Against the backdrop of the COVID-19 pandemic and the novel challenges with which public companies around the world have been faced, Glass Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services Inc. (“ISS”), two established proxy advisory firms, have released updates in connection with how their voting policies will be applied in the course of the 2020 proxy season. The central themes from both advisors are that the COVID-19 pandemic is creating exceptional and difficult circumstances for Boards to navigate, and that the firms will have an increased flexibility in their approach to proxy contest reviews, with an emphasis on the quality of companies’ decision-making, disclosure and reasoning in respect of any changes to governance, compensation and capital structure.
With a view to health and safety concerns that surround the COVID-19 pandemic, Glass Lewis and ISS will not respond unfavourably if a company chooses to hold its annual shareholder meeting on a “virtual” basis. Both firms are adamant, however, that the rationale behind a company’s choice to go “virtual” be sound, and that the company’s public disclosure of such rationale be robust. In any event, shareholders must be given as meaningful an opportunity to participate in the annual meeting as they would under normal circumstances, and each of Glass Lewis and ISS have indicated that they will assess meeting adjustments on case-by-case bases.
In jurisdictions where online meeting participation is not permitted, ISS recognizes that it may be nevertheless prudent for a company to postpone its meeting, provided that the company continues to adhere to the applicable regulatory framework. In such situations where holding an annual meeting is not permitted, management should take steps to engage with their shareholders through other virtual means such as conference calls and video conference calls.
Both firms recognize that the pandemic may have dislocated share prices from actual values of companies, and that Boards may feel compelled to take steps to protect shareholders from a “damaging” hostile takeover. In their policy updates, both firms have suggested that in determining their voting recommendations, they will apply contextual assessments to a company’s use of a “rights plan”. To that end, they have taken the stance that a “rights plan” must satisfy certain conditions to be considered reasonable in their view, including that the plan will remain in effect for less than one year, and that its rationale be solid and adequately-detailed in the company’s public disclosure. Also highlighted is the importance of conformity to the firms’ existing practice guidelines on “rights plans”, as well as adherence to any specific stock exchange requirements that pertain to “rights plan” approval by shareholders. A dramatic share price decline is likely to be considered by these firms to be valid justification for the adoption of a short-term “rights plan”.
Changes to a Company’s Board or Senior Management
Current ISS policies allow for flexibility and discretion when reviewing Board composition and management staffing. Director independence, potential overboarding and Board diversity are staple considerations that ISS takes into account when determining whether leadership is positioned to meet its company’s needs. ISS will continue to review the decision-making processes behind changes to a company’s Board or senior management on a case-by-case basis.
Glass Lewis, for its part, will be monitoring Board composition – with a particular focus on attendance rates, independence and diversity – against the overall ability of a company to navigate the COVID-19 pandemic, and it will take such considerations into account when determining a given voting recommendation.
Both Glass Lewis and ISS expect that many Boards may announce changes to compensation plan performance targets in response to COVID-19’s market impact, and neither firm has announced any planned deviation from their current policies on compensation. That said, ISS has suggested that while changes to compensation plans will in most cases be subject to shareholder review at next year’s general meetings, Boards should contemporaneously disclose the rationale of any change made in the meantime. ISS will assess changes to both long and short-term compensation plans on a case-by-case basis.
Capital and Liquidity
Capital raisings, by way of share issuances, private placements and other related proposals, will continue to be subject to the general policy framework of the proxy advisory firms, but the firms will also consider regulatory changes adopted to address the current crisis and circumstances faced by companies. Both firms recognize that the COVID-19 pandemic clearly represents exceptional circumstances and that a company’s ability to effectively maintain liquidity and manage capital is crucial in the current economic environment. The justifications provided by a company to take certain steps to that end will be reviewed by the firms case-by-case when a voting recommendation is made.
In the Canadian context, the foregoing policy updates should be reviewed in conjunction with the benchmark guidelines published for Canada by each of Glass Lewis and ISS. Further detail with respect to how Glass Lewis plans to apply its voting policies to the 2020 proxy season are available at its Resources & Blog page, where specific discussions regarding the impact of the COVID-19 pandemic on shareholder meetings and shareholder rights plans are provided. The updates released by ISS are outlined in its Impacts of the COVID-19 Pandemic publication.
Please visit the Fasken Coronavirus (COVID-19) Knowledge Centre for up-to-date information surrounding the COVID-19 pandemic and its legal ramifications both in Canada and around the world.