reasonable
qualifying offer clause.
238
We will consider supporting a poison pill plan if the qualifying offer clause includes each of the following attributes:
* The form of offer is not required to be an all-cash transaction;
* The offer is not required to remain open for more than 90 business days;
* The offeror is permitted to amend the offer, reduce the offer, or otherwise change the terms;
* There is no fairness opinion requirement; and
* There is a low to no premium requirement. Where these requirements are met, we typically feel comfortable that shareholders will have the opportunity to voice their opinion on any legitimate offer.
239
The Dodd-Frank Act also requires companies to allow shareholders a non-binding vote on the frequency of say-on-pay votes, i.e. every one, two or three years. Additionally, Dodd-Frank requires companies to
hold such votes on the frequency of say-on-pay votes at least once every six years.
240
We believe companies should submit say-on-pay votes to shareholders
every year.
241
We believe that the time and financial burdens to a company with regard to an annual vote
are relatively small and incremental and are outweighed by the benefits to shareholders through more frequent accountability.
242
Implementing biannual or triennial votes on executive compensation
limits shareholders’ ability to hold the board accountable for its compensation practices through means other than voting against the compensation committee. Unless a company provides a compelling rationale or unique circumstances for say-on-pay votes less frequent than annually, we will generally recommend that shareholders support annual votes on compensation.
243
Glass Lewis may consider supporting a limited poison pill in
the event that a company seeks shareholder approval of a rights plan for the express purpose of preserving Net Operating Losses (NOLs).
244
While companies with NOLs can generally carry
these losses forward to offset future taxable income, Section 382 of the Internal Revenue Code limits companies’ ability to use NOLs in the event of a “change of ownership.
245
a company may adopt or amend a poison pill (“NOL pill”) in order to
prevent an inadvertent change of ownership by multiple investors purchasing small chunks of stock at the same time, and thereby preserve the ability to carry the NOLs forward. Often such NOL pills have trigger thresholds much lower than the common 15% or 20% thresholds, with some NOL pill triggers as low as 5%.
246
Glass Lewis evaluates NOL pills on a strictly case-by-case basis taking into consideration
among other factors, the value of the NOLs to the company, the likelihood of a change of ownership based on the size of the holding and the nature of the larger shareholders, the trigger threshold and whether the term of the plan is limited in
duration (i.e., whether it contains a reasonable “sunset” provision) or is subject to periodic board review and/or shareholder ratification. In many cases, companies will propose the adoption of bylaw amendments specifically restricting certain share transfers, in addition to proposing the adoption of a NOL pill. In general, if we
support the terms of a particular NOL pill, we will generally support the additional protective amendment in the absence of significant concerns with the specific terms of that proposal.
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(NOL) we believe that shareholders should be offered the opportunity to vote on
any adoption or renewal of a NOL pill regardless of any potential tax benefit that it offers a company. As such, we will consider recommending voting against those members of the board who served at the time when an NOL pill was adopted without shareholder approval within the prior twelve months and where the NOL pill is not subject to shareholder ratification.
248
Fair price provisions, which are rare, require that
certain minimum price and procedural requirements be ob-served by any party that acquires more than a specified percentage of a corporation’s common stock.
249
The provision is intended to
protect minority shareholder value when an acquirer seeks to accomplish a merger or other transaction which would eliminate or change the interests of the minority shareholders.
250
The fair price provision is generally applied
against the acquirer unless the takeover is approved by a majority of ”continuing directors” and holders of a majority, in some cases a supermajority as high as 80%, of the combined voting power of all stock entitled to vote to alter, amend, or repeal the above provisions.
251
The effect of a fair price provision is to require
approval of any merger or business combination with an “interested shareholder” by 51% of the voting stock of the company, excluding the shares held by the interested shareholder. An interested shareholder is generally considered to be a holder of 10% or more of the company’s outstanding stock, but the trigger can vary.
252
Generally, fair price provisions are put in place for the ostensible purpose of
preventing a back-end merger where the interested shareholder would be able to pay a lower price for the remaining shares of the company than he or she paid to gain control.
253
The effect of a fair price provision on shareholders, however, is
to limit their ability to gain a premium for their shares through a partial tender offer or open market acquisition which typically raise the share price, often significantly. A fair price provision discourages such transactions because of the potential costs of seeking shareholder approval and because of the restrictions on purchase price for completing a merger or other transaction at a later time.
254
Glass Lewis believes that fair price provisions, while sometimes protecting shareholders from abuse in a take-over situation, more often
act as an impediment to takeovers, potentially limiting gains to shareholders from a
variety of transactions that could significantly increase share price. In some cases, even the independent directors of the board cannot make exceptions when such exceptions may be in the best interests of shareholders. Given the existence of state law protections for minority shareholders such as Section 203 of the Delaware
Corporations Code, we believe it is in the best interests of shareholders to remove fair price provisions.
255
Glass Lewis believes that a company’s quorum requirement should be set
at a level high enough to ensure that a broad range of shareholders are represented in person or by proxy, but low enough that the company can transact necessary business.
256
(quorum) Companies in the U.S. are generally subject to
quorum requirements under the laws of their specific state of incorporation.
257
(quorum)those companies listed on the NASDAQ Stock Market are required
to specify a quorum in their bylaws, provided however that such quorum may not be less than one-third of outstanding shares
258
Prior to 2013, the New York Stock Exchange required a quorum of 50% for
listed companies, although
this requirement was dropped in recognition of individual state requirements and
potential confusion for issuers. Delaware, for example, required companies to provide for a quorum of no less than one-third of outstanding shares; otherwise such quorum shall default to a majority.
259
(quorum)We generally believe a majority of outstanding shares entitled to vote is
an appropriate quorum for the transaction of business at shareholder meetings. However, should a company seek shareholder approval of a lower quorum requirement we will generally support a reduced quorum of at least one-third of shares entitled to vote, either in person or by proxy. When evaluating such proposals, we also consider the specific facts and circumstances of the company, such as size and shareholder base.
260
While Glass Lewis strongly believes that directors and officers should be held to the highest standard when carrying out their duties to shareholders,
some protection from liability is reasonable to protect them against certain suits so that these officers feel comfortable taking measured risks that may benefit shareholders. As such, we find it appropriate for a company to provide indemnification and/or enroll in liability insurance to cover its directors and officers so long as the terms of such agreements are reasonable.
261
In general, Glass Lewis believes that the board is in the best position to determine the appropriate jurisdiction of incorporation for the company. When examining a management proposal to reincorporate to a different
state or country, we review
the relevant financial benefits, generally related to improved corporate tax treat-
ment, as well as changes in corporate governance provisions, especially those relating to shareholder rights, resulting from the change in domicile. Where the financial benefits are de minimis and there is a decrease in shareholder rights, we will recommend voting against the transaction.
262
shareholder-initiated reincorporations are typically not the best route to achieve the furtherance of shareholder rights. We believe shareholders are
generally better served by proposing specific shareholder resolutions addressing pertinent issues which may be implemented at a lower cost, and perhaps even
with board approval.
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when shareholders propose a shift into a jurisdiction with enhanced shareholder rights, Glass Lewis examines the significant ways would the company benefit from shifting jurisdictions including the following:
• Is the board sufficiently independent?
• Does the company have anti-takeover protections such as a poison pill or classified board in place?
• Has the board been previously unresponsive to shareholders (such as failing to implement a share-
holder proposal that received majority shareholder support)?
• Do shareholders have the right to call special meetings of shareholders?
• Are there other material governance issues of concern at the company?
• Has the company’s performance matched or exceeded its peers in the past one and three years? • How has the company ranked in Glass Lewis’ pay-for-performance analysis during the last three
years?
• Does the company have an independent chair?
We note, however, that we will only support shareholder proposals to change a company’s place of incorporation in exceptional circumstances.
264
Glass Lewis recognizes that companies may be subject to frivolous and opportunistic lawsuits, particularly in conjunction with a merger or acquisition, that are expensive and distracting. In response,
companies have sought ways to prevent or limit the risk of such suits by adopting bylaws regarding where the suits must be brought or shifting the burden of the legal expenses to the plaintiff, if unsuccessful at trial.
265
Glass Lewis believes that charter or bylaw provisions limiting a shareholder’s choice of legal venue
are not in the best interests of shareholders. Such clauses may effectively discourage the use of shareholder claims by increasing their associated costs and making them more difficult to pursue. As such, shareholders should be
wary about approving any limitation on their legal recourse including limiting themselves to a single jurisdiction (e.g., Delaware) without compelling evidence that it will benefit shareholders.
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For this reason, we recommend that shareholders vote against any bylaw or charter amendment seeking to adopt an exclusive forum provision unless the company:
(i) provides a compelling argument on why the provision would directly benefit shareholders; (ii) provides evidence of abuse of legal process in other, non-favored
jurisdictions; (iii) narrowly tailors such provision to the risks involved; and (iv) maintains a strong record of good corporate governance practices.
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in the event a board seeks shareholder approval of a forum selection clause pursuant to a bundled bylaw amendment rather than as a separate proposal, we will weigh
the importance of the other bundled pro-visions when determining the vote recommendation on the proposal. We will nonetheless recommend voting
against the chair of the governance committee for bundling disparate proposals into a single proposal (refer to our discussion of nominating and governance committee performance in Section I of the guidelines).
268
Similarly, some companies have adopted bylaws requiring plaintiffs who sue the company and fail to receive a judgment in their favor pay the legal expenses of the company. These bylaws, also known as “fee-shifting”
or “loser pays” bylaws, will likely have a
chilling effect on even meritorious shareholder lawsuits as sharehold-
ers would face an strong financial disincentive not to sue a company. Glass Lewis therefore strongly opposes the adoption of such fee-shifting bylaws and, if adopted without shareholder approval, will recommend voting against the governance committee. While we note that in June of 2015 the State of Delaware banned the
adoption of fee-shifting bylaws, such provisions could still be adopted by companies incorporated in other
states.
269
Glass Lewis believes that adequate capital stock is important to a company’s operation. When analyzing a request for additional shares
we typically review four common reasons why a company might need additional
capital stock
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Stock Split
We typically consider three metrics when evaluating whether we think a stock split is likely or necessary: The historical stock pre-split price, if any; the current price relative to the company’s most common trading price over the past 52 weeks; and some absolute limits on stock price that, in our view, either always make a stock split appropriate if desired by management or would almost never be a reasonable price at which to split a stock.
271
Shareholder Defenses
Additional authorized shares could be used to bolster takeover defenses
such as a poison pill. Proxy filings often discuss the usefulness of additional shares in defending against or discouraging a hostile takeover as a reason for a requested increase. Glass Lewis is typically against such defenses and will oppose actions intended to bolster such defenses.
272
Financing for Acquisitions
We look at whether the company has a history of using stock for acquisitions and attempt to determine what levels of stock have typically been required to accomplish such transactions. Likewise, we look to see whether this is discussed as a reason for additional shares in the proxy.
273
Financing for Operations
We review the company’s cash position and its ability to secure fi-
nancing through borrowing or other means. We look at the company’s history of capitalization and whether the company has had to use stock in the recent past as a means of raising capital.
274
Issuing additional shares generally
dilutes existing holders in most circumstances
275
the availability of additional shares, where the board has discretion to implement a poison pill
can often serve as a deterrent to interested suitors
276
here we find that the company has not detailed a plan for use of the
proposed shares, or where the number of shares far exceeds those needed to accomplish a detailed plan
we typically recommend against the authorization of additional shares. Similar concerns may also lead us to recommend against a proposal to conduct a reverse stock split if the board does not state that it will reduce the number of authorized common shares in a ratio proportionate to the split.
277
While we think that having adequate shares to allow management to make quick decisions and effectively operate the business is critical, we prefer that
for significant transactions, management come to shareholders to justify their use of additional shares rather than providing a blank check in the form of a large pool of unallocated shares available for any purpose.
278
We typically recommend that shareholders vote against
proposals that would require advance notice of shareholder proposals or of director nominees.
279
These proposals typically attempt to
require a certain amount of notice before shareholders are allowed to place proposals on the ballot.
280
Notice requirements typically range between
three to six months prior to the annual meeting.
281
Advance notice requirements typically make it
impossible for a shareholder who misses the deadline to present a shareholder proposal or a director nominee that might be in the best interests of the company and its shareholders.
282
We believe shareholders should be able to
review and vote on all proposals and director nominees. Shareholders can always vote against proposals that appear with little prior notice. Shareholders, as owners of a business, are capable of identifying issues on which they have sufficient information and ignoring issues on which they have insufficient information. Setting arbitrary notice restrictions limits the opportunity for shareholders to raise issues that may come up after the window closes.
283
A growing contingent of companies have elected to hold shareholder meetings by virtual means only. Glass Lewis believes that virtual meeting technology can be
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a useful complement to a traditional, in-person shareholder meeting by expanding participation of shareholders who are unable to attend a shareholder meeting
in person (i.e. a “hybrid meeting”). However, we also believe that virtual-only meetings have the potential to curb the ability of a company’s shareholders to meaningfully communicate with the company’s management.
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284
Prominent shareholder rights advocates, including the Council of Institutional Investors, have expressed concerns that
such virtual-only meetings do not approximate an in-person experience and may serve to reduce the board’s accountability to shareholders. When analyzing the governance profile of companies that choose to hold virtual-only meetings, we look for robust disclosure in a company’s proxy statement which assures shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting.
285
Examples of effective disclosure include:
(i) addressing the ability of shareholders to ask questions during the meeting, including time guidelines for shareholder questions, rules around what types of questions are allowed, and rules for how questions and comments will be recognized and disclosed to meeting participants;
(ii) procedures, if any, for posting appropriate questions received during the meeting and the company’s answers, on the investor page of their website as soon as is practical after the meeting; (iii) addressing technical and logistical issues related to accessing the virtual meeting platform; and (iv) procedures for accessing
technical support to assist in the event of any difficulties accessing the virtual meeting.
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the board is planning to hold a virtual-only shareholder meeting and the company does not provide such disclosure.
We will generally recommend voting against members of the governance committee
287
Glass Lewis believes multi-class voting structures are
typically not in the best interests of common shareholders. Allowing one vote per share generally operates as a safeguard for common shareholders by ensuring that
those who hold a significant minority of shares are able to weigh in on issues set forth by the board.
288
we believe that the economic stake of each shareholder should
match their voting power and that no small group of shareholders, family or otherwise, should have voting rights different from those of other shareholders.
289
On matters of governance and shareholder rights, we believe shareholders should have
the power to speak and the opportunity to effect change. That power should not be concentrated in the hands of a few for reasons other than economic stake.
290
We generally consider a multi-class share structure to reflect
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negatively on a company’s overall corporate governance. Because we believe that companies should have share capital structures that protect the interests
of non-controlling shareholders as well as any controlling entity, we typically recommend that shareholders vote in favor of recapitalization proposals to eliminate multi-class share structures. Similarly, we will generally recommend against proposals to adopt a new class of common stock.
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291
In the case of a board that adopts a multi-class share structure in connection with an IPO or spin-off within the past year, we will
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generally recommend voting against all members of the board who served at the time of the IPO if the board: (i) did not also commit to submitting the multi-class structure to a shareholder vote at the company’s first shareholder meeting following the IPO; or (ii) did not provide for a reasonable sunset of the multi-class structure (generally seven years or less). If the multi-class share structure is put to a share-
holder vote, we will examine the level of approval or disapproval attributed to unaffiliated shareholders when determining the vote outcome.
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292
When analyzing voting results from meetings of shareholders at companies controlled through multi-class structures,
we will carefully examine the level of approval or disapproval attributed to unaffiliated shareholders Wwen determining whether board responsiveness is warranted. Where vote results indicate that a majority of
unaffiliated shareholders supported a shareholder proposal or opposed a management proposal, we believe
the board should demonstrate an appropriate level of responsiveness.
293
Cumulative voting increases the ability of minority shareholders to
elect a director by allowing shareholders to cast as many shares of the stock they own multiplied by the number of directors to be elected.
294
As companies generally have multiple nominees up for election, cumulative voting allows
shareholders to cast all of their votes for a single nominee, or a smaller number of nominees than up for election, thereby raising the likelihood of electing one or more of their preferred nominees to the board. It can be important when a board is
controlled by insiders or affiliates and where the company’s ownership structure includes one or more shareholders who control a majority-voting block of company stock.
295
Glass Lewis believes that cumulative voting generally acts as a
safeguard for shareholders by ensuring that those who hold a significant minority of shares can elect a candidate of their choosing to the board. This allows the creation of boards that are responsive to the interests of all shareholders rather than just a small group of large holders.
296
We review cumulative voting proposals on
a case-by-case basis, factoring in the independence of the board and the status of the company’s governance structure
297
But we typically find these proposals on ballots at
companies where independence is lacking and where the appropriate checks and balances favoring shareholders are not in place. In those instances we typically recommend in favor of cumulative voting.
298
Where a company has adopted a true majority vote standard (i.e., where a director must receive a majority of votes cast to be elected, as opposed to a modified policy indicated by a resignation policy only), Glass Lewis
will recommend
voting against cumulative voting proposals due to the incompatibility of the two election methods.
299
For companies that have not adopted a true majority voting standard but have adopted some form of majority voting,
Glass Lewis will also generally recommend voting against cumulative voting proposals if the company has not adopted anti-takeover protections and has been responsive to shareholders.
300
Where a company has not adopted a majority voting standard and is facing both a shareholder proposal to adopt majority voting and a shareholder proposal to adopt cumulative voting,
Glass Lewis will support only the majority voting proposal.
301
When a company has both majority voting and cumulative voting in place,
there is a higher likelihood of one or more directors not being elected as a result of not receiving a majority vote. This is because shareholders exercising the right to cumulate their votes could unintentionally cause the failed election of one or more directors for whom shareholders do not cumulate votes.
302
Glass Lewis believes that supermajority vote requirements
impede shareholder action on ballot items critical to shareholder interests. An example is in the takeover context, where supermajority vote requirements can
strongly limit the voice of shareholders in making decisions on such crucial matters as selling the business. This in turn degrades share value and can limit the possibility of buyout premiums to shareholders. Moreover, we believe that a supermajority vote requirement can enable a small group of shareholders to overrule the will
of the majority shareholders. We believe that a simple majority is appropriate to approve all matters presented to shareholders.
303
We typically recommend that shareholders not give their proxy
to management to vote on any other business items that may properly come before an annual or special meeting. In our opinion, granting unfettered discretion is unwise.
304
Glass Lewis will support proposals to adopt a provision preventing the payment of greenmail
which would serve to prevent companies from buying back company stock at significant premiums from a certain shareholder.
305
Since a large or majority shareholder could attempt to compel a board into purchasing its shares at a large premium, the anti-greenmail provision
would generally require that a majority of shareholders other than the majority shareholder approve the buyback.
306
Glass Lewis believes that decisions about a fund’s structure and/or a fund’s relationship with its investment advisor or sub-advisors are
generally best left to management and the members of the board, absent a show-
ing of egregious or illegal conduct that might threaten shareholder value. As such, we focus our analyses of such proposals on the following main areas:
• The terms of any amended advisory or sub-advisory agreement;
• Any changes in the fee structure paid to the investment advisor; and
• Any material changes to the fund’s investment objective or strategy.
307
We generally support amendments to a fund’s investment advisory agreement absent a material change that is not in the best interests of shareholders
ending voting against a proposed amendment to an investment advisory agreement or fund reorganization. However, in certain cases, we are more inclined to support an increase in advisory fees if such increases result from being performance-based rather than asset-based. Furthermore, we generally support sub-advisory agreements between a fund’s advisor and sub-advisor, primarily because the fees received by the sub-advisor are paid by the advisor, and not by the fund.
308
In matters pertaining to a fund’s investment objective or strategy, we believe
shareholders are best served when a fund’s objective or strategy closely resembles the investment discipline shareholders understood and selected when they initially bought into the fund. As such, we generally recommend voting against amend-
ments to a fund’s investment objective or strategy when the proposed changes would leave shareholders with stakes in a fund that is noticeably different than when originally purchased, and which could therefore potentially negatively impact some investors’ diversification strategies.
309
a REIT must have a minimum
of 100 shareholders (the “100 Shareholder Test”) and no more than 50% of the value of its shares can be held by five or fewer individuals (the “5/50 Test”).
310
as a publicly traded security listed on a stock exchange, a REIT
must comply with the same general listing requirements as a publicly traded equity.
311
REITs typically include percentage ownership limitations in their
organizational documents, usually
in the range of 5% to 10% of the REITs outstanding shares. Given the com-
plexities of REITs as an asset class, Glass Lewis applies a highly nuanced approach in our evaluation of REIT proposals, especially regarding changes in authorized share capital, including preferred stock.
312
Glass Lewis is generally against the authorization of preferred shares that
allows the board to determine the preferences, limitations and rights of the preferred shares (known as “blank-check preferred stock”). We believe that granting such broad discretion should be of concern to common shareholders, since blank-check preferred stock could be used as an antitakeover device or in some other fashion that adversely affects the voting power or financial interests of common shareholders.
313
given the requirement that a REIT must distribute 90% of its net income annually,
it is inhibited from retaining capital to make investments in its business. As such, we recognize that equity financing likely plays a key role in a REIT’s growth and creation of shareholder value.
314
shareholder concern regarding the use of preferred stock as an anti-takeover mechanism may be allayed by
the fact that most REITs maintain ownership limitations in their certificates of
incorporation. For these reasons, along with the fact that REITs typically do not engage in private placements of preferred stock (which result in the rights of common shareholders being adversely impacted), we may sup-
port requests to authorize shares of blank-check preferred stock at REITs.
315
Business Development Companies (“BDCs”) were created by the U.S. Congress in 1980; they are
regulated under the Investment Company Act of 1940 and are taxed as regulated investment companies (“RICs”) under the Internal Revenue Code.
316
BDCs typically operate as
publicly traded private equity firms that invest in early
| stage to mature private companies as well as small public companies.
317
BDCs realize operating income when
their investments are sold off, and therefore maintain complex organizational, operational, tax and compliance requirements that are similar to those of REITs—the most evident of which is that BDCs must distribute at least 90% of their taxable earnings as dividends.
318
Considering that BDCs are required to distribute nearly all their earnings to shareholders,
they sometimes need to offer additional shares of common stock in the public markets to finance operations and acquisitions.
319
shareholder approval is required in order for a BDC to
sell shares of common stock at a price below Net Asset Value (“NAV”). Glass Lewis evaluates these proposals using a case-by-case approach, but will recommend supporting such requests if the following conditions are met:
• The authorization to allow share issuances below NAV has an expiration date of one year or less from the date that shareholders approve the underlying proposal (i.e. the meeting date);
• The proposed discount below NAV is minimal (ideally no greater than 20%);
• The board specifies that the issuance will have a minimal or modest dilutive effect (ideally no greater than 25% of the company’s then-outstanding common stock prior to the issuance); and
• A majority of the company’s independent directors who do not have a financial interest in the issuance approve the sale.
In short, we believe BDCs should demonstrate a responsible approach to issuing shares below NAV, by proactively addressing shareholder concerns regarding the potential dilution of the requested share issuance, and explaining if and how the company’s past below-NAV share issuances have benefitted the company.
320
When a BDC submits a below-NAV issuance for shareholder approval, we
will refrain from recommending against the audit committee chair for not including auditor ratification on the same ballot.
321
Because of the unique way these proposals interact, votes may be
tabulated in a manner that is not in shareholders’ interests. In cases where these proposals appear on the same ballot, auditor ratification is generally the only “routine proposal,” the presence of which triggers a scenario where broker non-votes may be counted toward shareholder quorum, with unintended consequences.
322
Under the 1940 Act, below-NAV issuance proposals require relatively high shareholder approval. Specifically, these proposals must be approved by the lesser of:
(i) 67% of votes cast if a majority of shares are represented at the meeting; or (ii) a majority of outstanding shares. Meanwhile, any broker non-votes counted toward
quorum will automatically be registered as “against” votes for purposes of this proposal. The unintended result can be a case where the issuance proposal is not approved, despite sufficient voting shares being cast in favor. Because broker non-votes result from a lack of voting instruction by the shareholder, we do not believe
shareholders’ ability to weigh in on the selection of auditor outweighs the consequences of failing to approve an issuance proposal due to such technicality.
323
Special Purpose Acquisition Companies (“SPACs”), also known as “blank check companies,” are
are publicly traded entities with no commercial operations and are formed specifically to pool funds in order to complete a merger or acquisition within a set time frame.
324
In general, the acquisition target of a SPAC is either
not yet identified or otherwise not explicitly disclosed to the public even when the founders of the SPAC may have at least one target in mind. Consequently, IPO investors often do not know what company they will ultimately be investing in.
325
SPACs are therefore very different from typical operating companies. Shareholders
do not have the same expectations associated with an ordinary publicly traded company and executive officers of a SPAC typically do not continue in employment roles with an acquired company.
326
Governing documents of SPACs typically provide for the return
of IPO proceeds to common shareholders if no qualifying business combination is consummated before a certain date. Because the time frames for the consummation of such transactions are relatively short, SPACs will sometimes hold special shareholder meetings at which shareholders are asked to extend the business combination deadline. In such cases, an acquisition target will typically have been identified, but additional time is required to allow management of the SPAC to
finalize the terms of the deal.
327
Glass Lewis believes management and the board are generally in the best position to
determine when the extension of a business combination deadline is needed. We therefore generally defer to the recommendation of management and support reasonable extension requests.
328
The board of directors of a SPAC’s acquisition target is in many cases
already established prior to the business combination. In some cases, however, the board’s composition may change in connection with the business combination, including the potential addition of individuals who served in management roles with the SPAC.
329
The role of a SPAC executive is
unlike that of a typical operating company executive. Because the SPAC’s only
business is identifying and executing an acquisition deal, the interests of a former SPAC executive are also different. Glass Lewis does not automatically consider a former SPAC executive to be affiliated with the acquired operating entity when their only position on the board of the combined entity is that of an otherwise independent director. Absent any evidence of an employment relationship or continuing material financial interest in the combined entity, we will therefore consider such directors to be independent.
330
What is the soliciation period and why don’t we engage durign this time?
The soliciation period the time from when an issuer has filed their proxy statement through the conclkusion of the respective meeting. During the solicitation period,GL research teams are reviewing the issuer's disclosure, drafting our proxy papers and generating our recommendations. Also, this time usually falls during the busy proxy season., For these reasons, we limit engagements during this period to preserve iur independence in formulating recommendations for our clients and to avoid imprpomtu meetings during our busuest time of the year
331
Analysts cannot indicate what our recommendations will be based on information provided during an engagement
meeting. This is important for two reasons.
– First, while it may seem as if all the pertinent information is available at the time of the engagement meeting, companies may make subtle changes to
their proxy filings before they are released to the public, and these changes may have a material effect on Glass Lewis analysis (or key public disclosures may be missing).
– Second, Glass Lewis reviews issues and companies on a case-by-case basis, and it is possible our policies may change between the time of engagement and when we review the report.
332
If you don't know how to answer an issuer question, THAT’S OK. You can
say that you aren’t sure. Let the issuer know that you will review the matter
with the research team and will get back to them with the correct information or put them in contact with the appropriate analyst
333
IDR PROGRAM
enables companies to review the key data points used by Glass Lewis in its analysis prior to publication of the final Proxy Paper for institutional investor clients. While the IDR does not contain Glass Lewis’ analysis or voting recommendations, the data points included are critical inputs for Glass Lewis’ analysis. Issuers registered for the IDR can confirm their company data is accurately reflected per disclosure made publicly available to shareholders.
334
IDR PROCESS
Companies which meet the disclosure deadline will receive an email at least three to four weeks prior to their shareholder meeting with their data report and instructions for providing feedback.
From that point, issuers have 48-hours to review the data and provide suggested updates, pointing to any public documentation which supports noted corrections. The 48-hour deadline is strictly administered to ensure Glass Lewis’ research team sufficiently meets their publishing deadline. Where no feedback has been received within the 48-hour period, our research team reserves the right to proceed accordingly with its publishing deadlines.
Returned feedback is reviewed by Glass Lewis’ research analysts who in turn make relevant updates and then provide high-level feedback regarding amendments made. Once the research team submits their response to feedback, they will complete and publish the final Proxy Paper with voting recommendations and analysis.
335
Why did Glass Lewis initiate the Issuer Data Report (IDR) service?
Glass Lewis is dedicated to developing high quality, accurate corporate governance research based on publicly available information. Our reliance on publicly available information ensures our reports reflect the most current and accurate data available to shareholders about each public company. In addition to this, we recognize that constructive engagement with issuers enhances the quality of our research. Glass Lewis’ IDR program facilitates greater transparency with the companies we write about and improves the accuracy in our reports; it is a vital component of our ongoing issuer engagement initiative.
336
Is there a cost to participate in IDR?
No; IDRs are free of charge for participating issuers.
337
In which markets does Glass Lewis offer the IDR?
The IDR service is currently available for the following markets:
U.S. companies listed on the NASDAQ and NYSE exchanges
Canadian companies listed on the TSX or TSXV exchanges
European companies listed on a main market segment of a primary stock exchange
Israeli companies listed on the Tel Aviv stock exchange
Japanese companies listed on the Tokyo Stock exchange
Indian companies listed on the Bombay Stock exchange
Singaporean companies listed on the Singapore exchange
South African companies listed on the JSE exchange
Malaysian companies listed on the Bursa Malaysia
338
Will Glass Lewis provide an IDR for special or contested meetings?
No; IDRs are solely available for annual general meetings, not for special or extraordinary meetings including proxy contests, mergers or meetings with particularly contentious issues.
339
What happens is a potential error is identified?
Potential errors should be noted in the IDR, with the inclusion of citations to correct information, including page number and paragraph, from their meeting disclosures or weblinks to other publicly available information which may verify the correction. Glass Lewis only uses publicly available information in its research and policy prohibits the use of any non-public information in our Proxy Papers.
340
How does Glass Lewis respond in the event a potential error is identified?
Glass Lewis analysts review comments submitted by companies and determine whether the company has identified a factual inaccuracy or relevant omission. High-level feedback is returned to the issuer, in response to their comments/corrections. Errors which are confirmed by publicly available information, are corrected in advance of publication. We encourage companies to review our publicly available Policy Guidelines which are used to develop our analysis.
341
Is Glass Lewis available to discuss its policy during the IDR process?
The IDR is intended to provide issuers with a comprehensive snapshot of Glass Lewis’ corporate governance analysis. Our research team is prohibited from holding meetings during the solicitation period or during the busy proxy season; however, Engagement meetings with Glass Lewis may be scheduled outside of these periods
342
How can I access the final Proxy Paper with Glass Lewis’ recommendations?
The final Proxy Paper is available for purchase, after publication to Glass Lewis clients.
343
We refrain from reviewing or commenting
g on draft versions of proposed proxy materials.
344
The RFS allows public companies, shareholder proponents, dissident shareholders and parties to an M&A transaction
to directly express their differences, agreements and unfiltered opinions on Glass Lewis’ research and recommendations.
345
RFS PROCESS
All sides alike are eligible to participate and will provide their RFS directly to Glass Lewis’ research and engagement team, which will in turn attach each RFS to the relevant research report (i.e. “Proxy Paper”). Each RFS is included with Glass Lewis’ research and automatically redistributed to Glass Lewis clients through its
research and voting platforms. Investors are notified immediately when an RFS is available and can access the RFS directly from the front page of each Proxy Paper to quickly inform their voting decisions. Once a Proxy Paper includes an RFS, that will be the only version of the research Proxy Paper available from Glass Lewis, with prior versions removed from distribution. Any clients that have already downloaded an earlier version of the research Proxy Paper will receive an email with the updated research Proxy Paper that includes the RFS
346
Where additional public disclosure is provided subsequent to the publication of our Proxy Paper (typically three to four weeks prior to the meeting date),
Glass Lewis will assess whether the new information is of material use
for clients and, if there is a reasonable amount of time prior to the deadline for submitting votes, Glass Lewis will consider republishing its research Proxy Paper with the new information. We will always highlight whether or not any of our recommendations have changed as a result of the additional disclosure.
347
Companies, shareholder proponents and other interested parties are encouraged to contact Glass Lewis if they identify any errors in our research. When we are notified of a purported error or omission in a Proxy Paper that report is immediately reviewed. If there is a reasonable likelihood the Proxy Paper will require revision
we remove it from its published status so no additional clients can access it. If a Proxy Paper is updated to reflect new disclosure or the correction of an error, we notify all clients that have accessed the Proxy Paper or have ballots in the system for the meeting tied to that report, whether or not the update or revision affected Glass
Lewis and/or clients’ custom recommendations.
348
Errors should be reported to Glass Lewis through
its public website (https://www.glasslewis.com/report-error/)
349
When reporting an error, we request the following information:
Details on the issue, including meeting date, proposal number and title, page number in the Proxy Paper and the full sentence in which the discrepancy appears.
• Information as to precisely where within a company’s public disclosure we can find and verify the correct information to revise our Proxy Paper given Glass Lewis bases its analysis strictly on publicly available information
350
Because company disclosure is a critical aspect of assessing the mix of diverse attributes and skills of directors
Glass Lewis will begin tracking the quality of board diversity disclosures in company proxy statements.
351
Our assessment of race and ethnicity disclosure will consider
the following:
* Individual – Racial/ethnic diversity of directors is disclosed on an individual basis.
* Aggregate – Racial/ethnic diversity of directors is disclosed on an aggregate basis but does not identify specific directors.
* Combo/Individual – Diversity disclosure is provided on an individual basis but it is not clear what measures of diversity are represented.
* Combination – Diversity disclosure is provided on an aggregate basis and it is not clear what measures of diversity are represented.
* None – No data is provided in the proxy statement regarding racial/ethnic backgrounds of directors.
352
Item 407(c)(2)(vi) of the U.S. Securities and Exchange Commission’s Regulation S-K requires a description of how a board implements any policies that it follows regarding the consideration of diversity in identifying director nominees. In part because many boards of U.S. public companies do not have formal diversity policies and no regulatory requirement compels boards to adopt such a policy
compliance with this disclosure requirement has for years been achieved by many issuers with a small amount of relatively boiler-plate disclosure in the proxy
statement. However, companies have begun including more specific disclosure about what measures of diversity and background characteristics are considered
353
We believe that gender and race/ethnicity are important diversity considerations in the director nomination process nomination process.
Gender and Race/Ethnicity – Both are expressly included in the definition of diversity that is considered in the director search process.
• Gender – Gender, but not race/ethnicity, is included in the definition of diversity that is considered in the director search process.
• None – Neither gender nor race/ethnicity are expressly included in the definition of diversity that is considered in the director search process.
354
Some of the largest U.S. public companies have begun to include proxy statement disclosure highlighting the considerations they employ to ensure that women and racial/ethnic minorities are included in the initial pool of director candidates when nominating new directors, also known as the Rooney Rule. We will
generally note that a company has adopted such a rule where a formal commitment is included in the proxy statement or otherwise enshrined in the charter of a board’s nominating committee. This may take the form of an official Rooney Rule or equivalent policy that ensures women and minorities are included in the initial pool of director candidates considered when nominating new directors.
• Yes – The company discloses in its proxy statement that it utilizes a formal Rooney Rule in its director search process, or otherwise, the nominating committee is bound by a committee charter which expressly states a commitment to include diverse candidates in its director search pool.
• Not disclosed – No such disclosure is provided in the proxy statement or relevant committee charter.
355
A growing priority for many investors in recent years has been standardized disclosure of director skills. Shareholder campaigns and initiatives like the Boardroom Accountability Project have pushed companies to provide clear, concise representations of key knowledge and expertise that individual directors exemplify. These efforts have had an impact on proxy statement disclosure as it has become increasingly commonplace for many U.S. public companies to now disclose a director skills matrix. Our categorization for a skills disclosure assessment will consider the following:
Skills Matrix – A single table which identifies each director’s knowledge and proficiency in specified skills.
• Individual – Individual director biographies contain standardized skills disclosure which could be tabulated into a single table.
• Aggregate – Aggregated information that indicates how many directors have a particular skill but does not identify which directors have those skills.
• None – No standardized, tabulatable skills data is provided in the proxy statement.
356
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if they can not complete a proposed private placement, stock split
or merger (provided we’re supporting the accompanying transaction)
```
Vote “For” an IAS proposal
357
“Cushion Ratio”
Numeric value that measures at the total level of authorized but unissued shares that would result from a company’s request
358
Low stock price exception
Generally we’ll rec “For” if Company’s share price is below $1.00
359
Cushion ratio =
(total proposed shares/ current obligations) - 1
360
IAS scenario DOES NOT apply to
preferred stock increases
361
Preferred shares should be excluded from everything in the model UNLESS
there are preferred shares outstanding that the Company explicitly states
are convertible into common shares (put these into the “obligations” line)
362
Generally, we will vote against preferred share increases (stock text)
– “Blank check” preferred shares can be used for poison pills, or in ways that generally will make them senior to common shareholders. Good for raising capital, but bad for shareholders who could end up further back in the queue
– Exception: “de-clawed” language stating that the board will seek shareholder approval if preferred shares are to be used as anti-takeover mechanism
363
Reverse stock splits will reduce outstanding shares significantly. When the RSS does not proportionally reduce authorized shares, it therefore is effectively a “back door” IAS. Generally, if both of these are on a ballot and RSS doesn’t include a proportional authorized share decrease,
vote AGAINST the IAS and FOR the RSS
364
We are generally more lenient on IAS for pre-revenue biotechnology and pharmaceutical companies.
When their products are in clinical trials, they are not generating revenue. The way that they can raise money is by selling shares, so they need a large pool of shares available to sell.
365
Special Meeting Rights
Allows a shareholder/group of shareholders to call a special meeting, provided
that they hold a certain % of the Company’s shares
– Special meetings could be used to remove directors or approve special transactions not
favored by the board
– Shareholders like having this right
366
Shareholder Action by Written Consent
Allows shareholders to take corporate action without an annual or special meeting
– Instead, shareholders must provide notice that they “consent” to a particular action being taken
– Could be used by activists if board is unresponsive and shareholders can’t call a special meeting
– Generally found in the bylaws. Search “written consent” or “without meeting” or “without a meeting”
– BEWARE: most bylaws allow directors to conduct board business by written consent, which is different
367
Shareholders Right to Amend Bylaws
This provides for the vehicle through which shareholders can propose and adopt an
amendment to the bylaws:
– Typically we are looking for an amendment by a majority vote;
– Shareholders may prescribe a supermajority voting structure.
368
Removal of Directors
• Ideally, shareholders should be able to actively remove directors from office with the vote of a majority of outstanding shares
– Some companies only allow shareholders to remove directors for/with “cause” and may invalidate a director removal resolution accordingly
– Legal standard for “cause” is incredibly high, making this right impractical/hard to use
– Generally found in the certificate
369
Supermajority Voting Provisions
Require greater than 50% approval in order to alter certain provisions
– Example: Article 2 states that the board of directors is classified. In order to amend article 2, it must be approved by the affirmative vote of 75% of shares outstanding
– Example 2: in order for shareholders to amend bylaws without board approval, the changes must be approved by two-thirds of outstanding shares
• Generally speaking, these are bad as they prevent shareholders from approving things in their interests
– In extreme examples (75%/80% of outstanding requirement), even if every share voted is in favour of the proposal, it still won’t pass bc of a lack of participation
370
“Evergreen” Provisions in Equity Plans
• An equity plan provision stating that additional shares are automatically added to the pool every year without shareholder approval
– Usually based on set percentage of outstanding shares (e.g. 5%)
– This is bad, as shareholders don’t get to vote on the plan
• If the Company has an equity plan up for approval at the meeting you can almost certainly answer “No”
• Try searching for a summary of the plan in the Form 10-K and DEF 14A. The equity plan itself will also be attached
as an exhibit Form 10-K.
– Try searching “annual increase” or “automatically increase” in DEF 14A and 10-K
– In the plan test itself, evergreen provisions will be found in a section titled something like “Number of Shares” or “Shares Subject
to the Plan”
• Try searching for “%” and “percent”
371
When to Withhold IPO
```
When a company’s governing documents include several negative
provisions; withhold from all members of the nominating and corporate governance committee• Dual class stock w/ no sunset = withhold from nom/gov committee
• Poison pill = withhold from entire board (just like with non-IPO
companies)
```
372
Share Consolidation/Reverse Stock Split
• Example: ‘If approved, shareholders will receive one new ordinary share for every ten ordinary shares (one-for-ten basis) held.’
• We generally vote FOR this proposal.
– A higher share price may help increase investor interest, attract and retain employees and improve the Company's ability to raise additional capital through equity offerings (Low share price = Stigma of “penny stocks”)
– A Company may have to increase its share price via a share consolidation to retain its listing on an exchange
• What we look for in the plan terms:
– Exchange ratio
– Effect on authorized but unissued shares
• Example: 100 million shares outstanding → 10 million shares outstanding; stock price of $0.30 → $3.00
• This is one of the more common miscellaneous proposals you will encounter on a ballot.
• There will be stock text for this proposal, so follow along!
373
Reincorporations
• A Company wants to be governed by the corporation laws of a different state or country.
– Let’s move to Delaware!
– Tax inversions to Netherlands, Ireland
• The Company will list out the differences in corporate law between the two places (and additional governance changes), and we will compare positive changes to negative changes to shareholder rights.
– Positive: Established rules providing for special meetings, action by written consent, de-staggered boards or director nominations.
– Negative: Staggered boards, impediments to removal of directors, supermajority provisions.
• Beware: sometimes the most important changes aren’t between the different places of incorporation,
but in the company’s bylaws
– As the reincorp. is technically a merger, the “new” company has a new set of bylaws
374
Bundled Bylaw/Article Amendments
• Occasionally, companies will request to amend their Articles of Incorporation or Bylaws (the documents governing the Company’s operation) to effect numerous amendments, all in one proposal
– Board declassification
– Updating language to reflect regulatory changes
– Change voting standard
– Change in fiscal year end
• Examine the amendments in aggregate and determine whether the bundled amendments are beneficial or detrimental to shareholder rights.
375
Bylaw Amendments without a Proposal
• U.S. boards may amend a Company’s bylaws without shareholder approval
– Ex: Exclusive forum provisions, adopt majority voting, fee shifting bylaws, proxy access, ability of shareholders to call special meetings
– Generally, articles of incorporation cannot be unilaterally amended
• When this happens (and the amendments are material) we want to make sure we capture this in theEoD write up
• The key consideration: did this change negatively impact shareholder rights?
– Shareholders should be able to weigh in on matters pertaining to their rights
376
Proxy Access
• Incredibly popular shareholder proposal (SHP) for two years running
• Allows for shareholder-nominated director candidates to be included on management’s ballot
– Generally if you want to elect your own director
• General requirement: you must have owned at least 3% of the Company’s shares for 3 years
– Groups of shareholders can participate, generally up to a limit of 20 shareholders
– Shareholders/companies still scrapping over smaller restrictions
• “Resubmission threshold”: if your nominee fails to get 25% support, you can’t nominate them for the next two years
• Management proposals written by Governance team
• If you see one of these proposals talk to your lead
• If management unilaterally adopted proxy access, there’s stock text we’ll throw into the EOD
– Don’t worry too much about the complex table that pops up (for now)
377
GL Policy for Restatements
As with MWs, GL believes restatements are indicative of weak accounting policies for which the audit committee should be held responsible
378
What is Putnam?
– Director or family member receives compensation for professional services
379
When do I mark “Putnam” in the board table?
– The relationship is current/ongoing, or ended in the past fiscal year.
• If the director will receive compensation for professional services in the current fiscal year, or if they received fees in the fiscal year in review, consider this to be an ongoing relationship.
– When any money is paid: no threshold.
– It involves legal, brokerage, financial, accounting or consulting services.
– The director is directly compensated or partner, member, officer, managing member or partial owner of the firm that is
compensated.
380
What is not included in putnam?
– Leasing arrangements or property deals.
381
Charitable Donations
Use the $120K threshold based
on donations within the past year.
- Mark “Other” for affiliation
reason, Do Not Withhold
382
Aircraft and Real Estate purchases, Leases and Brokerage
```
Mark “business relationship” as
affiliation reason
- Withhold if amount exceeds
thresholds within past year
-Brokerage, and only brokerage,
may qualify for Putnam; 120 THOUSAND THRESHOLD
```
383
RPT: Only withhold from inside directors if they receive
more from RPTs with the Company than through compensation paid to them by the
Company (i.e., salary, bonus, etc.as employee of Company).
