COVID-19 Policy Updates from Glass Lewis & ISS
As the COVID-19 pandemic unfolds across North America, companies and their Boards are now forced to tackle unusual corporate governance matters, the likes of which have not been seen since the 2008-09 recession. While the true long-term impact of COVID-19 on corporate governance practice is still unknown, COVID-19 is forcing companies to consider significant changes to their corporate governance practices for the upcoming proxy season, some of which runs in opposition to previously-established best practices and voting guidelines.
Due to these unique circumstances, Glass Lewis and Institutional Shareholder Services (“ISS”) have updated their voting policies, primarily to provide reassurance to companies who may need to take drastic measures to navigate through the current crisis.
Glass Lewis
1. Virtual-only shareholder meetings
Glass Lewis has announced that it will not recommend an “against” vote for governance committee members of companies that have opted to hold virtual-only shareholder meetings between March 1, 2020 and June 30, 2020, provided that COVID-19 is cited as the main reason for doing so.
Glass Lewis states that it believes that “such meetings provide compelling advantages for both companies and shareholders to preserve the timing, certainty, agendas and voting of shareholder meetings”, and that to discourage virtual-only meetings is in the best interest of companies or shareholders.
For all meetings after June 30, Glass Lewis will continue to maintain its neutral stance towards virtual-only meetings.
2. Poison pill rights
In relation to the current crisis, Glass Lewis has stated that it will consider COVID-19’s impact as reasonable context for the adoption of a poison pill, provided that the duration of the pill is limited to one year or less, and a sound rationale is disclosed for adopting the pill as a result of COVID-19.
Glass Lewis has provided an excerpt of its report on Williams Companies Inc (NYSE: WMB) as an example of a supportable poison pill plan. In the event that the poison pill plan extends over a year, and / or the company does not seek shareholder approval upon expiry of the plan, Glass Lewis has stated that it will issue an “against” vote recommendation for all nominees that were Board members at the time of the plan’s initial approval.
Click here for Glass Lewis’s summary of its approach towards the COVID-19 pandemic, and here for its updated voting policy.
Institutional Shareholder Services (ISS)
1. Meeting postponements and virtual-only shareholder meetings
ISS has stated that it will be understanding of any necessary postponements of in-person meetings for markets that do not permit online meetings. Additionally, for the limited markets where ISS does have an existing policy for adverse vote recommendations for virtual-only meetings, ISS will not issue any “against” vote recommendations, provided that suitable rationale is disclosed and shareholders are still provided the opportunity to participate “as fully as possible”.
ISS does not disclose an end date for these amendments, but encourages companies to resume in-person / hybrid meetings as soon as practical.
2. Poison pill rights, Director attendance and Director / Executive replacements
Similar to Glass Lewis, ISS will likely consider a severe stock price as a result of the COVID-19 pandemic as valid justification for poison pill plans limited to one year or less in duration, but has stated that it expects detailed disclosure regarding its rationale and duration. ISS notes that the triggers for such plans will “continue to be closely assessed within the context of the rationale provided and the length of the plan adopted, among other factors”.
ISS also states that for jurisdictions that do not normally consider electronic / telephonic participation as “full participation”, it will be expecting companies’ explanations for directors that have chosen an alternative form of attendance out of health and safety concerns arising from in-person meetings.
Finally, ISS has reiterated that if sufficient explanation is provided, analysts will have appropriate discretion and flexibility with regards to director or executive team member replacements, and existing guidelines regarding independence, potential overboarding and diversity may be relaxed on a case-by-case basis.
3. Compensation issues
With regards to changes in metrics or targets, ISS expects contemporaneous disclosure regarding changes for 2020 compensation programs ahead of next year’s AGM, and has re-affirmed its negative stance towards any changes to “midstream” or “in-flight” long-term awards, as these awards are intended to measure performance across multiple years. For changes to long-term awards going forward, ISS will continue to use its existing policy frameworks in its assessment.
ISS will also continue to apply its existing voting guidelines with respect to option repricing in all jurisdictions including Canada, where ISS will issue “against” votes for any proposals to reprice outstanding options, and for any equity plan put forward by a company that has repriced stock options without shareholder approval within the last 3 years.
4. Capital structure and payouts
ISS will be supporting broad discretion for Boards that wish to set dividend payout ratios below historic levels or customary market practices, and will be looking for Board disclosure regarding any plans to use preserved cash from dividend reductions to support and protect their business and workforce.
ISS has also stated that it will continue to support share repurchase authorizations (in the absence of any regulation or severe concerns regarding the company), but cautions that directors “need to consider the reputational, regulatory and business risks that exercising such authority might create”, even if the authorization is approved by shareholders.
Finally, ISS has indicated that its current policies for share issuances and private placements will continue to hold, and that the current pandemic will constitute exceptional circumstances for i) any share issuance proposals that would normally exceed market-specific limits on size or dilution; or ii) for any private placements where exceptional circumstances would result in the company going out of business or file for bankruptcy if the private placement is not approved.
Click here for ISS’s policy guidance statement in relation to COVID-19, and here for ISS’s updated voting policies for TSX-listed companies.
AUTHORS
Eddington Ruiz, Consultant
→ eruiz@compgovpartners.com
Marlene Georges, Principal
→ mgeorges@compgovpartners.com