Key Considerations for the 2022 Annual Reporting and Proxy Season, Part II: Proxy Statement Considerations
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This memorandum outlines key considerations for U.S. public companies in preparation for the 2022 annual reporting and proxy season.
- Part I of this memo, which was published in January 2022, describes key considerations for Annual Reports on Form 10-K, including housekeeping items and our top eight disclosure considerations for Form 10-Ks in 2022.
- Part II of this memo below, describes key considerations for 2022 Annual Meeting Proxy Statements.
Part II: Top 13 Considerations for 2022 Annual Meeting Proxy Statements
The following are key considerations for your upcoming annual meeting proxy statement.
1. Focus on Board Diversity Disclosure. The call for enhanced disclosure on board diversity has accelerated in recent months, culminating in Nasdaq's new board diversity rules. Nasdaq now requires its listed companies, no later than August 8, 2022, to provide detailed disclosure on board diversity using standardized templates.1 Board diversity is also a key focus of proxy advisory firms and institutional investors. Companies should keep in mind the following when crafting and finalizing board diversity disclosure:
(a) Pay Attention to Definitions of Diversity to Align with a Wider Range of Diversity Policies. As companies seek to meet investor expectations on board diversity, it is important to consider relevant definitions of diversity. Nasdaq, ISS, BlackRock, Vanguard and State Street have different definitions of a diverse board member, as shown in Appendix A. In particular, ISS and BlackRock consider diversity to be broader and include more categories than Nasdaq (for example, BlackRock considers individuals with disabilities and veterans to be diverse, while Nasdaq does not). As a result, for a company to potentially increase the number of directors on its board that ISS or institutional investors like BlackRock consider to be diverse, it should consider and, if beneficial, disclose information in accordance with a broader definition of diversity.
When including this expanded disclosure, however, Nasdaq-listed companies must still follow the prescribed Nasdaq templates for the Board Diversity Matrix2 and can only supplement their Board Diversity Matrices with additional diversity categories below the Board Diversity Matrix (rather than within it). For an example of an acceptable presentation of the Nasdaq Board Diversity Matrix supplemented with additional diversity categories, see Appendix B. Nasdaq-listed companies must also follow additional requirements for their diversity disclosure. For example, the header for Nasdaq's required matrix must state "Board Diversity Matrix" and must disclose the date that the information was collected.
While NYSE-listed companies are not required to include a board diversity matrix in their proxy statements, they should consider doing so given proxy advisory and institutional investor policies, to the extent relevant in light of the companies' shareholder base.3 NYSE-listed companies should also consider Nasdaq templates as a point of reference (even though they are not bound to following that form) because of their prevalence in proxy statements this year.
(b) Re-visit SEC Guidance on Board Diversity. The SEC's rule on board diversity requires companies to disclose whether, and if so how, the nominating committee or the board considers diversity in identifying nominees for director. In the past, the SEC staff has taken the broad view that if a company "considers" diversity in selecting its director nominees, then essentially the company has adopted a diversity policy for purposes of the rule and, as a result, the company is required to disclose how it assesses the effectiveness of the policy and how it implements it.4 Accordingly, if a company includes disclosure that it "considers" diversity in selecting its director nominees this year, it should also consider providing language on how it implements and assesses the effectiveness of its approach to board diversity.
(c) Confirm Board Diversity Information with Directors. As referenced in Part I of our Annual Memo, Item 6, we recommended text for a question on diversity to add to D&O Questionnaires this year. Reviewing responses to this question is crucial to confirm information on your directors' diversity characteristics and to obtain their consent to disclose this information in the company's proxy statement (on an aggregate and anonymized basis). If this question was not added before D&O Questionnaires were distributed, a stand-alone question distributed to directors will suffice. See Appendix C for our sample board diversity question.
(d) Review Board Diversity Disclosure with Board Members. Given that many companies will provide new or enhanced board diversity disclosure this year, it is important to distribute the planned disclosure to the Board well in advance of its publication and explain the rationale and approach to the disclosure.
2. Consider Disclosure in a Board Skills Matrix. While neither Nasdaq nor the NYSE requires it, in light of investor pressure and market trends towards increased disclosure of director qualifications, companies should consider enhancing their board composition disclosures by providing a matrix summarizing the skills of their directors. Beginning in 2022, Glass Lewis may recommend voting "against" the chair of the nominating committee if a company has inadequate disclosure on board skills. In addition, Glass Lewis's reports for S&P 500 companies include an assessment of company disclosure in the proxy statement relating to board diversity, skills and the director nomination process.5 In drafting this disclosure, companies should consider whether to disclose each individual director's skills or aggregated data, and which skills to include in the matrix (for example, common skills include financial/accounting, industry knowledge, compensation/HR, board/governance experience and legal/regulatory/compliance experience, and companies may find it helpful to review peer disclosures).
3. Focus in on Board Risk Oversight Disclosure. The role of the board in overseeing the risk management for the entire enterprise has become a critical disclosure point. Item 407(h) of Regulation S-K requires companies to disclose the board's role in the risk oversight of a company, such as how the board administers its oversight function. The SEC has emphasized that companies should discuss how their boards oversee the management of material risks, such as with respect to cybersecurity risks. The SEC has been particularly focused on cybersecurity in recent months, with Chairman Gary Gensler announcing that he has asked the SEC staff to make recommendations relating to companies' cybersecurity practices and cyber risk disclosures.6
Moreover, investors have increasingly scrutinized board risk oversight disclosure for descriptions of the board's oversight of environmental and social ("E&S") issues,7 such as oversight of the COVID-19 pandemic and continued health and safety considerations, including potential vaccine mandates, and climate change and related disclosures. Proxy advisory firms are focused on board oversight of E&S risks as well. According to its 2022 updated proxy voting guidelines, ISS includes "demonstrably poor risk oversight of [E&S] issues, including climate change" in its list of material failures of governance, stewardship, risk oversight, or fiduciary responsibilities at a company that will result in a recommendation of a vote "against" directors, committee members, or the entire board. Additionally, Glass Lewis will note as a concern when boards of companies in the Russell 1000 do not provide clear disclosure concerning the board-level oversight afforded to E&S issues, and will generally recommend voting "against" the governance committee chair of an S&P 500 company that fails to provide explicit disclosure concerning the board's role in overseeing these issues.8
Similarly, BlackRock's 2022 voting guidelines note that if "a board has failed to exercise sufficient oversight…[w]ith regard to material ESG risk factors, or where the company has failed to provide shareholders with adequate disclosure to conclude appropriate strategic consideration is given to these factors by the board," it may vote against relevant directors.9
4. Review Board Considerations for Independence. ISS and Glass Lewis each have their own director independence criteria. To the extent relevant to a company in light of its shareholder base, these criteria generally should be assessed alongside the applicable NYSE or Nasdaq requirements to ensure shareholder support for the company's directors.
For a proxy statement's director independence section, under Item 407(a) of Regulation S-K, a company must identify each director who is independent under applicable NYSE or Nasdaq standards. In addition, under Item 407(a)(3), a company must describe in its proxy statement, by specific category or type, any transaction, relationship or arrangement that was considered by the board of directors under the applicable independence standard in determining that a director is independent. This disclosure requirement expressly requires companies to disclose transactions, relationships or arrangements not disclosed as related party transactions under Item 404, if they were considered by the board in finding a director to be independent. For this disclosure, companies should carefully (i) determine which transactions, relationships and arrangements warrant consideration by their board in a particular director's independence determination and therefore require proxy disclosure, and (ii) draft disclosure so as not to raise issues under the applicable proxy advisory firm's independence criteria.
5. Consider Board Overboarding Policies. Given the increasingly strict overboarding policies of institutional investors, it is crucial to monitor the number of outside public company directorships that each director holds. For example, BlackRock reported that from July 1, 2020 to June 30, 2021, it voted against 163 directors at 149 companies on the basis of overboarding10 and Glass Lewis cited overboarding as one of the top reasons it recommends against a director. Three key tips on this:
- First, Know Your Key Investors' Policies. A company should be aware of its investors' policies with respect to overboarding and educate its board of directors on these policies. See Appendix D for an outline of these overboarding policies.
- Second, Carefully Draft Your Director Biographies in the Proxy Statement.
- Ensure There Is Clear Disclosure of Outside Public Company Directorships. In proxy statements, information on outside directorships is provided in the directors' biographical section pursuant to Item 401(e)(2) of Regulation S-K, which requires disclosure of directorships at other U.S. publicly traded companies. To the extent a director at your company is serving on the board of either a private company or non-profit company,11 there is no SEC requirement to disclose this information.12 Moreover, if one of these other company directorships is voluntarily disclosed, your proxy statement should clarify that the outside directorship is at a private company in order to avoid having that directorship inadvertently counted against the director under an overboarding policy.
- Consider Disclosing Extenuating Circumstances for Overboarding Situations. For some investors, this additional explanation may be helpful if a director is overboarded. For example, Vanguard's policy states that a fund might vote for an overboarded director if the director has publicly committed to stepping down from a directorship in order to fall within the thresholds.13
- Third, Consider Your Overboarding Policies in Governance Guidelines. Lastly, companies may want to consider enhancing their overboarding policies in their governance policies to align with their investors' policies. According to Spencer Stuart data, company policies on limiting additional directorships at S&P 500 companies in 2021 are trending in line with key institutional investor overboarding policies.14
6. Consider Human Capital Management Disclosure. In addition to required disclosures in the Form 10-K, many companies are including disclosures on human capital issues in their proxy statements and/or on their websites, and investors are increasingly looking for additional disclosures on this topic. For example, BlackRock notes that a "company's approach to human capital management is a critical factor in fostering an inclusive, diverse, and engaged workforce" and called on companies to disclose their EEO-1 survey responses.15 Similarly, starting in 2022, State Street will vote "against" the compensation committee chair at companies that do not disclose their EEO-1 survey responses. Companies are already required to collect this data, and to the extent their investors request disclosure of this information, they should consider disclosing it on their websites or sustainability reports.
7. Determine Whether to Hold a Virtual Meeting and, if so, Provide Relevant Disclosures. As a result of the pandemic, the number of virtual meetings held by U.S. public companies has increased significantly. According to data from Broadridge, 1,929 meetings were held online using their virtual shareholder meeting platform in 2021 compared to 1,494 in 2020 and 248 in 2019.16 Mirroring this general trend, 86% of S&P 500 companies held virtual-only annual meetings in 2021 (compared to 78% in 2020).17 The SEC's Division of Corporation Finance recently updated its guidance on conducting shareholder meetings in light of COVID-19 concerns to encourage companies to continue to provide shareholder proponents or their representatives with the ability to present their proposals through alternative means, such as by phone, during the 2022 proxy season. Companies opting to hold virtual-only meetings should lock in their desired meeting date with service providers and consider their disclosure in light of proxy advisory firm policies. In particular, Glass Lewis expects "robust disclosure" in the proxy statement addressing the ability of shareholders to participate in the meeting, including disclosure of shareholders' ability to ask questions at the meeting; procedures, if any for posting appropriate questions received during the meeting and the company's answers on its public website; and logistical details for meeting access and technical support.18 Where such disclosure is not provided, Glass Lewis may recommend "against" the chair of the governance committee.19
8. Consider Any Updates to Related Person Transaction ("RPT") Disclosure. As discussed in our prior alert, the NYSE recently amended its related party transaction rule to require the audit committee (or another independent committee) to "conduct a reasonable prior review and oversight" of all RPTs. Accordingly, companies should (1) confirm that their RPT policies satisfy applicable requirements, and also (2) consider any updates to their proxy statements to reflect RPT policy changes. As we previously noted, SEC rules20 specifically allow a company to disclose that a policy permits the "ratification" of an RPT and further require a company to "identify" any RPT where a company did not follow its own policy (including via ratification of such an RPT). As a result, some companies have adopted revisions to their RPT policies that generally require advance approval of all RPTs, while still allowing for the specific "ratification" of RPTs in cases where advance approval is not reasonably feasible.
9. Assess ESG Disclosure in Proxy Statement. Both proxy advisory firms and institutional investors are focused on companies' ESG disclosures, and the proxy statement has increasingly become the home for many such disclosures. Companies should consider the following when drafting their proxy statements this year:
(a) Consider institutional investor policies: With a growing number of institutional investors now demanding disclosure on ESG topics, these disclosures have increasingly become necessary by default for many public companies. See Appendix E for summaries of the policies of institutional investors on ESG disclosure. In addition, ISS' 2022 policy updates introduce a board accountability policy for the world's highest greenhouse gas emitting companies, which looks for both disclosure of climate-related risks and specific emissions reductions targets, further emphasizing the importance of ESG disclosure, even for companies that are not the current target of the ISS policy.21
(b) Consider both market norms and potential liability: The proxy statement has increasingly become the home for ESG disclosure in SEC filings. Companies should weigh the appropriateness and benefits of enhancing their ESG disclosures in proxy statements. Companies should note the enhanced liability implications of including disclosure in their proxy statements. In addition to Section 10(b) and Rule 10b-5 of the Exchange Act, which are applicable to all public disclosures, Rule 14a-9 and Section 18 of the Exchange Act impose heightened liability risks for false and misleading statements filed with the SEC in proxy statements and annual reports, respectively.
(c) Consider potential SEC comments: Sustainability disclosure on corporate websites can provide equally effective vehicles for this disclosure to investors; however, in its recent sample comment letter, the SEC pointed out that it may ask companies why information included in their voluntary sustainability reports is not also included in their SEC filings.22 Regardless of the ultimate approach taken, the ESG information that is disclosed in proxy statements should be checked for consistency with information disclosed elsewhere by a company, including human capital disclosures in Form 10-Ks and voluntary sustainability reports on corporate websites. Moreover, ESG information that is disclosed in proxy statements should be vetted and reviewed by all appropriate parties and be subject to a company's disclosure controls and procedures.
10. Thoughtfully Address Say on Pay Vote Failures (or Weak Results) in CD&A. During 2021, increased opposition to Say on Pay votes resulted in the highest number of Say on Pay vote failures in the last ten years. A total of 63 Russell 3000 companies, including 18 S&P 500 companies, received less than 50% support for their Say on Pay votes. In addition, approximately 15% of Russell 3000 companies' Say on Pay proposals received less than 80% support (the Glass Lewis threshold for an adequate Say on Pay vote) and 6.8% received less than 70% support (the ISS adequacy threshold). In many of these situations, one-time COVID-19 related changes contributed to the opposition, especially where executive pay increased or was protected, or the company had other "problematic" pay practices.23
ISS recommendations have a significant impact on vote results, with results being on average 30% lower for companies that receive an ISS "against" recommendation. As a result, receiving an "against" recommendation from ISS will often result in a lost Say on Pay vote under ISS standards.
For any company that either failed a Say on Pay vote or experienced weak results last year, proxy advisory firms will expect compensation committees to demonstrate responsiveness to shareholder concerns. Developing an effective CD&A to address the failure head-on and regain shareholder support involves the following:
- Demonstrate an understanding of the drivers behind the failed vote. Carefully review ISS and Glass Lewis reports and voting results, and identify in the CD&A the specific issues raised. Make it clear that the company heard the message, and understands the concerns of shareholders.
- Describe the shareholder engagement process. Glass Lewis expects "robust disclosure of engagement activities and specific changes made in response to shareholder feedback". In the absence of evidence that the board is actively engaging shareholders on these issues, a company that previously failed Say on Pay may receive negative voting recommendations from ISS and Glass Lewis against compensation committee members.25 Describe in detail the company's engagement efforts (e.g., percentage of total investors and/or large investors contacted, and the percentage of total investors and/or large investors with whom the company spoke), who participated in the discussions (ideally, this includes the compensation committee chair) and the specific feedback received.
- Avoid using COVID-19 as a crutch. In its updated FAQs related to COVID-19 pay decisions published in December 2021, ISS cautioned companies that "[t]he surprise element of the pandemic in early 2020 is generally no longer applicable."26 So, blaming the pandemic generally as an explanation for problematic pay practices will not be well received. Companies will need to clearly and thoughtfully explain why any pandemic-related changes were necessary, including the "specific pandemic-related challenges and how those challenges rendered the original program design obsolete or the original performance targets impossible to achieve."
- Identify specific actions to address shareholder concerns. Whether the actions are modest (such as adopting a no hedging or pledging policy or stock ownership guidelines), middle-of-the-road (such as including in that same proxy statement more detailed disclosure of the performance metrics for a cash bonus plan or equity awards, or removing single-trigger vesting in equity awards) or substantial (such as a forward-looking commitment to use more robust performance-based compensation with more challenging performance targets or longer performance periods, or return to performance-based compensation following one-time COVID-19 changes), explain the changes clearly and tie them directly to the feedback received in shareholder meetings. Use charts and graphics wherever possible to strengthen the narrative, including a chart showing each concern and the company's actions in response. The company should also discuss its process for implementing these changes, such as the discussions between management and the compensation committee throughout the year.
- Don't side-step disagreement, but do provide a compelling justification. While a company should be responsive to shareholder concerns, this does not mean acceding to every demand. Certain program elements that garnered negative attention may legitimately further the company's business needs. The CD&A should identify any aspects of the company's compensation program that were not changed despite shareholder feedback, and clearly explain the rationale for retaining such elements and the importance to the company's overall compensation philosophy.
- Ensure the compensation committee has ample time to review and discuss the CD&A. The compensation committee should be given enough time to review the CD&A disclosure on the company's response to its low Say on Pay vote and should have a robust discussion with the company's management and compensation consultant on the disclosure.
- Consider getting ISS to review. As of January 2021, ISS' proxy research department no longer provides draft voting recommendation reports to U.S. companies,27 including those in the S&P 500 index. However, companies may pay ISS's consulting department (ISS Corporate Solutions) to prepare a written analysis of the possible voting recommendation from ISS' proxy research department on the Say on Pay proposal, or at least potential problems it may raise, based on ISS' publicly available policies. Companies should be aware that the ISS Corporate Solutions team providing the analysis does not have influence over, and may provide an analysis with a conclusion different from, the ultimate voting recommendation that ISS' proxy research department gives to investors.
11. Scrutinize Perquisites in Light of Recent SEC Enforcement Actions and Guidance. The SEC remains focused on perquisite disclosures and has brought at least six enforcement actions on perquisites involving findings of internal controls shortcomings in the last 18 months. These included actions against a company that failed to track whether corporate jet flights were integrally and directly related to an executive's job functions28, a company that failed to appropriately apply the SEC's rules to its system for identifying, tracking and calculating perquisites including for hotel stays by executives29, and a company that failed to implement expense reimbursement policies and procedures.30
It is important that companies have robust controls to track perquisites and confirm, based on the SEC's framework, that all perquisites are properly identified and disclosed. Under the SEC's framework, any personal benefit provided to an executive officer or director is a perquisite, unless (i) it is "integrally and directly related" to the performance of his/her duties to the company (i.e., he/she effectively could not do his/her job without it), (ii) it is available on a non-discriminatory basis to all employees to whom it may be lawfully provided (based on jurisdictionally recognized legal restrictions) or (iii) the executive officer or director fully reimburses the company for it.
Companies should also be particularly careful that any new or modified benefits offered to executive officers or directors because of the COVID-19 pandemic are appropriately considered and disclosed, if necessary. In September 2020, the SEC issued guidance emphasizing that during the pandemic the above-described analysis continues to apply when determining whether an item is a perquisite and that the determination of whether the personal benefit is "integrally and directly related" to the performance of the executive officer or director's duties (i.e., whether he/she could effectively not do his/her job without it) should be assessed in light of remote working arrangements during COVID-19.31
The SEC has pledged to continue to focus on whether companies are fully disclosing compensation paid to their top executives and have appropriate internal controls in place to ensure that shareholders receive information to which they are entitled,32 and the SEC's Division of Enforcement is scrutinizing perquisite disclosure using "risk-based data analytics to uncover potential violations."
12. Update Your Pay Ratio Disclosure: The 2022 proxy season will be the fifth year for mandatory pay ratio disclosure. The pay ratio rule permits a company to identify its median employee once every three years, as long as the company reasonably believes there has not been a change in its employee population or compensation arrangements that would significantly affect its pay ratio disclosure. Companies should continue to assess whether they need to select a new median employee due to significant changes in their employee population or compensation arrangements as a result of COVID-19 or other events.
13. Last But Not Least, Confirm Proxy Housekeeping Items Are Complete, Including These Five Items:
(a) Confirm Sufficient Shares Available for Grants under Equity Compensation Plans. Confirm as early as possible that no additional shares are required for future grants under an equity compensation plan. A company should confirm both the number of existing shares still available for grant, as well as its plans for future equity grants. Adding shares to a plan can be a straightforward exercise when planned in advance, but it also involves many to-do items (including, for example, updating the equity compensation plan itself; carefully form-checking the equity plan proposal against the technical requirements of Item 10 of Schedule 14A, which has been a hot-bed target for litigants; considering ISS and Glass Lewis policies to determine whether they will support the proposal and drafting disclosure to obtain their support; drafting a Form S-8 and updated equity plan prospectus showing the new number of shares, which may need to be updated for new tax disclosures if applicable tax laws have changed; and, in the case of NYSE-listed companies, drafting and having the NYSE clear a supplemental listing application to list the additional shares).
(b) Get Your Voting Standards Correct. Once an annual meeting agenda is finalized, confirm your proxy statement disclosure on the voting standards that will apply to each agenda item, as well as how broker non-votes and abstentions will be treated. Getting this correct means considering the applicability of state law, your certificate of incorporation, bylaws and stock exchange requirements for each proposal. As we reported in our prior alert, as a result of an amendment to NYSE rules, this is the first proxy season that proposals subject to NYSE rules (e.g., the approval of an equity plan) will no longer require any special treatment for abstentions. Consistent with Nasdaq's approach, the NYSE now defers to a company's governing documents and applicable state law for the treatment of abstentions with such proposals.
(c) Confirm Any Disclosure on Section 16 Delinquencies. Companies should review their prior Section 16 reports and identify any reports that were not filed on a timely basis. For each such late report, a company will need to disclose the Section 16 insider who filed late, the number of late reports and transactions that were not reported on a timely basis, and any known failure to file a form.
(d) Confirm Your Notice Complies with Applicable State Law. Companies should review their notice for their annual meeting at the beginning of their proxy statements in order to confirm it includes the information required by applicable state law. For Delaware corporations, written notice under Delaware General Corporate Law ("DGCL") Section 222 must include: the date, time and place, if any, for the meeting; the means of remote communications, if any, by which stockholders may be deemed to be present and vote at the meeting; and the record date for determining the stockholders entitled to vote at the meeting. In addition, Section 219 of the DGCL requires that if a stockholder meeting is to be held by means of remote communication, a company must include in its notice: (i) the specific means of accessing during the meeting the list of stockholders entitled to vote at the meeting;33 and (ii) if the company plans to host the stockholder list for the required 10-day period prior to the meeting virtually rather than at its principal place of business, the information required to gain access to such list.34
(e) Update Your Cover Page to Reflect Revised Filing Fee Disclosure Rules. This year, the proxy statement cover page should be updated to track the current form of the Schedule 14A, which is included in Rule 14a-101 of the Exchange Act. The updates include (1) deletion of two checkbox categories: the fee computation table and the fee offset information, and (2) replacement of this language with a simplified set of check boxes (with the categories: (i) No fee required, (ii) Fee paid previously with preliminary materials, and (iii) Fee computed on table in exhibit required by Item 25(b) per Exchange Act Rules 14a-6(i)(1)). These changes reflect amendments effective as of January 31, 2022 under the SEC's revised filing fee disclosure rules.
1 Nasdaq's Board Diversity Rule, as summarized here by Nasdaq, applies to domestic companies and foreign private issuers, as well as controlled companies. Newly listed companies have one year from the date of listing to provide the required board diversity disclosure. The only companies exempt are certain limited types of issuers such as SPACs, limited partnerships, closed end funds, management investment companies and issuers of exchanged traded products.
2 For Board Diversity Matrix templates permitted by Nasdaq, please see this link.
3 See our prior memo on ISS and Glass Lewis policy updates for 2022, "ISS and Glass Lewis Issue 2022 Updates: Top Six Key Policy Changes and Take-Aways."
4 See, e.g., SEC Comment Letter to Frontier Oil Co. (Mar. 31, 2010) and SEC Comment Letter to Synchronoss Technologies, Inc. (May 28, 2010). In both instances, the companies stated that they considered diversity in selecting director nominees, but that they did not have a formal diversity policy. The SEC, nonetheless, asked the companies to disclose how their diversity policies are implemented and their effectiveness assessed.
5 The skills matrix first came to the fore in 2017, when New York City Comptroller Scott Stringer, on behalf of the New York City Pension Fund, sent letters to 151 companies calling for the disclosure of a matrix covering the key skills, experience and attributes of board members.
6 Also see our prior alert related to cyber risk disclosures, "Time to Revisit Risk Factors in Periodic Reports."
7 Institutional investors are also focused on the board's role in risk oversight, particularly of ESG issues. For example, in 2021 BlackRock voted against the board chair — as the director most responsible for oversight of the company's strategy — at a utility company because it believed that the company could better articulate to its shareholders how its long-term value proposition would be impacted by the anticipated decline in demand for coal-based energy. See BlackRock's 2020-2021 Investment Stewardship Report, available here.
8 While Glass Lewis believes that it is important for these issues to be overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, it also believes that companies should determine the best structure for this oversight and that this oversight can be effectively conducted by specific directors, the entire board, a separate committee, or combined with the responsibilities of a key committee. For more information on ISS' and Glass Lewis's 2022 policy updates, see our prior alert, "ISS and Glass Lewis Issue 2022 Updates: Top Six Key Policy Changes and Take-Aways."
9 Available here. BlackRock also asks companies to disclose: "The aspects of diversity that the company believes are relevant to its business and how the diversity characteristics of the board, in aggregate, are aligned with a company's long-term strategy and business model; The process by which candidates are identified and selected, including whether professional firms or other resources outside of incumbent directors' networks have been engaged to identify and/or assess candidates, and whether a diverse slate of nominees is considered for all available board nominations; [and] [t]he process by which boards evaluate themselves and any significant outcomes of the evaluation process, without divulging inappropriate and/or sensitive detail."
10 See BlackRock's investment stewardship report regarding its voting practices for the Americas, available here.
11 See Item 401(e)(2) of Regulation S-K, which only requires a company to disclose current outside directorships (and those held in the past five years) of a company's directors at U.S. public companies (i.e., those with securities registered under section 12 or subject to the requirements of section 15(d) of the Securities Exchange Act of 1934, as amended "the Exchange Act")) and registered investment companies.
12 A directorship at a foreign publicly traded company is also not required to be disclosed under SEC rules; however, companies should still keep track of any such directorships, as proxy advisory firms and institutional investors may still count these as "public" directorships toward their overboarding limits.
13 See Vanguard policy on "Overboarded Directors" available on page four here.
14 See Spencer Stuart, 2021 U.S. Spencer Stuart Board Index (and 2020 U.S. Spencer Stuart Board Index. In 2021, 77% of S&P 500 boards reported having some limit on directors accepting other corporate directorships, an increase from 71% in 2010. In 2021, 67% of S&P 500 companies reported having a numerical limit for other corporate board service that applies to all directors, compared with 55% in 2010 (most of these boards limit members to three or four additional directorships), and one-quarter of S&P 500 boards reported a specific limit on the number of outside boards on which the CEO may serve, up from 15% in 2010.
15 The EEO-1 survey responses, which is a requirement of the U.S. Equal Employment Opportunity Commission, provides a breakdown of employees by race, ethnicity, and gender according to various employment categories, including senior management.
16 See Broadridge Financial Solutions, 2021 Proxy Season Key Statistics and Performance Rating; and Broadridge Financial Solutions and PwC, ProxyPulse—2020 Proxy Season Review.
17 See Wall Street Journal, Companies Say They Are Better Prepared to Host Virtual Annual Meetings This Year (April 2021).
18 For more information, see our alert "Glass Lewis Guidelines Update Policy on Virtual-Only Meetings Due to COVID-19."
19 ISS released guidance that boards are "encouraged to commit to return to in-person or "hybrid" meetings (or to put that matter to shareholders to decide) as soon as practicable." See here.
20 Under Item 404(b) of Regulation S-K.
21 For more information, see our prior alert "ISS and Glass Lewis Issue 2022 Updates: Top Six Key Policy Changes and Take-Aways."
22 For more information, see our prior alert, "SEC Issues Sample Comment Letter as it Ramps Up Scrutiny of Climate Disclosures."
23 See NASPP, Say-on-Pay Failed Votes Double in 2021: 4 Things to Know; FW Cook, Halfway Through 2021 Say-On-Pay Voting, S&P 500 Failures Approach All-Time High.
24 In 2021, for example, ISS recommended against 10.9% of Russell 3000 companies, and the average support level for a company with an "against" vote recommendation from ISS was 31% lower than those with a "for" recommendation.
25 According to a Semler Brossy study, in 2021 the Russell 3000 average Say on Pay vote (90.4%) was consistent with the prior two years, despite an uptick in failures. There was, however, a significant decrease in the S&P 500 average vote result to 88.3%, with 18 companies (3.7%) failing. This was 130 basis points below the prior year result and 210 basis points below the Russell 3000 average vote. See Semler Brossy's 2021 Say on Pay Results.
26 See U.S. Compensation Policies and the COVID-19 Pandemic – Updated for 2022 U.S. Proxy Season Frequently Asked Questions.
27 See ISS's announcement here.
28 See National Beverage Corp. (August 4, 2021), SEC order available here.
29 See Hilton Worldwide Holdings Inc. (September 30, 2020), SEC order available here.
30 See RCI Hospitality Holidings, Inc. (September 21, 2020), SEC orders available here and here.
31 See C&DI 219.05, which states that "i]n some cases, an item considered a perquisite or personal benefit when provided in the past may not be considered as such when provided as a result of COVID-19. For example, enhanced technology needed to make the NEO's home his or her primary workplace upon imposition of local stay-at-home orders would generally not be a perquisite or personal benefit because of the integral and direct relationship to the performance of the executive's duties."
32 See the SEC's press release related to its enforcement action against an insurance company for failure to disclose executive perks, available here.
33 For example, the following language could be used: "During the Annual Meeting, any shareholder attending the Annual Meeting may access a list of the shareholders entitled to vote at the Annual Meeting at [website] by following the instructions contained in the Proxy Statement."
34 For example, the following language could be used: "A list of the names of shareholders entitled to vote at the Annual Meeting will be available to shareholders for ten days prior to the Annual Meeting for any purpose germane to the Annual Meeting. Please contact [●] at [email address] or [telephone number], if you wish to examine the list prior to the Annual Meeting." This disclosure has the potential to invite requests from shareholders, so companies may be well advised to host the list in person at their principal place of business, as allowed under DGCL 219 (in which case they do not need to add additional disclosure to the notice).
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