The Spotlight: Setting the Bar for Proxy Disclosures with Glass Lewis

Published: December 2020


Spotlight, our regular Q&A with clients and colleagues, highlights leading viewpoints on trending topics in the world of human resources.

David Eaton
Associate Partner, Human Capital Solutions

Eric Shostal
SVP of Research and Engagement, Glass Lewis & Co.

Setting the Bar for Proxy Disclosures with Glass Lewis

Between health and safety concerns, economic uncertainty and a heightened focus on social justice, businesses are tackling new human capital challenges and initiatives this year and into the future. This is important to consider as investors and their advisers evaluate board progress on overseeing environmental, social and governance (ESG) issues, as well as perennial hot topics like executive compensation.
To explore the latest regulatory updates and expectations for the 2021 proxy season, David Eaton, associate partner in the governance practice for Aon’s human capital business, recently spoke with Eric Shostal, SVP of Research and Development at Glass Lewis & Co. Below they discuss how Glass Lewis is approaching proxy statement review, what they will be focusing on in the current climate and how firms are setting the bar higher for inclusion and diversity in 2021 and beyond.

Do you expect more disclosure and action on board evaluations in the future than simply stating that evaluations take place annually?

There is no question that institutional investors are increasing their focus on board quality, effectiveness and accountability. We’re finding  investors are seeking better disclosure on a broad range of factors to understand the composition of boards. But, because disclosure requirements in the U.S. around diversity are not prescriptive, company disclosures on this topic are inconsistent, making it challenging for institutional investors to support management or signal concern through their voting policies across portfolios. For companies that don’t effectively tell their own story about director characteristics, investors will increasingly turn to outside sources for information or rely on their own assessments. We frequently engage with companies on their board renewal processes and, in many cases, companies describe a robust evaluation that wasn’t included in the proxy disclosure. This information provides a window into the quality of the board’s processes.

We believe investors would also benefit from more consistent disclosure of director skills, including the disclosure of skills in a consolidated matrix to enable easier access to information. Additionally, companies should consider what certifies relevant and current experience; if every box on a firm’s matrix is marked for every director, this raises questions around what qualifies as experience in a given category, making such disclosure less useful to investors in their decision making.
On board diversity, institutional investors are incorporating more measures of diversity into their proxy voting policies that go beyond gender to include personal characteristics, such as race and ethnicity. These characteristics can be a proxy for cognitive diversity, which, in our view, ultimately contributes to a more effective board. We encourage companies to share self-identified characteristics of the directors in their proxy disclosure in a consolidated format, and when possible, provide such information on an individualized director basis.

What level of disclosure do you think investors expect in proxy statements regarding board oversight of inclusion and diversity?

It is important that companies clearly articulate how the board views and oversees issues related to human capital management. To start, firms should provide a high-level overview of how the board oversees inclusion and diversity within their workforce and the board committee that supervises human capital management. Companies should also provide details in their proxy statements on the programs and policies they have instituted to promote board diversity with respect to race and gender, among other director qualifications. It’s essential for firms to describe what they are doing to ensure that their executive pipeline includes underrepresented groups within their disclosure of succession planning.

Do you think we will see more investors calling boards out for having contradicting approaches to inclusion and diversity efforts for employees versus what might be happening at the board level?

Yes. The combination of the #MeToo movement, COVID-19 pandemic and racial tensions in the U.S. have collectively shed a spotlight on human capital management. It’s probably no surprise that a significant and growing proportion of institutional investors are looking for levers to reflect their concerns in the management of their portfolios. One such lever is through the adoption of proxy voting policies aimed at increasing the diversity of the board or supporting shareholder proposals that seek to enhance a company’s human capital management disclosures. Because of these focus areas, it is only logical that shareholders would increasingly look for boards to set the tone at the top by clarifying their role and oversight of an organization’s inclusion and diversity practices.

Moreover, a number of investors are of the belief that boards of directors should reflect their workforces and/or customers. For companies where there is significant disconnect between the board’s composition and these groups, or in the case of companies that have experienced diversity-related controversies, there will likely be increased scrutiny on the board to adopt policies that promote
enhanced diversity or more meaningful representation.

Will you be giving companies the benefit of the doubt for any special executive compensation decisions made due to COVID-19 this year (e.g., goal modification, special retention grants)?

The principles of our analysis haven’t changed because of the current pandemic. Broadly, compensation structures should be applicable in boom markets as well as downturns. However, we always look at company actions through a contextual lens. There is no single right way to approach the uncertainty in the marketplace right now, and we are receptive to a wide range of tactics, as long as companies are clear about what they are doing and why it’s the right path.

Our approach to compensation in the current climate will focus on three principles: alignment with shareholders; prudence in not hastily remaking effective programs; and compromises that do not disproportionally benefit executives relative to shareholders. We expect to see meaningful tradeoffs where concessions like lowered goals or new grants are possible, but we don’t necessarily prescribe any specific counterweights like longer vesting periods or lower pay ceilings. Some bright lines do exist, however. Companies should not pay bonuses meaningfully above the target level unless their absolute and relative performance is unassailable and unrestricted cash retention awards provide neither shareholder alignment nor retentive benefits.

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