COVID-19 guidance from proxy advisory firms

Institutional Shareholder Services (ISS) and Glass Lewis (GL) have issued guidance addressing the impact of COVID-19 on governance practices that issuers should keep in mind as we head into proxy season. A summary of the key takeaways is set out below.

Highlights of ISS and GL guidance

  • Holding virtual shareholder meetings due to COVID-19 will be acceptable to ISS and GL this proxy season. Companies should strive to provide shareholders with a meaningful opportunity to participate when meetings are held in this form.
  • Changes to executive compensation will be scrutinized, and boards are likely to face opposition where executives are not sharing the pain felt by employees and shareholders.
  • Dividend cuts will be recognized as a means to preserve cash in support of the business and workforce. Companies should proceed cautiously on share buybacks, which may attract criticism and result in reputational damage.
  • Board composition, attendance and effectiveness may be adversely impacted by the pandemic. The crisis will be an important test of board succession planning and renewal programs.

Virtual shareholder meetings are generally acceptable

ISS does not have a general policy that disfavours virtual-only meetings, and there will be no change to their approach. ISS encourages companies holding virtual-only meetings to disclose they are doing so due to COVID-19. Companies are also encouraged to provide shareholders with a meaningful opportunity to fully participate in virtual meetings, including by being able to ask questions and engage in a dialogue.

For meetings held between March 1 and June 30, GL will relax its usual policy of recommending against virtual-only meetings where detailed disclosure of enhanced measures to facilitate shareholder participation is not provided, provided that the company discloses its rationale for holding a virtual-only meeting, including citing COVID-19. For meetings held after June 30, GL’s standard policy on virtual meetings will apply (which requires robust disclosure in the proxy statement concerning enhanced measures to facilitate shareholder participation).

GL cautions companies not to use the crisis to dismiss or hamper the ability of shareholders to put forward proposals, speak at virtual meetings or hold a vote on such proposals.

Changes to executive compensation will be subject to increased scrutiny

In response to the impacts of the pandemic, ISS expects many boards are likely to announce plans to materially change the performance metrics, goals or targets used in their short-term compensation plans. While board decisions to adjust 2020 compensation programs will be considered by shareholders at the 2021 annual meeting, ISS encourages boards to provide contemporaneous disclosure of their rationale for making such changes. Mid-stream changes to long-term compensation awards will be assessed by ISS on a case-by-case basis (based on whether directors exercised appropriate discretion and provided adequate explanation to shareholders of the rationale for such changes). Any structural changes to long-term compensation plans will be assessed by ISS under its existing policy.

GL expects increased shareholder focus on incentive award repricing, dilution, burn rates, hurdle adjustments, changes to vesting periods, caps and cuts on incentives, and the quality of disclosure concerning the limits and exercise of board discretion. GL cautions boards against compensation changes designed to make executives whole (at the expense of shareholders and employees) and warns that such changes may be a lightning rod for activism and lawsuits, and that boards may be held accountable. GL notes that companies who maintain a “business as usual” approach to executive pay will face opposition if employees and shareholders are suffering. It will commend those companies that have rolled back planned salary increases or above-target bonus outcomes to ensure that executives are sharing the pain felt by employees and shareholders.

Consistent with existing policies, ISS and GL expect that shareholder approval would be sought for any repricing of “out-of-the-money” options. Shareholder approval to reprice options would also be required under the rules of the Toronto Stock Exchange and the TSX Venture Exchange, and under the terms of many equity compensation plans. Existing ISS policies state that market deterioration is not an acceptable reason for companies to reprice options and ISS will generally recommend voting against such repricing proposals. GL is also generally against repricing proposals but evaluates these on a case-by-case basis.

As the long-term effects of COVID-19 on the economy and stock markets remain uncertain, many issuers are taking a wait-and-see approach to whether adjustments to compensation arrangements are warranted. To the extent boards determine that adjustments to executive compensation arrangements are necessary, clear disclosure regarding the nature and rationale for the changes will be critical, particularly where shareholders and employees have had to endure the negative effects of the pandemic.

Share buybacks and dividend cuts: proceed cautiously

ISS supports board discretion to set dividend payout ratios that may fall below historic levels or customary market practice, but expects boards to disclose any plans to use any preserved cash from dividend cuts to support the business and workforce. ISS also notes that in most cases boards will attract intense criticism and may sustain reputational damage by undertaking share buybacks, especially if the company’s workforce has been reduced or suffered cutbacks.

Board composition, attendance and effectiveness may be adversely impacted

ISS understands that boards will need flexibility to ensure that they have the right team in place, and will exercise discretion when applying their existing policies regarding director independence, overboarding, diversity and other attributes, or where board members may need to fill senior executive roles on an interim basis due to the disability or incapacity of an existing member of the management team.

ISS advises that, while company disclosures should be sensitive to privacy concerns regarding a director’s health, shareholders should be provided with adequate information about director absences from board and committee meetings.

Given the prevalence of male directors over the age of 65 (who are at the highest risk of experiencing severe symptoms after contracting COVID-19), GL suggests this could lead to reduced director attendance rates and changes in board composition. GL notes that the crisis will be an important test of board succession planning and renewal programs.

Poison pills will be assessed in light of declining stock prices

ISS notes that many U.S. companies and their advisors have considered adopting shareholder rights plans (or “poison pills”) to ward off opportunistic bidders in light of declining stock prices. ISS advises that it will continue to assess poison pills on a case-by-case basis, which includes examining whether directors appear to have sought to appropriately protect shareholders from abusive bidders without inappropriately entrenching the existing board and management team.

ISS also notes that a severe stock price decline as a result of the COVID-19 pandemic is likely to be considered valid justification in most cases for adopting a pill of less than one year in duration, provided that boards give detailed disclosure regarding their choice of duration. The triggers for such plans will continue to be closely assessed within the context of the rationale provided and the length of the plan adopted, among other factors. This guidance will have less relevance to Canadian issuers in light of the different regulatory approach to shareholder rights plans in Canada.

Read all our coronavirus-related updates on our COVID-19 guidance for organizations resource page.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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