ISS and Glass Lewis Proxy Advisory Firms Issue 2017 Updates

What you need to know:

Institutional Shareholder Services (ISS) and Glass Lewis have recently issued their updated policy statements with respect to 2017 public company annual meetings. Public companies will want to evaluate their existing governance practices and items for which shareholder approval is being sought in 2017 – including director election – in light of these updates.

ISS

The ISS 2017 Benchmark Policy Recommendations are effective for meetings on or after February 1, 2017. Key updates include:

• Overboarded Directors: The sunset period from the 2016 updates has expired, meaning that a director isnow deemed overboarded and will be subject to adverse recommendation if the director serves on morethan five public company boards rather than on six such boards. A CEO continues to be consideredoverboarded if the CEO serves on more than two public company boards, other than the CEO’s owncompany. ISS will recommend against overboarded CEO directors only at their own companies.
• Dividends in Equity-Based and Other Incentive Plans: Updated policy to specifically consider whetherdividends are payable prior to vesting, with full points being allocated under the ISS equity plan scorecardonly if the plan expressly prohibits the payment of dividends in respect of unvested awards and applies toall awards.
  Director Pay Programs: New policy to consider ratification on a case-by-case basis and updated policy onapproval of non-employee director compensation, clarifying and broadening the factors considered whenassessing the reasonableness of compensation, including the addition of relative pay magnitude andmeaningful pay limits. In response to recent litigation over the level of director pay, many companies havesought shareholder ratification of compensation limits.
• Restricting Binding Shareholder Proposals: New policy to vote against or withhold from members of thegovernance committee if the company’s charter imposes undue restrictions on shareholders’ ability toamend the bylaws, such as limitations on the ability to make proposals based upon minimum holdingperiods or share ownership.
• Multi-Class Capital Structure Post-IPO: Updated policy relating to corporate governance of newly publiccompanies to vote against or withhold from directors individually, committee members or the entire board(except new members) if, prior to or in connection with the company’s public offering, the company or itsboard adopted bylaw or charter provisions materially adverse to shareholder rights or implemented a multi-class capital structure in which the classes have unequal voting rights.

Glass Lewis

The Glass Lewis 2017 Proxy Paper Guidelines include the following key updates:

• Overboarded Directors: New guideline to codify policy included in last year’s update that Glass Lewis willgenerally recommend voting against a director who serves as an executive officer of any public companywhile serving on a total of more than two public company boards and any other director who serves on atotal of more than five public company boards.
• Board Evaluation and Refreshment: Glass Lewis clarified its policy to articulate that an overall evaluation of the board’s composition, including diversity of skill sets, alignment of expertise, approach to corporate governance and responsibility for company performance, is a more beneficial way to evaluate a board than an arbitrary age or term limit. Failure to satisfy the Glass Lewis policy could result in an adverse recommendation against the chair of the nominating committee or all members of the nominating and/or governance committees.
• Post-IPO Corporate Governance: Glass Lewis has now adopted a one-year period following an IPO during which it will generally refrain from making recommendations on the basis of governance standards (e.g., board independence, committee membership and structure, meeting attendance, etc.). However, if Glass Lewis believes that a company’s charter and by-laws severely restrict shareholder rights it may recommend voting against individual directors if they served on the board when the governance documents were adopted.

What you need to do:

In addition to evaluating your company’s corporate governance practices and items for which shareholder approval will be sought in 2017, near-term action items include:

• Enrollment in Glass Lewis 2017 Issuer Data Report (IDR) Program: Glass Lewis is making this program available on a “first come, first serve” basis through January 6, 2017. Under the IDR Program, participating companies may access a data-only version of the Glass Lewis proxy paper prior to Glass Lewis completing its proxy voting recommendation.
• Verify Data Underlying ISS QualityScore: Prior to filing of the company’s proxy statement, a company may review and confirm the accuracy of the raw data used by ISS to generate its corporate governance rating system known as ISS QualityScore.
• Update ISS Peer Compensation Group: From November 28th to December 9th, companies may update their peer compensation group if there have been changes since its last proxy statement.
• Review the full ISS proxy voting policies and FAQs to be issued in December and the updated U.S. Summary Proxy Voting Guidelines to be issued in January 2017.

For More Information

If you have questions about these developments, please contact your lawyer at Choate, or one of the following Choate attorneys:

Frederick Callori	617-248-5239 | fcallori@choate.com
William Gelnaw	617-248-5034 | wgelnaw@choate.com
Stuart Glass	617-248-4804 | sglass@choate.com
Andrew Hickey	617-248-5267 | ahickey@choate.com
Robert Jahrling	617-248-5148 | rjahrling@choate.com
James McDaniel	617-248-5280 | jmcdaniel@choate.com
Arthur Meyers	617-248-4808 | ameyers@choate.com
John Pitfield	617-248-5093 | jpitfield@choate.com