Locke Lord QuickStudy: Proxy Season is Coming

Locke Lord LLP
December 15, 2017

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The 2018 proxy season is almost upon us. This QuickStudy recaps some important policy updates and new disclosure requirements to keep in mind as proxy preparations begin in earnest this winter. 

ISS and Glass Lewis 2018 Voting Policy Updates 
Both ISS and Glass Lewis have updated their proxy voting guidelines for the 2018 proxy season.1 The following table summarizes and compares certain of the key updates to their voting guidelines.

Topic  ISS Glass Lewis
Board Gender Diversity
Companies with no female directors will receive a notation in their proxy research reports, but will not issue negative recom­mendations against directors based on the lack of gender diversity. 
Will not make voting recommendations solely on a lack of gender diversity but it may be noted in the company’s proxy report and considered in connection with the evalua­tion of the company’s oversight structures. However, beginning in 2019, will gener­ally recommend against the nominating committee chair of a board with no female members. 
Climate Change Proposals
Generally supports proposals seeking disclosure of risks related to climate change, including financial, physical and regulatory risks. Now also supportive of proposals seeking disclosure on how the company identifies, measures and manages such risks. The policy changes are intended to better align ISS’ policy with the recommendations from the Task Force on Climate-Related Financial Disclosures (“TCFD”).
Generally will recommend in favor of propos­als requesting that companies in certain extractive or energy-intensive industries that have increased exposure to climate change-related risks provide information concerning their climate change scenario analyses and other climate change-related considerations. Although generally supportive of the TCFD disclosure recommendations, will review proposals requesting TCFD-style disclosure on a case-by-case basis. 
Board Responsiveness 
No change generally but, with respect to say-on-pay proposals that receive less than 70% support, will take into account (i) the timing and frequency of engage­ments with major institutional investors to learn their concerns and whether independent directors participated, (ii) disclosure of the feedback from dissent­ing investors that led them to oppose the say-on-pay proposal and (iii) whether the company made meaningful changes that were responsive to investor concerns.
Now expects shareholder engagement and other board responsiveness measures when 20% or more of shareholders vote contrary to management’s recommendation, especially with respect to director elections or compen­sation proposals.
Proxy Access “Fix It” Proposals
No change.
Will evaluate proxy access “fix it” proposals on a case-by-case basis. If the existing proxy access provisions “reasonably conform with broad market practice,” Glass Lewis will gen­erally recommend against “fix it” proposals. 
Gender Pay Gap Proposals
Will evaluate proposals seeking reports on company pay data by gender, or policies to reduce any gender pay gap, on a case-by-case basis, considering the company’s current policies and disclosure on diversity, whether the company has recently been the subject of litigation or other controversies related to gender pay gap issues and whether the company’s reporting or initiatives lags its peers.
No change for 2018. Their current policy is similar to the new ISS policy. 
CEO Pay Ratio Will include a company’s CEO pay ratio as a data point in its proxy research reports, but it will not impact their assessment of, or voting recommendations on, say-on-pay proposals. 
Same as ISS.
Virtual Shareholder Meetings No change.
For 2018, will not make voting recommen­dations solely on the basis that a company is holding a virtual-only meeting. However, beginning in 2019, will generally recommend against members of the governance com­mittee where the board is planning to hold a virtual-only shareholder meeting and the company does not provide robust disclo­sure assuring shareholders that they will be afforded the same opportunity to participate as they would at an in-person meeting. 

SEC’s Latest Guidance on Excluding Shareholder Proposals

On November 1, 2017, the staff of the Securities and Exchange Commission issued Staff Legal Bulletin No. 14I2 (“SLB No. 14I”), which provides guidance to companies regarding no-action requests to exclude shareholder proposals from their proxy materials under Rule 14a-8(i)(7) (the “ordinary business” exception) and Rule 14a-8(i)(5) (the “economic relevance” exception). Under SLB No. 14I, if the shareholder proposal raises significant policy or business issues, the staff encourages (but does not require) a company submitting a no-action request relying on the ordinary business exception or the economic relevance exception to include a discussion that reflects its board of directors analysis of the issues. Because both of these exceptions can often raise difficult judgment calls, the staff believes that the company’s board is in the best position to make an initial determination on these matters. Therefore, going forward, a company should consider whether its no-action request under these exceptions should include a discussion reflecting the board’s analysis of the issues raised in the proposal and the specific processes it employed to reach a well-informed and well-reasoned conclusion that the issues are not sufficiently significant for a shareholder vote. While SLB No. 14I can place greater responsibility on boards who follow the recommendation that they consider shareholder proposals, board input into the process (and possible staff deference to that input) may allow companies to exclude more proposals under these two exceptions.3

Pay Ratio Disclosures

Most public companies will be required, for the first time, to include pay ratio disclosure in their 2018 proxy statements. These companies should already be hard at work on their pay ratio disclosures required under Item 402(u) of Regulation S-K.4 Each company’s current priority should be to identify its median employee and calculate the median employee’s annual total compensation. In September, both the SEC and its Division of Corporation Finance provided guidance on how to determine the median employee and other related matters, and also updated certain of the pay ratio C&DIs. You can read the SEC guidance here, the Division of Corporation Finance guidance here, the updated C&DIs here, and our related QuickStudy on this guidance here. Also, see above for a discussion of how ISS and Glass Lewis will treat the pay ratio disclosures for the 2018 proxy season. 


1 See the ISS updates here and the Glass Lewis updates here and here.

2 See SLB No. 14I here.

3 On November 20, 2017, Apple, relying on the ordinary business exception and the new guidance in SLB No. 14I, submitted a no-action request regarding a shareholder proposal on human rights. In the no-action request, Apple argues that its board already regularly considers and actively oversees its human right policies and that even if the proposal was approved by shareholders it would not call for Apple to do anything it does not already do in the course of its ordinary day-to-day operations and therefore the proposal should be excluded. We will have to wait and see whether Apple’s argument (effectively, “we already do that” and reading more like a “substantial implementation” exclusion) will be sufficient to avail itself of the potential benefits of SLB No. 14I.

4 The SEC’s adopting release for Pay Ratio disclosures can be found here.