Glass Lewis publish UK proxy voting guidelines for 2022

Glass Lewis has published its revised 2022 proxy voting guidelines for the UK. A summary of the key changes made is provided below. This includes updated remuneration-related guidance on remuneration committee performance and accountability, ESG metrics, and expanded narrative around scenarios where they may recommend a vote against the remuneration policy and remuneration report. The full guidelines can be read here.

Key remuneration-related changes

• Remuneration committee performance and accountability:
  Glass Lewis have broadened the circumstances under which they would recommend voting against the remuneration committee chair and/or all of the remuneration committee members. They may recommend that shareholders vote against the re-election of:
  • The remuneration committee chair where there are substantial concerns with the remuneration policy or the pay practices outlined in the remuneration report. In staggered boards where the committee chair is not up for re-election, Glass Lewis may instead recommend that shareholders oppose the re-election of a long-serving committee member.
  • All remuneration committee members when a company's policies and practices are particularly egregious - especially in cases where these concerns have existed over multiple years.
  • The Remco chair and/or all remuneration committee members when the committee failed to address shareholder concerns following majority shareholder rejection of the proposal in the previous year; and/or the proposal was approved but there was a significant shareholder vote (i.e., greater than 20% of votes cast) against the proposal in the prior year, and there is no evidence that the board responded accordingly to the vote including a ctively engaging with shareholders on this issue.
• Glass Lewis will generally recommend shareholders vote against (previously abstain) the remuneration committee chair when this committee has fewer than the recommended number of members.
• ESG metrics – Generally supportive of ESG metrics ‘when used appropriately’:
  • Flexibility around if/how ESG metric are included – Glass Lewis “ does not maintain a requirement of the inclusion of such metrics in incentive programmes” and states that “not all remuneration schemes lend themselves to the inclusion of E&S metrics”. They are of the view that “companies should retain flexibility in not only choosing to incorporate E&S metrics in their remuneration plans, but also in the placement of these metrics” (e.g. annual bonus or LTI).
  • Metrics related to ethical behaviour or compliance with policies and regulations: Some metrics are “viewed as prerequisites for executive performance, as opposed to behaviours and conditions that need to be incentivised. For example, we believe that shareholders should interrogate the use of metrics that award executives for ethical behaviour or compliance with policies and regulations.”
  • Prospective disclosure of ESG targets - “Where quantitative targets have been set, we believe that shareholders are best served when these are disclosed on an ex-ante basis, or the board should outline why it believes it is unable to do so.”
• Executives with significant shareholding – “Where an executive owns or directly controls more than 10%-20% of a company's shares or voting rights, we would not expect the individual to participate in equity incentive schemes unless a cogent rationale is provided by the company. In general, however, we would be sceptical of any large grant, either in equity instruments or cash, that would allow the executive to further consolidate its ownership level; in such cases, we would expect the board to implement anti-dilutive safeguards and disclose the terms thereof.”
• Remuneration policy – Expanded list of “some of the potentially troubling issues we will consider when analysing remuneration policies” to include “significant increases in quantum, absent a sufficient rationale” and where “the policy does not include structural safeguards and risk mitigating features, such as clawback/malus provisions, deferral, post-vesting holding periods, and in-post and post-employment shareholding requirements”.
• Remuneration report - new section ‘Vote on Remuneration Report’ to outline “indications of problematic pay practices or remuneration committee decisions which may cause Glass Lewis to recommend against the remuneration report” to include:
  • Remuneration outcomes that are not correlated with overall company performance or the stakeholder experience, or are high compared to a company’s peers;
  • Significant increases in base salary or variable incentive opportunity absent a compelling rationale;
  • Egregious or excessive bonuses, equity awards, or severance payments;
  • Guaranteed bonuses;
  • Performance targets are not sufficiently challenging and/or providing for unreasonably high potential payouts, do not align with business strategy over the long-term, or are well below actual past performance, previous targets, or strategic targets provided in guidance to shareholders, absent a compelling rationale for lowering the target;
  • Lack of disclosure regarding performance metrics and targets;
  • Discretionary payments which fall outside of short- and long- term incentive plans;
  • Inappropriate use of committee discretion; and
  • Non-executive directors are eligible for cash and/or equity awards on similar terms as those granted to executive directors.
• “We also believe that this annual vote provides shareholders with an important opportunity to express concern with a company's remuneration policies and practices that are not explicitly limited to the year under review.”
• Performance measures (adjusted financial measures) – Where the financial metrics used to determine payouts have been adjusted, such as to exclude exceptional items or other costs, the report should disclose how the calculation differs from reported accounting figures, and a rationale for these adjustments including the use of the adjusted financials by industry peers and financial analysts.
• Non-executive director (NED) fees – expanded guidance on NED fees. Glass Lewis believes that the quantum of non-executive fees should be broadly comparable to a company's country and industry peers, should take into account the time commitment required for a director to satisfactorily discharge their duties to shareholders and should be reasonable in order to retain and attract qualified individuals.

Other changes:

Diversity of Ethnicity and National Origin at Board Level

As previously announced, from 2022, Glass Lewis will generally recommend against the re-election of the chair of the nomination committee at any FTSE 100 board that has failed to appoint at least one director from a minority ethnic group and has failed to provide clear and compelling disclosure for why it has been unable to do so.

Environmental and Social Risk Oversight

As previously announced, from 2022, Glass Lewis will generally recommend that shareholders vote against the re-election of the governance committee chair (or equivalent) of FTSE 100 companies that fail to provide explicit disclosure concerning the board’s role in overseeing material environmental and social issues.

Overall Approach to ESG

Expanded discussion of ESG initiatives in a new section titled Overall Approach to ESG, providing additional details of considerations when evaluating these topics. In summary, Glass Lewis evaluates all environmental and social issues through the lens of long-term shareholder value - companies should be considering material environmental and social factors in all aspects of their operations and that companies should provide shareholders with disclosures that allow them to understand how these factors are being considered and how attendant risks are being mitigated.

Gender Diversity

Amended language to clarify that the Glass Lewis assessment of board-level gender diversity is based on the self-identification of directors and that we consider directors that self-identify as non-binary to contribute to the gender diversity of a board.