Glass Lewis Policy Updates for 2024

Glass Lewis has announced updates to its benchmark policy guidelines for the 2024 proxy season. Key topics addressed by the updates include disclosure regarding remediation of material weaknesses, board oversight of environmental and social issues, board oversight, response and disclosure concerning cyber-related issues, board accountability for climate-related issues, and compensation clawback policies. Additionally, Glass Lewis published its 2024 Shareholder Proposals & ESG-Related Issues Benchmark Policy Guidelines. The changes to Glass Lewis’s benchmark policy guidelines will apply for shareholder meetings to be held after January 1, 2024.

As of December 14, 2023, Institutional Shareholder Services Inc. had not proposed any changes to its U.S. benchmark voting policies for 2024.

A.  Material Weaknesses

Glass Lewis believes it is the responsibility of audit committees to ensure that material weaknesses are remediated in a timely manner, and that companies should disclose remediation plans that include detailed steps to resolve a given material weakness. In cases where a material weakness has been ongoing for more than one fiscal year, Glass Lewis believes the company should disclose an updated remediation plan at least annually thereafter.

Glass Lewis will consider recommending voting against all members of the audit committee who served on the committee at the time a material weakness was identified, if the company does not disclose a remediation plan when it reports the material weakness, or where a material weakness has been ongoing for more than one year and the company has not disclosed an updated remediation plan that clearly outlines the company’s progress towards remediating the material weakness.

B.  Board Oversight of Environmental and Social Issues

For the 2023 proxy season, Glass Lewis adopted a policy to generally recommend voting against the governance committee chairs of Russell 1000 index companies that fail to provide explicit disclosures about the board’s role in overseeing environmental and social issues. Also for 2023, Glass Lewis expanded its tracking of this board-level oversight to all companies within the Russell 3000 index.

Glass Lewis believes responsibility for board oversight of environmental and social risks should be formally designated and codified in the appropriate committee charters or other governing documents. Therefore, starting in 2024, Glass Lewis will examine the company’s committee charters and governing documents to determine whether the company has codified a meaningful level of oversight and accountability for the company’s material environmental and social impacts.

C.  Board Oversight of Cyber Risk

Glass Lewis has updated its approach to cyber risk oversight in light of the Securities and Exchange Commission’s (“SEC”) new cybersecurity disclosure rules, which were adopted in 2023. Glass Lewis confirmed that in the absence of material cyber incidents, it will generally not make recommendations on the basis of a company’s oversight or disclosure concerning cyber-related issues. In cases where cyber incidents have caused significant harm to a company’s shareholders Glass Lewis will closely evaluate the board’s oversight of cybersecurity as well as the company’s response and disclosures.

The updates further provide that, in cases where a company has been materially impacted by a cyber incident, Glass Lewis believes shareholders can reasonably expect periodic updates communicating the company’s progress towards resolving and remediating the impact of the cyber incident. Glass Lewis believes shareholders are best served when this disclosure includes, at a minimum, details such as when the company has fully restored its systems, when the company has returned to normal operations, what resources the company is providing for affected stakeholders, and any other potentially relevant information, until such time the company considers the impact of the cyber incident fully remediated. The disclosures should focus on the company’s response to address the impacts to affected stakeholders and should not reveal specific and/or technical details that could impede the company’s response or remediation efforts or that could assist threat actors.

In cases where a company has been materially impacted by a cyber incident, Glass Lewis may recommend that shareholders vote against appropriate directors if it finds that the board’s oversight, response, or disclosure concerning cybersecurity-related issues was insufficient, or were not provided to shareholders.

D.  Board Accountability for Climate-Related Issues

For the 2023 proxy season, Glass Lewis adopted a policy that companies with material exposure to climate risk stemming from their own operations, such as those companies identified by groups including Climate Action 100+, should provide shareholders with thorough disclosures aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”), and that boards of such companies should have explicit and clearly defined oversight responsibilities over climate-related issues. In cases where it determines either the disclosures or the board oversight are absent or significantly lacking, Glass Lewis’s policy is to recommend shareholders vote against responsible directors.

For 2024, Glass Lewis is expanding the above policy to companies in the S&P 500 index operating in industries where the Sustainability Accounting Standards Board (“SASB”) has determined that the companies’ greenhouse gas (“GHG”) emissions represent a financially material risk, as well as companies where Glass Lewis believes emissions or climate impacts, or stakeholder scrutiny thereof, represent an outsized, financially material risk.

E.  Clawback Provisions

Glass Lewis has updated its approach to compensation clawback provisions in light of the new NYSE and Nasdaq listing requirements requiring clawback policies, which took effect in 2023. Glass Lewis believes that clawback provisions play an important role in mitigating excessive risk-taking that may be encouraged by poorly-structured variable incentive programs. Glass Lewis also recognizes that excessive risk-taking that can materially and adversely impact shareholders may not necessarily result in an accounting restatement or correction to previous financial statement.

In addition to meeting the requirements of stock exchange listing standards, Glass Lewis believes clawback policies should permit companies to claw back incentive compensation (whether time-based or performance based) when there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure, or a material operational failure, the consequences of which have not already been reflected in incentive payments and where recovery is warranted. Clawback policies should permit recoupment regardless of whether an executive officer was terminated with or without cause.

In situations where a company decides not to follow through with recovery, Glass Lewis believes the company should provide a thorough, detailed discussion of its decision and, if applicable, how the company has otherwise rectified the disconnect between executive pay outcomes and negative impacts of their actions on the company. Glass Lewis will assess the appropriateness of such determination and the company’s disclosure, which play a role in Glass Lewis’s overall recommendation for the advisory vote on executive compensation.

F.  Executive Ownership Guidelines

For 2024, Glass Lewis has formally outlined its approach to executive share ownership guidelines. Glass Lewis believes that companies should facilitate the alignment between shareholder interests and the interests of executives by adopting and enforcing minimum executive share ownership requirements. Companies should clearly disclose their executive share ownership requirements in the Compensation Discussion and Analysis section in their proxy statement, including how the various types of outstanding equity awards are counted or excluded from the ownership level calculation.

The updates further explain that Glass Lewis believes counting unearned performance-based full value awards and/or unexercised stock options, when determining whether executives have met the ownership requirements, is inappropriate, and it expects companies following such a practice to provide shareholders with a cogent rationale for doing so.

G.  Proposals for Equity Awards for Shareholders

For 2024, Glass Lewis has added a discussion to its guidelines for equity-based compensation proposals. For proposals seeking approval for individual equity awards where the recipient of the proposed grant is also a large shareholder whose vote can materially affect the passage of the proposal, Glass Lewis expects companies to require the recipient to abstain or refrain from voting on the proposal. Glass Lewis will weigh this favorable feature alongside the structure, disclosure, dilution, provided rationale, and other provisions related to the individual award to assess the award’s alignment with long-term shareholder interests.

H.  Net Operating Loss Poison Pills

Glass Lewis’s existing policy provides that it may consider supporting a limited poison pill for the purpose of preserving Net Operating Losses (“NOLs”). For 2024, Glass Lewis has updated its discussion of NOL pills to outline its concerns with “acting-in-concert” provisions, which have the effect of broadening the concept of beneficial ownership and which can, as a result, aggregate the ownership of shareholders acting in concert to trigger the NOL pill.

Glass Lewis believes such provisions broadly limit the voice of shareholders and may diminish their ability to engage in a productive dialogue with the company and other shareholders. Such provisions, combined with other concerning features such as low thresholds, may disempower shareholders and insulate the board and management, and when such provisions are present within the terms of a NOL pill it may raise concerns as to the true objective of the pill.

Glass Lewis evaluates NOL pills on a case-by-case basis, taking into account several enumerated factors. For 2024, Glass Lewis has added to its list of considerations (i) the inclusion of an acting in concert provision, and (ii) whether the pill is implemented following the filing of a Schedule 13D by a shareholder or there is evidence of hostile activity or shareholder activism.

I.  Clarifying Amendments

For 2024, Glass Lewis also issued a number of clarifications to its existing policies:

• Board Responsiveness: Under existing policy, Glass Lewis believes that when 20% or more of shareholders vote contrary to management, or oppose a say-on-pay proposal, boards should engage with shareholders on the issue and respond to shareholder feedback. Glass Lewis clarified that this occurs when more than 20% of votes on the proposal are cast as against and/or abstain.
• Interlocking Directorships: Under existing policy, Glass Lewis views interlocking directorships—CEOs or other top executives who serve on each other’s boards—as a conflict of interest. Glass Lewis clarified that on a case-by-case basis, it would also evaluate other types of interlocking relationships, such as interlocks with close family members of executives or within group companies.
• Board Diversity: Under existing policy, Glass Lewis requires that the boards of companies within the Russell 1000 index have at least one director from an underrepresented community. Glass Lewis also requires boards of companies within the Russell 3000 index be at least 30 percent gender diverse, or for companies outside the Russell 3000 index, have at least one gender diverse director. When these thresholds are not met, Glass Lewis will generally recommend against the chair of the nominating committee of the board. For 2024, Glass Lewis has clarified that it may refrain from recommending against when the board has provided sufficient rationale for the lack of diversity or a plan to address the lack of diversity, including a timeline to appoint additional diverse directors (generally by the next annual meeting or as soon as reasonably practicable).
• Non-GAAP to GAAP Reconciliation Disclosure: Glass Lewis has expanded its discussion regarding the use of non-GAAP measures in incentive programs to emphasize that in circumstances where significant adjustments were applied to performance results, thorough, detailed discussion of such adjustments is required within the proxy statement. The absence of such enhanced disclosure for significant adjustments will impact Glass Lewis's assessment of the quality of disclosure and, in turn, may play a role in the overall recommendation for the advisory vote on executive compensation.
• Pay-Versus-Performance Disclosure: Glass Lewis has revised its discussion of the pay-for-performance analysis to note that Glass Lewis may use the pay-versus-performance disclosure required by the SEC as part of the supplemental quantitative assessments that support Glass Lewis’s primary pay-for-performance grade.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Securities and Capital Markets practice: