ISS and Glass Lewis Issue Updates to 2022 Policy Guidelines

By Joe Sorrentino, Alex Swan


ISS and Glass Lewis recently issued policy updates for the 2022 proxy season. This year’s updates primarily focus on Climate Change, including Board accountability and Say on Climate proposals, Board diversity, and shareholder voting rights. Compensation policy updates mostly represent expansions on and/or clarifications of current practices including the restoration of many pre-COVID compensation-related voting policies and a change in ISS burn rate calculations effective for 2023.

ISS Policy Updates (Effective February 1, 2022)

Pay Actions in Response to COVID-19

ISS provided an update on its treatment of pandemic-related pay practices, acknowledging that while COVID-19 may have lasting impact on the financial performance of some companies—and in certain instances this impact warrants consideration and merits leniency—the surprise element of the pandemic from early 2020 is generally no longer applicable. As such, ISS plans to predominantly restore its pre-pandemic expectations of compensation practices and disclosure. Going forward, ISS recognizes that the following items will be met with increased scrutiny, unless clear rationale is provided justifying these actions:

  • Mid-year changes to incentive plan metrics, performance targets, measurement periods and increased discretion/subjectivity in annual incentive plans
  • Lower annual incentive plan performance targets than the prior year’s performance
  • In-progress modifications to long-term incentive plans, and any drastic shifts to predominantly time-vesting incentives or short-term measurement periods in current or future long-term plans
  • One-time special awards issued in response to the pandemic. ISS states that any such awards—as with non-COVID-related specials—must be explained with rationale that extends beyond “retention concerns,” must be strongly performance-based, must have a long-term vesting period, and should contain shareholder-friendly guardrails to avoid windfalls for award recipients (e.g., limitations on termination-related vesting). ISS will also continue to scrutinize companies that have exhibited repeated use of special awards, regardless of disclosed justifications
  • The granting of one-time awards in the context of forfeited incentives
  • Disclosure of shareholder engagement in response to low say-on-pay support (i.e., below 70%) that does not include outreach efforts taken, feedback received from dissenting investors, and specific actions taken by the company to address concerns. This includes negative feedback stemming from one-time COVID-related pay decisions

Equity-based Incentive Plans – Changes to Three-Year Burn Rate Calculations

Beginning in 2023, ISS will transition its burn rate calculation from a volatility-based approach to a value-adjusted approach, more consistent with the Black-Scholes valuation of stock options used by many companies. The current and updated methodologies for burn rate calculations are provided for reference below:

  • Volatility-Based Burn Rate (current methodology) = (# of appreciation awards granted + # of full value awards granted * Volatility Multiplier) / Weighted average common shares outstanding
  • Value-Adjusted Burn Rate (future methodology) = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) / (Weighted average common shares * stock price)

ISS believes that a departure from the volatility-based calculation is warranted because the value-adjusted approach more accurately assesses the value of recently granted equity awards and the value of option grants. ISS also deems the value-adjusted approach as more closely reflecting the communication of equity value in the current market: the actual stock price for full-value awards, and a Black-Scholes adjusted value for options. Over time, this may have an unintended consequence of pushing companies with very high stock price volatility to grant more full-value awards in place of options, as options may be counted as nearly the same as RSUs for ISS burn rate purposes. The new methodology will be for display only in 2022, but will be factored into ISS’ Equity Plan Scorecard in 2023.

Board Diversity

Last year, ISS stated that it would generally recommend shareholders vote against or withhold support for the chair of the nominating committee—or other directors on a case-by-case basis—where the board has no women and apparent racially or ethnically diverse members, where there was not a woman and a racially/ethnically diverse member within the past year, and where no commitment to appointing at least one woman and one racially/ethnically diverse member within a year is in place. These policies take effect in 2022 and apply to all Russell 3000 or S&P 1500 index companies. Beginning in 2023, policies on gender diversity will also apply to companies not in the Russell 3000 and S&P 1500. Foreign private issuers in the Russell 3000 or S&P 1500 indices will now be subject to the same U.S. gender diversity policy applied to U.S. domestic issuers in those indices.

Canadian Say-on-Pay Threshold

While the Say-on-Pay minimum vote threshold that triggers a qualitative review of the Board’s shareholder responsiveness for U.S. companies remains 70%, the policy for Canadian companies is being raised from 70% to 80%. ISS announced this change to align with recommendations from the Canadian Coalition for Good Governance. This may signal a potential increase for the minimum support level for U.S. firms at some point in the future.

Click here to access the complete policy updates and guidelines for 2022 from the ISS website.

Glass Lewis Policy Updates (Effective January 1, 2022)

Board Diversity

Glass Lewis has expanded its policy on board gender diversity, and will begin recommending votes against the nominating committee chair of companies with fewer than two gender diverse board members. Glass Lewis will also recommend voting against the entire nominating committee of companies inside the Russell 3000 index with no gender diverse board members. In 2023, Glass Lewis will transition from a fixed numerical approach of determining board gender diversity to a percentage-based approach, and will begin recommending votes against the nominating committee chair of companies within the Russell 3000 index that do not have at least 30% gender diverse board members. Exceptions to these policies may be made in the event a company provides sufficient rationale or plans to address the lack of diversity.

Beginning in 2022, Glass Lewis may recommend voting against the chair of the nominating committee of S&P 500 companies failing to provide sufficient disclosure of director diversity and skills. Beginning in 2023, Glass Lewis will generally recommend voting against the chair of the governance committee of S&P 500 companies that have not provided any disclosure of individual or aggregate racial/ethnic minority demographic information.

Glass Lewis will also make voting recommendations in accordance with state and stock exchange mandates or disclosure requirements related to gender and racial/ethnic board diversity.

Committee Chair Nominations

In instances where Glass Lewis would recommend voting against the reelection of a committee chair that is not up for election due to a staggered board, Glass Lewis will generally recommend voting against other members of the same committee who are up for election on a case-by-case basis.

Special Purpose Acquisition Companies (SPACs)

Glass Lewis will generally recommend voting against all members of the board of a company that has completed a business combination with a SPAC within the past year if that company adopted overly-restrictive governance documents, a multi-class share structure, or an anti-takeover provision or classified board. Glass Lewis will make exceptions to this policy in the event the company submitted these provisions to a shareholder vote either at the meeting where shareholders voted on the business combination or the first shareholder meeting after the business combination, or if a reasonable sunset of these provisions (generally three to five years in the case of a classified board or poison pill; or seven years or less in the case of a multi-class share structure) is in place.

Additionally, Glass Lewis will generally apply the higher limit for company directorships (i.e., five boards) of directors whose only executive role is at a SPAC. Glass Lewis believes this policy is reasonable given the limited business operations of a SPAC, since the primary role of a SPAC executive officer is to identify and consummate a business combination.

Waiver of Age and Tenure Policies

Glass Lewis will generally recommend voting against the nominating and/or governance committee chair of companies that have waived their self-imposed board age/tenure limits for two or more consecutive years, unless a compelling rationale for why this rule was waived is provided (i.e., consummation of a corporate transaction).

Other Policy Guideline Clarifications

Glass Lewis fine-tuned and clarified other existing policies of interest to Compensation Committee members and compensation professionals:

  • Linking Executive Pay to Environmental and Social Criteria – Does not maintain an explicit policy on the inclusion of metrics, but expects robust disclosure of any such metrics if included in the plan, the rigor of their performance targets, and payout determination. Qualitative measures should have clear disclosure on how they are assessed
  • Short- and Long-Term Incentives – Will consider adjustments to GAAP financials when assessing the effectiveness of a plan’s tie between executive pay and performance
  • Grants of Front-Loaded Awards – Considers not only the annualized value of such awards, but their impact on dilution and shareholder wealth
  • Approach to Environmental, Social, and Governance (ESG) and Shareholder Proposals – Evaluates all environmental and social issues and shareholder proposals through the lens of long-term shareholder value

 Glass Lewis’s 2022 policy guidelines can be found here.

Portrait of Joe Sorrentino, PrincipalJoe Sorrentino

Joe Sorrentino has over 20 years of executive compensation consulting experience. His client assignments have been with both public and privately-held companies in industries including: chemicals, consumer products, financial services, health care, manufacturing, pharmaceuticals, real estate/REITS and utilities. His consulting engagements often focus on the development of executive compensation strategy, design of annual and long-term incentive programs, and ISS equity plan modeling, compensation and governance policies.

Alex Swan

Alex Swan assists a diverse group of both privately-held and publicly-traded clients that span all global industry sectors. His consulting engagements include competitive assessment of executive and director compensation, incentive plan design and strategy, analysis of equity compensation cost and usage levels, executive realizable compensation, pre-IPO compensation practices and carried interest, and pay-for-performance modeling.