Institutional Shareholder Voting Guidelines

How to Win a Proxy Fight Despite a "NO" Recommendation from ISS and/or Glass Lewis

There is no doubt that Institutional Shareholder Services ("ISS") and Glass Lewis, as advisors to institutional shareholders, have a significant impact on the level of shareholder support for a company's Say on Pay and Incentive Plan proposals.  However, a "no" recommendation from either ISS or Glass Lewis does not necessarily mean that you will fail a Say on Pay or an Incentive Plan proxy proposal. 


Instead, if you received a "no" recommendation from either ISS or Glass Lewis, it is critical that you take a proactive approach and promptly put in place a shareholder outreach plan to directly engage your larger institutional shareholders to discuss your pay decisions and to ask for their thoughts on the ISS/Glass Lewis "no" recommendation.  The shareholder outreach plan is most effective when orchestrated by a cross-functional team, including your proxy solicitor, inside and outside legal counsel, the Compensation Committee's chair and compensation consultant and internal HR and investor relations team members.

One of the first tasks for the team is to have your proxy solicitor arrange for telephone calls with your larger investors, and it is most effective, if possible, to have the chair of the Compensation Committee lead the calls.  If that is not possible, investor relations, internal legal and th​e head of HR should take the call.  If brief talking points are prepared to organize the discussion on the calls, th​ey should not have to be filed in advance with the SEC.  However, if an actual script is prepared, it would likely be considered "solicitation materials" and need to be filed with the SEC as supplemental proxy materials.

Some of the larger and mor​e prominent institutional shareholders include the following:

  • BlackRock
  • T Rowe Price
  • Vanguard
  • Fidelity
  • Morgan Stanley
  • State Street

Because these institutions have voting guidelines that are broader than the bright line quantitative tests of ISS/Glass Lewis and they tend to look at the big picture and larger time horizons, often these institutions will not follow the voting recommendations of ISS/Glass Lewis.  These institutions will, however, want a clear explanation and perhaps additional disclosure of how the pay decisions are in the shareholders' best interests.

If the institutions express support for the "no" recommendation, then you should consider what the vote will be with a "no" vote by the particular institutions and whether it results in less than a majority or less than 70% approval.   A vote of less than 70% support will result in greater scrutiny of the Compensation Committee by ISS in the following year, including a requirement that the company disclose whether and how it has adequately addressed shareholder issues and what changes the company has made to its compensation programs.  Our next Alert will cover under what circumstances the institutions will vote against the re-election of the Compensation Committee members.

If the Company wants to win the Say on Pay proposal, it has two options. Depending on what the Company hears from shareholders, the Company can:

  1. Not change anything but issue a supplemental proxy explaining how the pay decisions are in the shareholders' best interests and continue the dialogue with the undecided or negative shareholders; or
  2. Reduce compensation and/or add performance conditions and file an 8-K regarding these changes to try to get ISS to change its "no" recommendation and the large institutions to vote "yes."  

For example, the following is a case study with a couple of examples of strategies for supplemental disclosures or amendments​ to reduce compensation.

  1. Supplemental Disclosure. Let's assume the shareholder advisory firm recommended a "no" vote based on a "medium" quantitative concern and that the resulting qualitative review focused on excessive CEO pay relative to performance. Under these circumstances, the supplemental disclosure should focus on the prior year's good record of Say on Pay votes and list examples of the company's good governance/pay prac​tices. The disclosure should then focus on why the compensation appeared to be high and offer extenuating circumstances, >e.g., turn around, outstanding operational results other than TSR and why the pay decisions were in the shareholders' best interests looking at the year in terms of a 3- to 5-year time horizon and the company's long-term business strategy.
  2. 8-K Disclosing Changes in Compensation. If the Compensation Committee concludes that changes should be made (and assuming the same facts), one relatively painless solution is to add performance conditions to equity grants that are perceived to be too large. Since the time period to add performance conditions under Internal Revenue Code Section 162(m) has most likely expired, the conditions can be added as a form of negative discretion that can result in the reduction of the portion of the award not earned under the performance condition with no opportunity as upside. Alternatively, the Compensation Committee may be able to persuade the CEO (or other named executive officers) to waive a portion of his/her long-term incentive award—it's too late to waive cash bonuses—for the year. The amount waived might be the amount necessary to change the "medium" quantitative concern to a "low" concern. Unfortunately, companies are not generally able to determine in advance if their proposed action will change the advisor's "no" recommendation, so it is a bit of a gamble and the change of compensation is generally viewed as "the court of last resort."  In terms of timing for the 8-K, a Company should assess what the vote will be after it has engaged in shareholder outreach and issued a supplemental proxy.  If the solicitor's projected vote percentage is less than a majority, or if there is a majority approval that is less than 70% approval and the Compensation Committee desires greater than 70% approval, then the Compensation Committee should take action to change the compensation and file an 8-K at least 5-7 business days before the annual meeting to try to change the ISS/Glass Lewis voting recommendation(s).

In preparing for discussions with these shareholders and preparing any amendments to compensation, it is important to know each of their proxy voting guidelines, as summarized in the charts.  More significantly, it is ​important to know about these guidelines and the advisors' policies well in advance of the annual meeting when designing and disclosing the CEO's pay in the proxy to avoid a recommended "no" vote.


For more information, see our Alerts titled "The Importance of Good Compensation Committee Minutes – 7 Tips" and "How to Win Say on Pay Proposals." If you would like additional information on the topic discussed, please contact any member of Orrick's Compensation and Benefits Group.