Glass Lewis publishes 2024 proxy season updates

Glass Lewis (GL) has published the 2024 edition of its benchmark policy guidelines, which indicate how it will advise institutional shareholders to vote during the coming shareholder meeting season. The key changes for 2024 center on oversight of ESG-related risks, board composition and governance, and director and officer compensation.

Oversight of ESG-related risks

Climate-Related Disclosure – the ‘E’

GL introduced a new climate-related disclosure policy last year for companies whose greenhouse gas emissions represent a “financially material risk.” The policy provided that GL will generally recommend against the chair of the responsible committee in cases where the company has not provided adequate disclosure regarding (i) climate-related risk information in line with the Task Force on Climate-related Financial Disclosures (TCFD) or (ii) board-level oversight responsibilities for climate-related issues. In its first year, this policy was applied to companies included on the Climate Action 100+ Focus Group list. In 2024 the policy will apply to TSX 60 companies operating in industries that the Sustainability Accounting Standards Board (SASB) has determined have material exposure to climate risk stemming from their own operations.

Human Capital Management – the ‘S’

GL has introduced a new policy related to board accountability for oversight of human capital issues as defined in the SASB Universe of Sustainability Issues, which includes labour relations, fair labour practices, compensation and benefits, diversity and inclusion, employee health, safety and wellbeing, and recruitment, development and retention. Where a board has failed to respond to “legitimate concerns” with the company’s human capital management practices, GL may recommend voting against the chair of the responsible committee.

Cyber Risk Oversight – the ‘G’

Last year GL introduced a new section in its guidelines on the topic of cybersecurity oversight and disclosure of cyber risk, stating such risk is material for all companies and GL expects all companies to provide disclosure on the board’s role in overseeing issues related to cybersecurity and the steps taken to properly educate directors on the topic. GL has expanded its policy for 2024 to provide that, where a company has been materially impacted by a cyber-attack, it may recommend voting against appropriate directors where the board’s oversight or response is insufficient or the company has provided insufficient disclosure concerning cybersecurity-related issues.

Board composition and governance

Conflicts of Interest – Interlocking Directorships

The concept of “interlocking directorships” refers to the linkages among corporations created by individuals who sit on more than one board. GL has expanded its policy to provide that where executives serve on each other’s boards, it may recommend voting against the election of a director that has an interlocking relationship with a member of management. GL will also consider on a case-by-case basis interlocks with family members of executives and also instances of multiple directors serving on the same boards at other companies.

Audit Committees

GL has set out increased expectations for audit committee composition, requiring at least one member that meets the definition of an “audit financial expert,” being a director that is a chartered accountant or certified public accountant, a former or current CFO or corporate controller of a public company, a current or former partner of an audit firm or a director with similar meaningful audit experience. GL will consider the audit financial expert designation separately from the more generalized financial skill element of the board skills matrix.

In addition, GL has clarified the list of circumstances in which it may recommend voting against a member of the audit committee. In general, GL may recommend a vote against the chair of the audit committee if audit and audit-related fees amount to less than half of the fees billed by the auditor during the year, and may similarly recommend against the entire audit committee if the situation continues. GL may also recommend against the entire committee where there is a material weakness in the company’s controls over financial reporting and the company has not disclosed an adequate remediation plan or the material weakness has persisted for more than a year without an updated plan or different material weaknesses occur over consecutive years.

Governance Committees

GL has augmented its list of factors that may attract a negative vote recommendation, adding it may recommend withholding votes from the chair of the governance committee where the company has provided inadequate disclosure regarding transactions with related parties, particularly in circumstances where the company has disclosed that a director provides material consulting or other professional services to the company without stating which director has this potential conflict of interest.

Director and officer compensation

Clawback Provisions

Clawback provisions generally provide for some or all of a stock option or other incentive award to be recouped by the company in specified circumstances. GL has significantly expanded its policy so as to encourage the adoption of clawback provisions that allow recovery from current and former executive officers not only in the event of a restatement of financial results, but also if there is a revision of the performance indicators upon which the awards were based or there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, a material risk management failure or a material operational failure. GL expects the policy to allow for recoupment regardless of whether the executive officer was terminated with our without cause.

If there is a circumstance that would trigger applying the clawback provision, GL may recommend voting against the say-on-pay resolution if the company determines not to recoup from the executive officer and there is insufficient rationale disclosed to shareholders. 

Executive Ownership Guidelines

GL has introduced a new guideline for 2024 encouraging companies to adopt a policy of minimum share ownership requirements for executive officers. The guideline provides that companies should disclose the specific requirements as part of the compensation discussion and analysis, including how various types of equity awards are counted or excluded from the calculation. In calculating share ownership and whether an executive has met the requirements, GL may view the inclusion of unearned performance-based awards or unexercised stock options as problematic.

Say-on-Pay

GL has long encouraged companies to include on their ballots an advisory (i.e., non-binding) vote on executive compensation. GL has augmented its policy to provide that a say-on-pay vote is particularly important where companies use pay levels in jurisdictions where such a vote is required to justify their own compensation decisions. It has also clarified that where it has identified significant concerns with a TSX Composite Index company’s pay practices and the company does not provide shareholders a say-on-pay vote, it will recommend a vote against the chair of the compensation committee and possibly other committee members as well. 

Non-GAAP Performance Metrics

GL has expanded its discussion on using non-GAAP metrics in incentive-based compensation programs. Where significant adjustments have been applied to performance results to determine incentive payouts, a company should provide a detailed explanation akin to a non-GAAP to GAAP reconciliation. Failure to do so may attract a negative voting recommendation on a say-on-pay resolution.

Front-Loaded Award to a Large Shareholder

A front-loaded award refers to a larger grant of cash or equity given up front that is intended to serve as compensation for multiple years. GL has expanded its guidelines regarding front-loaded awards to address the situation where a recipient is also a large shareholder of the company. Where a shareholder vote is required for a front-loaded equity award and the intended recipient is a shareholder of sufficient size to be able to impact the vote, GL advises companies to obtain approval of the disinterested shareholders.