For the first time, Glass Lewis recently conducted an annual policy survey¹. The survey previews potential changes to its proxy voting policies and provides the views of over 550 investors, public corporations and their advisers on a wide range of compensation and governance matters.
Summarized below are investor and non-investor responses to policy questions on compensation and select governance matters. Public companies and their advisors are collectively referred to as “non-investors” in this Client Alert.
Clawback Provisions
Investors are more likely than non-investors to believe that clawback provisions should be triggered by events beyond a restatement, such as misconduct and reputational failures.
Survey Question: Where a restatement has not occurred, do you believe clawback policies should be applicable in response to any of the following?
Non-GAAP Incentive Metrics
When incentive payouts are based on non-GAAP metrics and a company fails to provide a full non-GAAP to GAAP reconciliation, investors believe that should strongly factor into Say-on-Pay vote recommendations (53% vs 23% for non-investors). In addition, 81% of investors (vs. 52% of non-investors) believe that the absence of such disclosure should be a factor on investor Say-on-Pay vote decisions. This is consistent with the position taken by a large number of institutional shareholders and backed by the Council of Institutional Investors.
Survey Question: Where incentive outcomes are materially impacted by the use of Non-GAAP results and the company fails to provide a reconciliation in the proxy statement, should this be a factor in determining Say-on-Pay vote recommendations?
Assessing Pay and Performance
Investors place a greater weight and importance (indicating they were ‘very important’ or ‘somewhat important’) than non-investors on the factors listed for consideration when assessing executive Pay-for-Performance alignment.
Survey Question: In assessing executive pay-for-performance alignment, how important are each of the following factors?
Mitigating Quantum Concerns
When assessing pay-for-performance alignment, a significant majority of investors and non-investors agree that certain factors could mitigate concerns about pay magnitude.
Survey Question: In assessing executive pay-for-performance alignment, how important are each of the following in assuaging concerns about pay magnitude?
Executive Stock Ownership Guidelines
Nearly 80% of investors and non-investors consider the presence of any executive share ownership requirement as somewhat or very important.
Survey Question: When assessing a company’s share ownership requirements, how important are the following features?
Emerging Board Skills
Investors and non-investors believe board members should possess a broad range of skills, with at least 70% of investors and non-investors rating human capital management, cybersecurity and employee health and safety as a somewhat or very important skills.
Survey Question: How important do you consider the following director skills/qualifications to be in your assessment of board skillsets?
Mandatory Retirement Policies
A plurality (41%) of investors and non-investors view mandatory director retirement policies as a reasonable method to promote board refreshment. However, non-investors (41%) were more likely than investors (31%) to believe the disadvantages of such policies outweigh their advantages.
Former Executive Independence
Frequently, retired/separated executives are appointed to their former employer’s board of directors. A bare majority of non-investors (51%) and a minority of investor (27%) consider such directors to be independent at the time of their appointment. A plurality of investors (30%) believes a former executive can never be considered an independent board member.
Director Overboarding
Approximately 90% of investors and non-investors believe that independent directors should serve on no more than five boards.
ESG Compensation Metrics
A plurality (43%) of investors and a minority of non-investors (37%) believe that all companies should incorporate ESG metrics into their executive compensation plans. In contrast, a majority of non-investors (54%) and a minority of investors (37%) believe that companies should have the discretion to determine whether to include ESG metrics in their executive compensation plans.
Conclusion
Several of the investor answers to the policy survey questions were consistent with existing Glass Lewis policies (e.g., the maximum number of board commitments), so unsurprisingly Glass Lewis did not make any policy updates with respect to these questions for 2024. But several answers to questions did cause Glass Lewis to expand existing policies (e.g., those regarding non-GAAP incentive metrics and clawback applicability). It will be interesting to see if Glass Lewis builds on these responses in next year’s policy survey, and, if so, what that implies for Glass Lewis’s 2025 policy updates.
¹ Glass Lewis’s Client Policy Survey 2023: Results and Key Findings, available at: https://www.glasslewis.com/2023-policy-survey/
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The Client Update is prepared by Meridian Compensation Partners’ Governance and Regulatory Team led by Donald Kalfen. Questions regarding this Client Update or executive compensation technical issues may be directed to Donald Kalfen at 847-235-3605 or dkalfen@meridiancp.com.
This report is a publication of Meridian Compensation Partners, LLC, provides general information for reference purposes only, and should not be construed as legal or accounting advice or a legal or accounting opinion on any specific fact or circumstances. The information provided herein should be reviewed with appropriate advisors concerning your own situation and issues. www.meridiancp.com