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Proxy Advisors Issue Updated Guidelines Related to COVID-19 Fallout

Proxy season is underway, but this year, it’s under unusual circumstances.

COVID-19 has created unique chaos around executive compensation. Thus, Glass Lewis and Institutional Shareholder Services (ISS) have each recently released updates for upcoming shareholder meetings, with both commenting on the impact of the global pandemic and their respective policy guidelines.


Glass Lewis previously updated its policy to indicate support for virtual meetings in the current COVID-19 environment, and its public statement in late March addressed broader policy areas, noting it expects that all governance areas will be impacted, specifically:

  • Compensation program approaches
  • Balance sheet and capital management
  • Board composition and effectiveness
  • Activism and M&A
  • At-risk sectors
  • Shareholder proposals and environmental, social and governance factors.

Glass Lewis said it intends to exercise “discretion and pragmatism” and to prioritize “timing, certainty, disclosure and voting” on affected proposals as provided in their guidelines, noting that the guidance provides “certainty and transparency” on the firm’s established approach based on expectation of changes or amendments to existing programs in response to COVID-19. The proxy advisory firm said it anticipates a significant increase in shareholder concerns through at least 2021 related to executive compensation areas such as stock option repricing, dilution, burn rates, hurdle adjustments, changes to vesting periods, caps and cuts on incentives, and the quality of disclosure relating to the limits and exercise of board discretion.

FW Cook outlined the major exec comp themes Glass Lewis emphasized in the release, which included:

  • Support for executive compensation program changes/adjustments that reflect a “proportional approach” aligned with adverse outcomes experienced by shareholders and employees;
  • Pay in the context of COVID-19 is not “business as usual,” noting that such an approach may face substantial shareholder opposition as employees endure pay cuts or loss of jobs and shareholders confront significantly reduced portfolio values;
  • Effective disclosures and rationales will be critical to how Glass Lewis evaluates whether adjustments to programs in response to the crisis are justifiable and shareholder friendly; and
  • A caution that the timing of decisions on matters that are material to a company’s ability to address risks, manage operations and maximize shareholder returns not be delayed or postponed significantly.

On April 8, ISS published its updated policy guidance for 2020 related to COVID-19, noting that the regular policy update process will be carried out as usual for 2021. Its guidance also covered a range of areas, including:

  • Shareholder meeting issues, such as postponements and virtual meetings
  • Poison pills, shareholder rights, and director attendance and changes
  • Compensation issues
  • Capital structure and payouts.

ISS notes that the pandemic is presenting unprecedented challenges not only to individual health, communities, jobs, businesses and economies, but also “specifically to public companies and the shareholders that invest in them.” Its guidance emphasizes that it will rely on a “case-by-case” approach to its analysis, which highlights the importance of expansive and detailed disclosure.

The guidance explains the implications COVID-19 will have on these compensation issues:

  • Short-term incentive goal setting: ISS anticipates that numerous companies will “materially” change the performance metrics, goals or targets used in their short-term incentive plans in response to the market decline and potential recession resulting from the pandemic.
  • Long-term incentive goal setting: ISS reiterates that its benchmark voting policies are generally not supportive of goal adjustments for in-cycle long-term awards (i.e., performance awards previously granted with multi-year goals).
  • Structural changes in long-term incentive plans: As a result of the recent market turmoil and economic uncertainty, companies are considering changes in long-term incentive plan structure in order to adapt to the “new normal.”
  • Option Repricing: Not surprisingly, ISS reiterates that the firm is opposed to repricing stock options without shareholder approval.

In its analysis of the ISS guidance, FW Cook writes “that while COVID-19 has broad implications in multiple compensation-related areas, ISS’ guidance covers only a subset of compensation issues that may be impacted by the pandemic.”

In its analysis of both the Glass Lewis and ISS guidance, Willis Towers Watson notes that while neither guidance is particularly definitive in terms of actions that will or will not result in a negative voting recommendation, “companies can take comfort in the fact that both highlight an intent to take a pragmatic and informed approach based on individual circumstances.”

Additionally, Willis Towers Watson surmises that based on the guidance, institutional investors will be less inclined to support companies taking what they perceive to be disproportionate actions to protect executives if:

  • Returns are markedly down in absolute or relative terms;
  • Dilution increases; and/or
  • There are significant furloughs, reductions in force or pay cuts for the broader workforce.

“It will be important for compensation committees to carefully and fairly balance these multiple perspectives in reaching difficult decisions on executive compensation,” Willis Towers Watson notes.

About the Author

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Brett Christie is the managing editor of Workspan Daily.

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