Glass Lewis’s 2024 voting policy updates address clawbacks and stock ownership guidelines 

Proxy advisor Glass Lewis & Co. (Glass Lewis) has updated its voting policy guidelines for the 2024 proxy season. The compensation-related updates address (among other things) clawbacks, stock ownership guidelines and the impact of pay-versus-performance disclosures on a company’s pay-for-performance grade. The policies are effective for meetings held on or after January 1, 2024. Just-released proposed updates from ISS don’t include changes for US companies but this could change when ISS releases its final policies. There was a question on non-GAAP metric disclosures in its annual benchmark survey that could be addressed, along with other topics. Separately, ISS added compensation factors on non-CEO executive severance and change-in-control agreements to its Governance QualityScore.

Glass Lewis voting policy updates

Glass Lewis’s compensation policies affect the proxy advisor’s say-on-pay (SOP) vote recommendations. The updates came one week after Glass Lewis released the results of its first-ever policy survey. 

Clawback policies

US-listed companies have until December 1 to adopt a policy that requires the recovery of excess incentive-based pay from current and former executive officers if they received payments based on financial statements that were later subject to a restatement. Glass Lewis’s policy updates want companies to go further. According to the proxy advisor:

• Policies should allow companies to recoup incentive compensation (whether time-based or performance-based) in cases of problematic decisions or actions (e.g., material misconduct, reputational failure, risk management failure, or operational failure).
• The power to recoup should be provided regardless of whether the executive's employment was terminated with or without cause.
• If the company decides not to recoup compensation, it should explain its decision and disclose alternative measures pursued (e.g., exercising negative discretion on future payments).

Similarly, ISS believes clawbacks should cover time-based incentives and won’t give companies credit for having a robust policy under its Governance QualityScore or its Equity Plan Scorecard unless theseawards are covered. So far, the ISS guidelines don’t address misconduct.

Stock ownership guidelines

Glass Lewis believes companies should adopt and enforce minimum share ownership rules for proxy named executive officers and disclose the ownership requirements in the CD&A, including whether outstanding equity awards count toward the requirements. The updates clarify that unearned performance-based full value awards and unexercised stock options shouldn’t be counted without a “cogent” rationale. ISS goes farther in its Governance QualityScore, not giving companies credit for having guidelines unless unearned performance awards and unexercised options are excluded under all circumstances.

Pay-versus-performance disclosure

Glass Lewis may use the new SEC required pay-versus-performance disclosures as part of its supplemental quantitative assessments, which support its primary pay-for-performance grade. ISS has so far been silent on this (including in its proposed updates), but this could change when the final updates are released. In 2023, the disclosures were included in ISS proxy reports for informational purposes only.

Non-GAAP reconciliation disclosure

Glass Lewis wants companies to disclose differences between non-GAAP and GAAP results for incentive payout determinations in a thorough and transparent manner, particularly where significant adjustments were applied and materially impact incentive pay outcomes. ISS may take a similar approach when it releases its final policies, as its benchmark survey included a question on this topic and investor respondents strongly favored line-by-line reconciliations. 

Other topics

Other compensation updates and clarifications include the following:

• Glass Lewis expects companies to respond to a low SOP vote (≤80%) or it may recommend against not only the SOP on next year’s proxy, but also directors — particularly those on the compensation committee. The updates clarify that the calculation of SOP opposition includes votes cast as either AGAINST or ABSTAIN.
• If a company seeks shareholder approval of an individual equity award where the recipient of the proposed grant is also a shareholder, the provisions should require a non-vote, or vote abstention from the shareholder, to address conflicts of interest -- particularly when the vote of the grant recipient could significantly impact the passage of the proposal.

Non-compensation updates cover board oversight of climate-related issues, cybersecurity, risk management and environmental and social issues.

ISS QualityScore updates

ISS’s 2024 compensation-related QualityScore updates expand the proxy advisor’s interest in CEO severance and change-in-control payments to non-CEO executives with two new factors:  

• What is the multiple of pay in the change-in-control or the severance agreements for non-CEO executives? 
• What is the basis for the change-in-control or severance payment for the non-CEO executives?

It’s unclear how ISS scores the factors and they don’t directly impact its voting recommendations.

ISS’s final voting policy updates are expected shortly. While it’s proposed updates don’t include changes for US companies, this could change when ISS releases its final policies. The updates are typically effective for meetings on or after February 1.