Expect negative votes against incumbent directors to hold greater weight in 2020. Policy updates from ISS and Glass Lewis will likely provide pressure that leads to governance changes at some companies and more director resignations due to failure to win majority shareholder support for re-election.
Director accountability will be a major theme in 2020, and shareholders and regulators are set to use voting as an enforcement measure. This approach has been advocated for years by the Council of Institutional Investors whose governance policies state that “in uncontested elections, directors should be elected by majority vote; directors who fail to receive a majority support should step down from the board and not be reappointed.” In reality, at many companies, even if a majority of shareholders vote “No” toward an incumbent director’s re-election, the director can retain the board seat with a single “Yes” vote because there are no other candidates. We may see less of that next year.
Policy updates recently issued by ISS and Glass Lewis indicate that the proxy advisory firms are increasing their scrutiny of director performance. They warn that the firms will recommend that shareholders vote against the re-election of directors in a number of situations starting in 2020.
The Harvard Business Review covered the policy updates from both ISS and Glass Lewis earlier this month. Directors now at risk of ISS generally recommending voting against or withholding votes for them next year include:
• nominating committee chairs (and other directors on a case-by-case basis) at Russell 3000 or S&P 1500 companies with no women on the board.
• all governance committee members until the company gives shareholders unfettered ability to amend the bylaws or allows shareholder to vote on a proposal providing for such unfettered right.
• the entire board (except new nominees) if prior to or in connection with the company’s public offering, the company or its board implemented a multi-class capital structure where the classes have unequal voting rights, unless the structure is subject to a reasonable time-based sunset provision.
Directors that Glass Lewis will now generally recommend voting against or withholding votes include:
• the audit committee chair when fees paid to the company’s external auditor are not disclosed.
• governance committee chairs when directors’ records for board and committee meeting attendance are not disclosed or the company discloses that a director attended less than 75 percent of board and committee meetings but is unable to identify the specific director that was lacking.
• all members of the compensation committee when the board adopts a frequency for future say-on-pay votes other than the frequency approved by a plurality of shareholders.
Board members are now on notice that committee chairs and directors who serve on specific committees will find their board seat more at risk if certain governance policies are not adhered to. Directors should review the policy updates and determine if their board seat could be challenged by means other than a proxy fight. Then it’s up to directors to do everything possible to avoid being the target of a negative vote recommendation.
It should be noted that most of the policy updates that would vote against directors are generally being viewed as efforts to improve governance. While directors may feel these updates shift too much power to shareholders, they should think very carefully before fighting against the measures. It’s never good to be called out as a director who is a potential impediment to good governance. And going against the will of the majority of shareholders? In some cases, such a move might actually cause colleagues to question a director’s judgment.
In reality, 2020 ushers in a new decade, and new standards for governance. This means that the role of the corporate director has changed yet again, and the added scrutiny and accountability may not suit everyone who is a director today. It may be that the policy updates force boards of directors to update governance policies and reconsider the type of board they want to be in the process. Earlier this year, the Wall Street Journal reported that 478 public company directors failed to receive majority shareholder support, a 39 percent increase from 2015. While not all of those directors resigned, there was pressure on them to do so. Expect the pressure on directors in a similar situation to increase next year.
That Journal report, which was based on data from Broadridge Financial Solutions Inc., also noted that 1,726 directors received less that 70 percent support in director elections. It will be interesting to see if the policy updates help move those voting percentages higher or lower next year.
