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Ross Carney
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IN-DEPTH: Proxy advisors tweak policies for 2025

January 15, 2025
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Policy changes for 2025 proxy advisors

This article first appeared on Diligent Market Intelligence's Voting newswire. To register for a demonstration and trial of the product, click here.

As boards brace for a new season of engagement, proxy advisors Glass Lewis and Institutional Shareholder Services (ISS) have been setting out their stalls for 2025 as part of their annual global policy development.

To inform the process, both advisors carried out consultations in the third quarter with Glass Lewis’ policy survey receiving insights from over 480 investors, companies and market stakeholders, while that of ISS received 325 responses.

In its subsequent 2025 Voting Policy Guidelines, Glass Lewis has placed a new focus on board oversight of artificial intelligence (AI), shareholder meeting formats, and time-based awards, with its tweaked policies applying to shareholder meetings held after January 1.

ISS’ updated guidelines, which will take effect in February, will see the implementation of 41 changes to its voting policy including a terminology shift related to environmental proposals, as well as a tweak in its approach to short-term poison pills.

AI becomes new area of governance focus

With a growing number of investors pressing companies to address the risks associated with the use of artificial intelligence (AI), Glass Lewis has expanded its policy to include a global focus on board oversight of AI.

In the U.S., its benchmark policy will generally not make voting recommendations on the basis of a company’s oversight of, or disclosure concerning, AI-related issues. However, in instances where there is evidence that insufficient oversight or management of AI technologies has resulted in material harm to shareholders, Glass Lewis will review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of AI-related risks.

"We will also closely evaluate the board’s response to, and management of, this issue as well as any associated disclosures and the benchmark policy may recommend against appropriate directors should we find the board’s oversight, response or disclosure concerning AI-related issues to be insufficient," the new guidelines read.

While ISS has not formally added the topic to its guidelines for 2025, it outlined that it discussed AI as part of its wider engagement on environmental and social topics with 15 institutional investors.

US

In the U.S., ISS made three main changes to its policy. One tweak will see it refer to environmental proposals as “natural capital,” after observing that recent years have seen an increased number of shareholder proposals focused on biodiversity and other connected environmental topics such as deforestation and water pollution, while also acknowledging developments in frameworks such as the Taskforce on Nature-related Financial Disclosures (TNFD).

Tweaking its approach to short-term poison pills, ISS will start taking into account contextual factors such as a company’s size and stage of development as well as macroeconomic events when voting on board nominees following the adoption of such plans without shareholder approval. There is no change to the policy applied when a board adopts a long-term pill without a shareholder vote.

On SPAC extensions, ISS will support requests to extend the termination date by up to one year from the original termination date. "Since the SPAC boom during the pandemic, there has been a proliferation of so called 'zombie SPACs' which can be described as those that have experienced heavy shareholder redemptions that leave minimal funds in the trust account," the rationale reads.

On compensation, ISS noted plans to introduce adaptations to the qualitative review of performance-vesting equity awards carried out under its U.S. benchmark policy citing concerns from investors about potential pitfalls surrounding metric-based performance equity programs. Specifically, any design or disclosure concerns regarding performance equity will carry greater weight in the qualitative analysis, and significant concerns in these areas will be more likely to drive an adverse "say on pay" recommendation.

ISS also flagged a potential policy update under consideration for 2026 or later regarding the evaluation of the equity pay mix for regular-cycle equity awards.

In addition to the aforementioned focus on board oversight of AI, Glass Lewis has made four other policy changes impacting the U.S. market. In a clarification of its policy around board responsiveness to shareholder proposals, the advisor will expect boards to provide disclosure addressing shareholder concerns and outreach initiatives when such demands receive significant support (generally more than 30% but less than majority of votes cast).

Referencing management proposals to reincorporate to a different state or country, Glass Lewis will assess these on a case-by-case basis, outlining that it will closely examine the impact on shareholder rights arising from such a change in domicile and governing law, and whether a company is proposing to reincorporate to a jurisdiction considered to be a “tax haven.”

The policy also notes that where a company is seeking to change its location, it will seek to evaluate how independent board members came to their recommendation, and if controlling shareholders had the ability to influence the board.

In the event a change in control occurs, Glass Lewis has stipulated that companies that allow for committee discretion over the treatment of unvested awards should commit to providing clear rationale for how such awards are treated.

On executive pay, Glass Lewis clarified its holistic approach to analyzing compensation programs. "Unfavorable factors in a pay program are reviewed in the context of rationale, overall structure, overall disclosure quality, the program’s ability to align executive pay with performance and the shareholder experience and the trajectory of the pay program resulting from changes introduced by the compensation committee," the policy reads.

Canada

ISS has identified six changes to its policy in Canada, where it will now deem a former CEO of a company to be non-independent, unless in a scenario where a five-year cooling off period is deemed sufficient.

On pay-for-performance evaluation, the proxy advisor may opt to use a non-CEO named executive officer such as the chair or a former CEO, if doing so would provide a more appropriate assessment of alignment. This action will be taken in exceptional circumstances where the compensation of such NEO is regularly significantly higher than that of the CEO.

It will also recommend support for amendments to articles or bylaws that give the board discretion to hold shareholders' meetings in virtual-only format without compelling rationale.

Glass Lewis has confirmed that it may recommend a vote against the reelection of the chair of a governance committee in a case where a board has failed to adequately respond to shareholder concerns regarding the shareholder meeting format.

The advisor also noted the importance of companies providing substantive disclosure in their proxy filings about the experience and expertise of board nominees.

Europe

In Europe, Glass Lewis has recommended that closed-door shareholder meetings be avoided, outlining that it will recommend shareholders vote against any amendments to articles of association that will allow for closed-door shareholder meetings. It will also recommend against the reelection of directors deemed accountable where a board has failed to address legitimate shareholder concerns regarding the manner in which the company is holding its shareholder meetings.

On virtual meetings, ISS will look for assurance from companies that they are only convened in the case of extraordinary circumstances that necessitate restrictions on physical attendance.

In the U.K., Glass Lewis will recommend against the reelection of the chair of the nomination committee at any main market board which has failed to appoint at least two gender diverse directors and at least one director from an ethnic minority background and has failed to provide a clear and compelling rationale for the lack of board-level ethnic diversity.

Japan

Glass Lewis will no longer provide an exemption under its benchmark policy for Japanese companies listed outside the Prime Market where a company fails to meet the required board gender diversity requirements. It will also require Prime Market-listed companies to have a board comprised of at least 20% gender-diverse directors.

The proxy advisor will also implement stricter requirements for companies when providing an exemption to its policy guidelines on excessive strategic shareholding, outlining that it may refrain “from recommending shareholders vote against directors for this issue in cases where the company has disclosed a clear plan that outlines the specific scale and timeframe for reducing the size of its strategic shareholdings to 20% or less of its net assets by the conclusion of the fiscal year ending in 2030.”

For Japan-listed companies, ISS has said that it would now consider directors who have served on the board for 12 years or more as non-independent.

“The policy change would help send shareholders’ message that long-serving board members should use their expertise and experience at the boards of other companies,” ISS concluded. “The lack of a deep pool of qualified independent outside board members in Japan is often pointed out by companies, so if long-serving board members were added to the pool, that should enable companies to secure qualified individuals as new board members.”

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