Glass Lewis Policy Update Regarding “Company Feedback”
On March 26, 2020, Glass Lewis announced that “Everything in Governance is Affected by the Coronavirus Pandemic” and provided their view on how they expect the pandemic to affect issuers and markets. Most importantly, Glass Lewis indicated where the application of their voting policy may be affected. In short, Glass Lewis expects that the following will be impacted by the pandemic:
all governance issues,
a broad range of ESG issues, and
most shareholder proposals.
Glass Lewis is expected to exercise discretion and pragmatism afforded to them in their voting policies when making voting recommendations this season, and possibly into 2021, to the extent that COVID-19 continues to be a factor at that time.
Glass Lewis’ update discussed the following governance topics and each has been described in detail below:
Virtual-only Shareholder Meetings
Executive Compensation, Say-on-pay Resolutions, and Balance Sheets
Board Composition and Effectiveness
Activism and M&A
Oil and Gas
Shareholder Proposals and ESG
1) Virtual-Only Shareholder Meetings
Glass Lewis reiterated their recent support for Virtual-only shareholder meetings in response to the pandemic. Prior to the pandemic, Glass Lewis would generally recommend voting against members of the governance committee where the board is planning to hold a virtual-only shareholder meeting if the company does not provide disclosure which assures shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting.
Examples of effective disclosure include:
addressing the ability of shareholders to ask questions during the meeting, including time guidelines for shareholder questions, rules around what types of questions are allowed, and rules for how questions and comments will be recognized and disclosed to meeting participants;
procedures, if any, for posting appropriate questions received during the meeting and the company’s answers, on the investor page of their website as soon as is practical after the meeting;
addressing technical and logistical issues related to accessing the virtual meeting platform; and
procedures for accessing technical support to assist in the event of any difficulties accessing the virtual meeting.
However, as a result of the pandemic, for the duration of the 2020 proxy season which includes meetings held between March 1, 2020 to June 30, 2020, Glass Lewis will generally refrain from recommending to vote against members of the governance committee on this basis, provided that the company discloses, at a minimum, its rationale for doing so, including citing COVID-19. Additionally, should these companies opt to continue holding virtual-only shareholder meetings in subsequent years, Glass Lewis expects future proxy statements to include the robust disclosure concerning shareholder participation. The standard policy on virtual shareholder meetings will apply in those future years.
Even if the pandemic continues beyond the 2020 proxy season and companies continue to hold virtual-only shareholder meetings because of fears surrounding COVID-19, since companies have been given sufficient time to address shareholder concerns as outlined in their standard policy, the standard policy will apply.
2) Executive Compensation, Say-on-pay Resolutions, and Balance Sheets
Executive Compensation and Say-on-pay Resolutions
Glass Lewis is not expected to provide any leeway for a pay-for-performance disconnect that is identified in their quantitative models. Glass Lewis expects that companies take a proportional approach to the impacts on shareholders and employees when reviewing compensation relative to shareholder returns. Moreover, as stated in the release “even those companies who project a “business as usual” approach to executive pay will face opposition if employees and shareholders see their own “paychecks” cut. Companies would be wise to avoid this.”
In light of decreased share prices, some Issuers may be tempted to load up executives with relatively cheap equity-based compensation through the use of spring-loaded awards, the cancellation and reissue of options, or even simply repriced options. GL explicitly warn against “trying to make executives whole at the further expense of shareholders and other employees” and cite this as a driver for possible failed resolutions and, in the longer term, board removal, activism and lawsuits.
Finally, GL also called out directors, noting they bear the responsibility to justify compensation levels in what is a changed market for human capital.
Balance Sheets and Capital Management
Glass Lewis expects the widespread pausing of buyback programs, suspension of dividends and an increase in capital raisings and placements. Some companies will need to seek more flexibility to carry out capital raisings than shareholders are used to granting in accordance with strict best practice recommendations. Dogmatic application of pre-existing standards by investors could mean the difference between a company surviving this crisis and shareholders suffering even greater losses.
Therefore, we expect that Glass Lewis will be more lenient in its application of its policies regarding capital raises as this is widely assumed to be a necessary activity in the current climate to preserve shareholder value.
3) Board Composition and Effectiveness
Glass Lewis views companies with boards lacking in age and gender diversity as being at risk, given recent COVID-19 studies that men and in particular, those that are aged 65 and over, are at a higher risk of becoming critically ill or fatal results. Additionally, while complying with social distancing, Glass Lewis notes possible risks of having effective board meetings and decision-making from going remote “without specialized software or clear governance procedures”.
Glass Lewis perceives the pandemic will test succession planning and board renewal programs and states, “In our experience during past crises, well governed companies who made the right decisions during the good times are well prepared and durable during a crisis, and far better positioned to deliver shareholder returns afterwards.”
As it relates to Glass Lewis’ voting application for this year on directors, we expect that they will strictly apply its board commitments policy. That being, shareholders vote against any directors who failed to attend at least 75% of all board and key committee meetings held during the previous fiscal year.
4) Activism and M&A
Glass Lewis drew a parallel between the global financial crisis of 2007-2008 and the current COVID-19 pandemic. During the global financial crisis, poor governance and shareholder returns inspired a wave of shareholder activism, M&A, lawsuits and consolidation as macro conditions improved. Glass Lewis expects to see similar behavior as a result of the current crisis.
Glass Lewis expects delays to existing campaigns as well as some new opportunities for activism. Some activity will be driven by survival or opportunism and some will be driven by an estimated $1.5 trillion USD in cash held by private equity firms that has been sitting on the sidelines waiting to take significant positions in companies at discount prices.
5) Oil and Gas
In the oil and gas industry, Glass Lewis has indicated that the combined triple threat raise the concern regarding the viability for many issuers. Specifically, they site:
the accumulation of high and poorly rated debt,
the Saudi-driven plunge in oil prices, and
shrinking demand due to the pandemic and social distancing measures.
The threat will be particularly notable for companies involved in fracking, where higher levels of poor debt are now harder to repay or refinance as the price of crude oil falls toward and below the cost of shale oil production. Glass Lewis will closely monitor how oil and gas companies will respond to protect shareholder value in exceptionally challenging conditions that will likely include many restructures and bankruptcies.
Glass Lewis did not indicate how this would affect the application of their policy for oil and gas companies, but we believe that they will be more likely to recommend in favour of M&A or activism that will preserve shareholder value.
6) Shareholder Proposals and ESG
Glass Lewis indicated that since shareholder proposals are normally submitted in the months leading up to proxy season (typically November to January), the content of most shareholder proposals for this season likely did not include any consideration of the pandemic or related crisis. Therefore, the impact of the pandemic and related crisis may not be immediately obvious by looking at the shareholder proposals or a company’s AGM agenda for this year. Furthermore, the shareholder proposals that have been made might not make as much sense in the midst of this crisis and the very material challenges that many companies are now facing in the short to medium-term.
Issuers should not use the crisis to dismiss or hamper the ability of shareholder proponents to put forward their resolutions, speak at virtual meetings and have shareholders vote on such matters. Poor behavior or treatment towards shareholders will likely only encourage more activist attention and will certainly be reflected in future shareholder votes on directors and recommendations from proxy advisors.
Based on the foregoing, it seems that Glass Lewis will evaluate shareholder proposals in the context of the current situation and recommend accordingly. Shareholder proposals that could distract the company from addressing its current situation are likely to get an against recommendation.
How will Glass Lewis use context, discretion and pragmatism in their voting recommendations?
Glass Lewis’ voting policies generally allow for analyst discretion to incorporate extenuating and unusual circumstances such as this pandemic and the many issues discussed above. Glass Lewis will also be looking for appropriate company responses in each company’s disclosure documents (circular, news releases) to see that the company has continued to govern itself appropriately in this challenging time.
Questions?
Our team is available to speak in more detail, and provide case-by-case advice on how to proactively avoid or manage negative Glass Lewis recommendations as they relate to these changes and other Glass Lewis voting policies.