The following is a description of the policies and procedures that it uses to
determine how to vote proxies relating to portfolio securities as contained in
the following Glass Lewis' Proxy Paper Guidelines -- 2011 Proxy Season.
Where determined appropriate by the Adviser in order to comply with Federal
securities regulations and the rules promulgated thereunder, the Fund reserves
the right to shadow vote certain proxies received by it with respect to the
annual or special meetings of shareholders for companies in which the Fund is
invested.
I. A BOARD OF DIRECTORS THAT
SERVES THE INTERESTS OF SHAREHOLDERS
================================================================================
ELECTION OF DIRECTORS
The purpose of Glass Lewis' proxy research and advice is to facilitate
shareholder voting in favor of governance structures that will drive
performance, create shareholder value and maintain a proper tone at the top.
Glass Lewis looks for talented boards with a record of protecting shareholders
and delivering value over the medium- and long-term. We believe that boards
working to protect and enhance the best interests of shareholders are
independent, have directors with diverse backgrounds, have a record of positive
performance, and have members with a breadth and depth of relevant experience.
Independence
The independence of directors, or lack thereof, is ultimately demonstrated
through the decisions they make. In assessing the independence of directors, we
will take into consideration, when appropriate, whether a director has a track
record indicative of making objective decisions. Likewise, when assessing the
independence of directors we will also examine when a director's service track
record on multiple boards indicates a lack of objective decision-making.
Ultimately, we believe the determination of whether a director is independent or
not must take into consideration both compliance with the applicable
independence listing requirements as well as judgments made by the director.
We look at each director nominee to examine the director's relationships with
the company, the company's executives, and other directors. We do this to
evaluate whether personal, familial, or financial relationships (not including
director compensation) may impact the director's decisions. We believe that such
relationships make it difficult for a director to put shareholders' interests
above the director's or the related party's interests. We also believe that a
director who owns more than 20% of a company can exert disproportionate
influence on the board and, in particular, the audit committee.
Thus, we put directors into three categories based on an examination of the type
of relationship they have with the company:
Independent Director - An independent director has no material financial,
familial or other current relationships with the company, its executives,
or other board members, except for board service and standard fees paid
for that service. Relationships that existed within three to five years
NASDAQ originally proposed a five-year look-back period but both it and
1
the NYSE ultimately settled on a three-year look-back prior to finalizing their
rules. A five-year standard is more appropriate, in our view, because we believe
that the unwinding of conflicting relationships between former management and
board members is more likely to be complete and final after five years. However,
Glass Lewis does not apply the five-year look-back period to directors who have
previously served as executives of the company on an interim basis for less than
one year. before the inquiry are usually considered "current" for purposes of
this test.
In our view, a director who is currently serving in an interim management
position should be considered an insider, while a director who previously served
in an interim management position for less than one year and is no longer
serving in such capacity is considered independent. Moreover, a director who
previously served in an interim management position for over one year and is no
longer serving in such capacity is considered an affiliate for five years
following the date of his/her resignation or departure from the interim
management position. Glass Lewis applies a three-year look-back period to all
directors who have an affiliation with the company other than former employment,
for which we apply a five-year look-back.
Affiliated Director - An affiliated director has a material financial, familial
or other relationship with the company or its executives, but is not an employee
of the company. If a company classifies one of its non-employee directors as
non-independent, Glass Lewis will classify that director as an affiliate. This
includes directors whose employers have a material financial relationship with
the company. We allow a five-year grace period for former executives of the
company or merged companies who have consulting agreements with the surviving
company. (We do not automatically recommend voting against directors in such
cases for the first five years.) If the consulting agreement persists after this
five-year grace period, we apply the materiality thresholds outlined in the
definition of "material." In addition, we view a director who owns or controls
20% or more of the company's voting stock as an affiliate.
We view 20% shareholders as affiliates because they typically have access to and
involvement with the management of a company that is fundamentally different
from that of ordinary shareholders. More importantly, 20% holders may have
interests that diverge from those of ordinary holders, for reasons such as the
liquidity (or lack thereof) of their holdings, personal tax issues, etc.
-------------
(1) NASDAQ originally proposed a five-year look-back period but both it and the
NYSE ultimately settled on a three-year look-back prior to finalizing their
rules. A five-year standard is more appropriate, in our view, because we believe
that the unwinding of conflicting relationships between former management and
board members is more likely to be complete and final after five years. However,
Glass Lewis does not apply the five-year look-back period to directors who have
previously served as executives of the company on an interim basis for less than
one year.
(2) If a company classifies one of its non-employee directors as
non-independent, Glass Lewis will classify that director as an affiliate.
(3) We allow a five-year grace period for former executives of the company or
merged companies who have consulting agreements with the surviving company. (We
do not automatically recommend voting against directors in such cases for the
first five years.) If the consulting agreement persists after this five-year
grace period, we apply the materiality thresholds outlined in the definition of
"material."
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Definition of "Material": A material relationship is one in which the
dollar value exceeds:
$50,000 (or where no amount is disclosed) for directors who are paid for a
service they have agreed to perform for the company, outside of their
service as a director, including professional or other services; or
$120,000 (or where no amount is disclosed) for those directors employed by
a professional services firm such as a law firm, investment bank, or
consulting firm where the company pays the firm, not the individual,
for services. This dollar limit would also apply to charitable
contributions to schools where a board member is a professor; or
charities where a director serves on the board or is an executive; We
will generally take into consideration the size and nature of such
charitable entities in relation to the company's size and industry
along with any other relevant factors such as the director's role at
the charity. However, unlike for other types of related party
transactions, Glass Lewis generally does not apply a look-back period
to affiliated relationships involving charitable contributions; if the
relationship ceases, we will consider the director to be independent.
and any aircraft and real estate dealings between the company and the
director's firm; or
1% of either company's consolidated gross revenue for other business
relationships (e.g., where the director is an executive officer of a
company that provides services or products to or receives services or
products from the company).
Definition of "Familial": Familial relationships include a person's spouse,
parents, children, siblings, grandparents, uncles, aunts, cousins, nieces,
nephews, in-laws, and anyone (other than domestic employees) who shares
such person's home. A director is an affiliate if the director has a family
member who is employed by the company and who receives compensation of
$120,000 or more per year or the compensation is not disclosed.
Definition of "Company": A company includes any parent or subsidiary in a
group with the company or any entity that merged with, was acquired by, or
acquired the company.
Inside Director - An inside director simultaneously serves as a director and as
an employee of the company. This category may include a chairman of the board
who acts as an employee of the company or is paid as an employee of the company.
In our view, an inside director who derives a greater amount of income as a
result of affiliated transactions with the company rather than through
compensation paid by the company (i.e., salary, bonus, etc. as a company
employee) faces a conflict between making decisions that are in the best
interests of the company versus those in the director's own best interests.
Therefore, we will recommend voting against such a director.
--------------
(4) We will generally take into consideration the size and nature of such
charitable entities in relation to the company's size and industry along with
any other relevant factors such as the director's role at the charity. However,
unlike for other types of related party transactions, Glass Lewis generally does
not apply a look-back period to affiliated relationships involving charitable
contributions; if the relationship ceases, we will consider the director to be
independent.
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Voting Recommendations on the Basis of Board Independence
Glass Lewis believes a board will be most effective in protecting shareholders'
interests if it is at least two-thirds independent. We note that each of the
Business Roundtable, the Conference Board, and the Council of Institutional
Investors advocates that two-thirds of the board be independent. Where more than
one-third of the members are affiliated or inside directors, we typically With a
staggered board, if the affiliates or insiders that we believe should not be on
the board are not up for election, we will express our concern regarding those
directors, but we will not recommend voting against the other affiliates or
insiders who are up for election just to achieve two-thirds independence.
However, we will consider recommending voting against the directors subject to
our concern at their next election if the concerning issue is not resolved.
recommend voting against some of the inside and/or affiliated directors in order
to satisfy the two-thirds threshold.
However, where a director serves on a board as a representative (as part of his
or her basic responsibilities) of an investment firm with greater than 20%
ownership, we will generally consider him/her to be affiliated but will not
recommend voting against unless (i) the investment firm has disproportionate
board representation or (ii) the director serves on the audit committee. I
In the case of a less than two-thirds independent board, Glass Lewis strongly
supports the existence of a presiding or lead director with authority to set the
meeting agendas and to lead sessions outside the insider chairman's presence.
In addition, we scrutinize avowedly "independent" chairmen and lead directors.
We believe that they should be unquestionably independent or the company should
not tout them as such.
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(5) With a staggered board, if the affiliates or insiders that we believe should
not be on the board are not up for election, we will express our concern
regarding those directors, but we will not recommend voting against the other
affiliates or insiders who are up for election just to achieve two-thirds
independence. However, we will consider recommending voting against the
directors subject to our concern at their next election if the concerning issue
is not resolved.
(6) We will recommend voting against an audit committee member who owns 20% or
more of the company's stock, and we believe that there should be a maximum of
one director (or no directors if the committee is comprised of less than three
directors) who owns 20% or more of the company's stock on the compensation,
nominating, and governance committees.
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Committee Independence
We believe that only independent directors should serve on a company's audit,
compensation, nominating, and governance committees. We will recommend voting
against an audit committee member who owns 20% or more of the company's stock,
and we believe that there should be a maximum of one director (or no directors
if the committee is comprised of less than three directors) who owns 20% or more
of the company's stock on the compensation, nominating, and governance
committees. We typically recommend that shareholders vote against any affiliated
or inside director seeking appointment to an audit, compensation, nominating, or
governance committee, or who has served in that capacity in the past year.
Independent Chairman
Glass Lewis believes that separating the roles of CEO (or, more rarely,
another executive position) and chairman creates a better governance
structure than a combined CEO/chairman position. An executive manages the
business according to a course the board charts. Executives should report
to the board regarding their performance in achieving goals the board set.
This is needlessly complicated when a CEO chairs the board, since a
CEO/chairman presumably will have a significant influence over the board.
It can become difficult for a board to fulfill its role of overseer and
policy setter when a CEO/chairman controls the agenda and the boardroom
discussion. Such control can allow a CEO to have an entrenched position,
leading to longer-than-optimal terms, fewer checks on management, less
scrutiny of the business operation, and limitations on independent,
shareholder-focused goal-setting by the board.
A CEO should set the strategic course for the company, with the board's
approval, and the board should enable the CEO to carry out the CEO's
vision for accomplishing the board's objectives. Failure to achieve the
board's objectives should lead the board to replace that CEO with someone
in whom the board has confidence.
Likewise, an independent chairman can better oversee executives and set a
pro-shareholder agenda without the management conflicts that a CEO and
other executive insiders often face. Such oversight and concern for
shareholders allows for a more proactive and effective board of directors
that is better able to look out for the interests of shareholders.
Further, it is the board's responsibility to select a chief executive who
can best serve a company and its shareholders and to replace this person
when his or her duties have not been appropriately fulfilled. Such a
replacement becomes more difficult and happens less frequently when the
chief executive is also in the position of overseeing the board.
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We recognize that empirical evidence regarding the separation of these two roles
remains inconclusive. However, Glass Lewis believes that the installation of an
independent chairman is almost always a positive step from a corporate
governance perspective and promotes the best interests of shareholders. Further,
the presence of an independent chairman fosters the creation of a thoughtful and
dynamic board, not dominated by the views of senior management. Encouragingly,
many companies appear to be moving in this direction--one study even indicates
that less than 12 percent of incoming CEOs in 2009 were awarded the chairman
title, versus 48 percent as recently as 2002. Ken Favaro, Per-Ola Karlsson and
Gary Neilson. "CEO Succession 2000-2009: A Decade of Convergence and
Compression." Booz & Company (from Strategy+Business, Issue 59, Summer 2010).
Another study finds that 40 percent of S&P 500 boards now separate the CEO and
chairman roles, up from 23 percent in 2000, although the same study found that
only 19 percent of S&P 500 chairs are independent, versus 9 percent in 2005.
Spencer Stuart Board Index, 2010, p. 4.
We do not recommend that shareholders vote against CEOs who chair the board.
However, we typically encourage our clients to support separating the roles of
chairman and CEO whenever that question is posed in a proxy (typically in the
form of a shareholder proposal), as we believe that it is in the long-term best
interests of the company and its shareholders.
Performance
The most crucial test of a board's commitment to the company and its
shareholders lies in the actions of the board and its members. We look at the
performance of these individuals as directors and executives of the company and
of other companies where they have served.
Voting Recommendations on the Basis of Performance
We disfavor directors who have a record of not fulfilling their
responsibilities to shareholders at any company where they have held a
board or executive position. We typically recommend voting against:
1. A director who fails to attend a minimum of 75% of board and applicable
committee meetings, calculated in the aggregate.
------------
(7) Ken Favaro, Per-Ola Karlsson and Gary Neilson. "CEO Succession 2000-2009: A
Decade of Convergence and Compression." Booz & Company (from Strategy+Business,
Issue 59, Summer 2010).
(8) Spencer Stuart Board Index, 2010, p. 4.
(9) However, where a director has served for less than one full year, we will
typically not recommend voting against for failure to attend 75% of meetings.
Rather, we will note the poor attendance with a recommendation to track this
issue going forward. We will also refrain from recommending to vote against
directors when the proxy discloses that the director missed the meetings due to
serious illness or other extenuating circumstances.
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2. A director who belatedly filed a significant form(s) 4 or 5, or who has a
pattern of late filings if the late filing was the director's fault (we look at
these late filing situations on a case-by-case basis).
3. A director who is also the CEO of a company where a serious and material
restatement has occurred after the CEO had previously certified the
pre-restatement financial statements.
4. A director who has received two against recommendations from Glass Lewis for
identical reasons within the prior year at different companies (the same
situation must also apply at the company being analyzed). 5. All directors who
served on the board if, for the last three years, the company's performance has
been in the bottom quartile of the sector and the directors have not taken
reasonable steps to address the poor performance.
Audit Committees and Performance
Audit committees play an integral role in overseeing the financial reporting
process because "[v]ibrant and stable capital markets depend on, among other
things, reliable, transparent, and objective financial information to support an
efficient and effective capital market process. The vital oversight role audit
committees play in the process of producing financial information has never been
more important."
When assessing an audit committee's performance, we are aware that an audit
committee does not prepare financial statements, is not responsible for making
the key judgments and assumptions that affect the financial statements, and does
not audit the numbers or the disclosures provided to investors. Rather, an audit
committee member monitors and oversees the process and procedures that
management and auditors perform. The 1999 Report and Recommendations of the Blue
Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees
stated it best:
A proper and well-functioning system exists, therefore, when the
three main groups responsible for financial reporting - the full
board including the audit committee, financial management
including the internal auditors, and the outside auditors - form
a 'three legged stool' that supports responsible financial
disclosure and active participatory oversight. However, in the
view of the Committee, the audit committee must be 'first among
equals' in this process, since the audit committee is an
extension of the full board and hence the ultimate monitor of the
process.
----------------
(10) Audit Committee Effectiveness - What Works Best." PricewaterhouseCoopers.
The Institute of Internal Auditors Research Foundation. 2005.
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Standards for Assessing the Audit Committee
For an audit committee to function effectively on investors' behalf, it must
include members with sufficient knowledge to diligently carry out their
responsibilities. In its audit and accounting recommendations, the Conference
Board Commission on Public Trust and Private Enterprise said "members of the
audit committee must be independent and have both knowledge and experience in
auditing financial matters."
We are skeptical of audit committees where there are members that lack expertise
as a Certified Public Accountant (CPA), Chief Financial Officer (CFO) or
corporate controller or similar experience. While we will not necessarily vote
against members of an audit committee when such expertise is lacking, we are
more likely to vote against committee members when a problem such as a
restatement occurs and such expertise is lacking.
Glass Lewis generally assesses audit committees against the decisions they make
with respect to their oversight and monitoring role. The quality and integrity
of the financial statements and earnings reports, the completeness of
disclosures necessary for investors to make informed decisions, and the
effectiveness of the internal controls should provide reasonable assurance that
the financial statements are materially free from errors. The independence of
the external auditors and the results of their work all provide useful
information by which to assess the audit committee.
When assessing the decisions and actions of the audit committee, we typically
defer to its judgment and would vote in favor of its members, but we would
recommend voting against the following members under the following
circumstances:
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(11) Commission on Public Trust and Private Enterprise. The Conference Board.
2003.
(12) Where the recommendation is to vote against the committee chair but the
chair is not up for election because the board is staggered, we do not recommend
voting against the members of the committee who are up for election; rather, we
will simply express our concern with regard to the committee chair.
8
1. All members of the audit committee when options were backdated, there is a
lack of adequate controls in place, there was a resulting restatement, and
disclosures indicate there was a lack of documentation with respect to the
option grants.
2. The audit committee chair, if the audit committee does not have a financial
expert or the committee's financial expert does not have a demonstrable
financial background sufficient to understand the financial issues unique to
public companies.
3. The audit committee chair, if the audit committee did not meet at least 4
times during the year.
4. The audit committee chair, if the committee has less than three members.
5. Any audit committee member who sits on more than three public company audit
committees, unless the audit committee member is a retired CPA, CFO, controller
or has similar experience, in which case the limit shall be four committees,
taking time and availability into consideration including a review of the audit
committee member's attendance at all board and committee meetings.
6. All members of an audit committee who are up for election and who served on
the committee at the time of the audit, if audit and audit-related fees total
one-third or less of the total fees billed by the auditor.
7. The audit committee chair when tax and/or other fees are greater than audit
and audit-related fees paid to the auditor for more than one year in a row (in
which case we also recommend against ratification of the auditor).
8. All members of an audit committee where non-audit fees include fees for tax
services (including, but not limited to, such things as tax avoidance or shelter
schemes) for senior executives of the company. Such services are now prohibited
by the PCAOB.
9. All members of an audit committee that reappointed an auditor that we no
longer consider to be independent for reasons unrelated to fee proportions.
----------
(13) Glass Lewis may exempt certain audit committee members from the above
threshold if, upon further analysis of relevant factors such as the director's
experience, the size, industry-mix and location of the companies involved and
the director's attendance at all the companies, we can reasonably determine that
the audit committee member is likely not hindered by multiple audit committee
commitments.
9
10. All members of an audit committee when audit fees are excessively low,
especially when compared with other companies in the same industry.
11. The audit committee chair if the committee failed to put auditor
ratification on the ballot for shareholder approval. However, if the non-audit
fees or tax fees exceed audit plus audit-related fees in either the current or
the prior year, then Glass Lewis will recommend voting against the entire audit
committee.
12. All members of an audit committee where the auditor has resigned and
reported that a section 10A letter has been issued.
13. All members of an audit committee at a time when material accounting fraud
occurred at the company.
14. All members of an audit committee at a time when annual and/or multiple
quarterly financial statements had to be restated, and any of the following
factors apply:
o The restatement involves fraud or manipulation by insiders;
o The restatement is accompanied by an SEC inquiry or investigation;
o The restatement involves revenue recognition;
o The restatement results in a greater than 5% adjustment to costs of
goods sold, operating expense, or operating cash flows; or
o The restatement results in a greater than 5% adjustment to net income,
10% adjustment to assets or shareholders equity, or cash flows from
financing or investing activities.
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(14) In all cases, if the chair of the committee is not specified, we recommend
voting against the director who has been on the committee the longest.
(15) Auditors are required to report all potential illegal acts to management
and the audit committee unless they are clearly inconsequential in nature. If
the audit committee or the board fails to take appropriate action on an act that
has been determined to be a violation of the law, the independent auditor is
required to send a section 10A letter to the SEC. Such letters are rare and
therefore we believe should be taken seriously.
(16) Recent research indicates that revenue fraud now accounts for over 60% of
SEC fraud cases, and that companies that engage in fraud experience significant
negative abnormal stock price declines--facing bankruptcy, delisting, and
material asset sales at much higher rates than do non-fraud firms (Committee of
Sponsoring Organizations of the Treadway Commission. "Fraudulent Financial
Reporting: 1998-2007." May 2010).
10
15. All members of an audit committee if the company repeatedly fails to file
its financial reports in a timely fashion. For example, the company has filed
two or more quarterly or annual financial statements late within the last 5
quarters.
16. All members of an audit committee when it has been disclosed that a law
enforcement agency has charged the company and/or its employees with a violation
of the Foreign Corrupt Practices Act (FCPA).
17. All members of an audit committee when the company has aggressive accounting
policies and/or poor disclosure or lack of sufficient transparency in its
financial statements.
18. All members of the audit committee when there is a disagreement with the
auditor and the auditor resigns or is dismissed.
19. All members of the audit committee if the contract with the auditor
specifically limits the auditor's liability to the company for damages.
20. All members of the audit committee who served since the date of the
company's last annual meeting, and when, since the last annual meeting, the
company has reported a material weakness that has not yet been corrected, or,
when the company has an ongoing material weakness from a prior year that has not
yet been corrected.
We also take a dim view of audit committee reports that are boilerplate, and
which provide little or no information or transparency to investors. When a
problem such as a material weakness, restatement or late filings occurs, we take
into consideration, in forming our judgment with respect to the audit committee,
the transparency of the audit committee report.
Compensation Committee Performance
Compensation committees have the final say in determining the compensation of
executives. This includes deciding the basis on which compensation is
determined, as well as the amounts and types of compensation to be paid. This
process begins with the hiring and initial establishment of employment
agreements, including the terms for such items as pay, pensions and severance
arrangements. It is important in establishing compensation arrangements that
compensation be consistent with, and based on the long-term economic performance
of, the business's long-term shareholders returns.
------------
(17) The Council of Institutional Investors. "Corporate Governance Policies," p.
4, April 5, 2006; and "Letter from Council of Institutional Investors to the
AICPA," November 8, 2006.
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Compensation committees are also responsible for the oversight of the
transparency of compensation. This oversight includes disclosure of compensation
arrangements, the matrix used in assessing pay for performance, and the use of
compensation consultants. In order to ensure the independence of the
compensation consultant, we believe the compensation committee should only
engage a compensation consultant that is not also providing any services to the
company or management apart from their contract with the compensation committee.
It is important to investors that they have clear and complete disclosure of all
the significant terms of compensation arrangements in order to make informed
decisions with respect to the oversight and decisions of the compensation
committee.
Finally, compensation committees are responsible for oversight of internal
controls over the executive compensation process. This includes controls over
gathering information used to determine compensation, establishment of equity
award plans, and granting of equity awards. Lax controls can and have
contributed to conflicting information being obtained, for example through the
use of nonobjective consultants. Lax controls can also contribute to improper
awards of compensation such as through granting of backdated or spring-loaded
options, or granting of bonuses when triggers for bonus payments have not been
met.
Central to understanding the actions of a compensation committee is a careful
review of the Compensation Discussion and Analysis (CD&A) report included in
each company's proxy. We review the CD&A in our evaluation of the overall
compensation practices of a company, as overseen by the compensation committee.
The CD&A is also integral to the evaluation of compensation proposals at
companies, such as advisory votes on executive compensation, which allow
shareholders to vote on the compensation paid to a company's top executives.
In our evaluation of the CD&A, we examine, among other factors, the
following:
1. The extent to which the company uses appropriate performance goals
and metrics in determining overall compensation as an indication that
pay is tied to performance.
2. How clearly the company discloses performance metrics and goals so
that shareholders may make an independent determination that goals
were met.
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3. The extent to which the performance metrics, targets and goals are
implemented to enhance company performance and encourage prudent
risk-taking.
4. The selected peer group(s) so that shareholders can make a
comparison of pay and performance across the appropriate peer group.
5. The extent to which the company benchmarks compensation levels at
a specific percentile of its peer group along with the rationale for
selecting such a benchmark.
6. The amount of discretion granted management or the compensation
committee to deviate from defined performance metrics and goals in
making awards, as well as the appropriateness of the use of such
discretion.
We provide an overall evaluation of the quality and content of a company's
executive compensation policies and procedures as disclosed in a CD&A as either
good, fair or poor.
We evaluate compensation committee members on the basis of their performance
while serving on the compensation committee in question, not for actions taken
solely by prior committee members who are not currently serving on the
committee. At companies that provide shareholders with non-binding advisory
votes on executive compensation ("Say-on-Pay"), we will use the Say-on-Pay
proposal as the initial, primary means to express dissatisfaction with the
company's compensation polices and practices rather than recommending voting
against members of the compensation committee (except in the most egregious
cases).
When assessing the performance of compensation committees, we will recommend
voting against for the following:
1. All members of the compensation committee who are up for election and
served at the time of poor pay-for-performance (e.g., a company receives an
F grade in our pay-for-performance analysis) when shareholders are not
provided with an advisory vote on executive compensation at the annual
meeting.
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(18) Where the recommendation is to vote against the committee chair and the
chair is not up for election because the board is staggered, we do not recommend
voting against any members of the committee who are up for election; rather, we
will simply express our concern with regard to the committee chair.
(19) Where there are multiple CEOs in one year, we will consider not
recommending against the compensation committee but will defer judgment on
compensation policies and practices until the next year or a full year after
arrival of the new CEO. In addition, if a company provides shareholders with a
Say-on-Pay proposal and receives an F grade in our pay-for-performance model, we
will recommend that shareholders only vote against the Say-on-Pay proposal
rather than the members of the compensation committee, unless the company
exhibits egregious practices. However, if the company receives successive F
grades, we will then recommend against the members of the compensation committee
in addition to recommending voting against the Say-on-Pay proposal.
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2. Any member of the compensation committee who has served on the compensation
committee of at least two other public companies that received F grades in our
pay-for-performance model and who is also suspect at the company in question.
3. The compensation committee chair if the company received two D grades in
consecutive years in our pay-for-performance analysis, and if during the past
year the Company performed the same as or worse than its peers.
4. All members of the compensation committee (during the relevant time period)
if the company entered into excessive employment agreements and/or severance
agreements. 5. All members of the compensation committee when performance goals
were changed (i.e., lowered) when employees failed or were unlikely to meet
original goals, or performance-based compensation was paid despite goals not
being attained. 6. All members of the compensation committee if excessive
employee perquisites and benefits were allowed.
7. The compensation committee chair if the compensation committee did not meet
during the year, but should have (e.g., because executive compensation was
restructured or a new executive was hired).
8. All members of the compensation committee when the company repriced options
or completed a "self tender offer" without shareholder approval within the past
two years.
------------------
(20) In cases where the company received two D grades in consecutive years, but
during the past year the company performed better than its peers or improved
from an F to a D grade year over year, we refrain from recommending to vote
against the compensation chair. In addition, if a company provides shareholders
with a Say-on-Pay proposal in this instance, we will consider voting against the
advisory vote rather than the compensation committee chair unless the company
exhibits unquestionably egregious practices.
14
9. All members of the compensation committee when vesting of in-the-money
options is accelerated or when fully vested options are granted.
10. All members of the compensation committee when option exercise prices were
backdated. Glass Lewis will recommend voting against an executive director who
played a role in and participated in option backdating.
11. All members of the compensation committee when option exercise prices were
spring-loaded or otherwise timed around the release of material information.
12. All members of the compensation committee when a new employment contract is
given to an executive that does not include a clawback provision and the company
had a material restatement, especially if the restatement was due to fraud.
13. The chair of the compensation committee where the CD&A provides insufficient
or unclear information about performance metrics and goals, where the CD&A
indicates that pay is not tied to performance, or where the compensation
committee or management has excessive discretion to alter performance terms or
increase amounts of awards in contravention of previously defined targets.
14. All members of the compensation committee during whose tenure the committee
failed to implement a shareholder proposal regarding a compensation-related
issue, where the proposal received the affirmative vote of a majority of the
voting shares at a shareholder meeting, and when a reasonable analysis suggests
that the compensation committee (rather than the governance committee) should
have taken steps to implement the request.
Nominating and Governance Committee Performance
The nominating and governance committee, as an agency for the
shareholders, is responsible for the governance by the board of the
company and its executives. In performing this role, the board is
responsible and accountable for selection of objective and competent board
members. It is also responsible for providing leadership on governance
policies adopted by the company, such as decisions to implement
shareholder proposals that have received a majority vote.
------------
(21) In all other instances (i.e. a non-compensation-related shareholder
proposal should have been implemented) we recommend that shareholders vote
against the members of the governance committee.
15
Consistent with Glass Lewis' philosophy that boards should have diverse
backgrounds and members with a breadth and depth of relevant experience, we
believe that nominating and governance committees should consider diversity when
making director nominations within the context of each specific company and its
industry. In our view, shareholders are best served when boards make an effort
to ensure a constituency that is not only reasonably diverse on the basis of
age, race, gender and ethnicity, but also on the basis of geographic knowledge,
industry experience and culture.
Regarding the nominating and or governance committee, we will recommend voting
against the following:
1. All members of the governance committee during whose tenure the board failed
to implement a shareholder proposal with a direct and substantial impact on
shareholders and their rights - i.e., where the proposal received enough
shareholder votes (at least a majority) to allow the board to implement or begin
to implement that proposal. Examples of these types of shareholder proposals are
majority vote to elect directors and to declassify the board.
2. The governance committee chair, when the chairman is not independent and an
independent lead or presiding director has not been appointed.
-----------
(22) Where we would recommend to vote against the committee chair but the chair
is not up for election because the board is staggered, we do not recommend
voting against any members of the committee who are up for election; rather, we
will simply express our concern regarding the committee chair.
(23) If the board does not have a governance committee (or a committee that
serves such a purpose), we recommend voting against the entire board on this
basis.
(24) Where a compensation-related shareholder proposal should have been
implemented, and when a reasonable analysis suggests that the members of the
compensation committee (rather than the governance committee) bear the
responsibility for failing to implement the request, we recommend that
shareholders only vote against members of the compensation committee.
(25) If the committee chair is not specified, we
recommend voting against the director who has been on the committee the longest.
If the longest-serving committee member cannot be determined, we will recommend
voting against the longest-serving board member serving on the committee.
(26) We believe that one independent individual should be appointed to serve as
the lead or presiding director.
16
When such a position is rotated among directors from meeting to meeting, we will
recommend voting against as if there were no lead or presiding director. We note
that each of the Business Roundtable, The Conference Board, and the Council of
Institutional Investors advocates that two-thirds of the board be independent.
3. In the absence of a nominating committee, the governance committee chair when
there are less than five or the whole nominating committee when there are more
than 20 members on the board.
4. The governance committee chair, when the committee fails to meet at all
during the year.
5. The governance committee chair, when for two consecutive years the company
provides what we consider to be "inadequate" related party transaction
disclosure (i.e. the nature of such transactions and/or the monetary amounts
involved are unclear or excessively vague, thereby preventing an average
shareholder from being able to reasonably interpret the independence status of
multiple directors above and beyond what the company maintains is compliant with
SEC or applicable stock-exchange listing requirements).
Regarding the nominating committee, we will recommend voting against the
following:
1. All members of the nominating committee, when the committee nominated or
renominated an individual who had a significant conflict of interest or whose
past actions demonstrated a lack of integrity or inability to represent
shareholder interests.
2. The nominating committee chair, if the nominating committee did not meet
during the year, but should have (i.e., because new directors were nominated or
appointed since the time of the last annual meeting).
3. In the absence of a governance committee, the nominating committee chair when
the chairman is not independent, and an independent lead or presiding director
has not been appointed.
-----------
(27) Where we would recommend to vote against the committee chair but the chair
is not up for election because the board is staggered, we do not recommend
voting against any members of the committee who are up for election; rather, we
will simply express our concern regarding the committee chair.
(28) If the committee chair is not specified, we will recommend voting against
the director who has been on the committee the longest. If the longest-serving
committee member cannot be determined, we will recommend voting against the
longest-serving board member on the committee.
(29) In the absence of both a governance and a nominating committee, we will
recommend voting against the chairman of the board on this basis.
17
4. The nominating committee chair, when there are less than five or the whole
nominating committee when there are more than 20 members on the board.
5. The nominating committee chair, when a director received a greater than 50%
against vote the prior year and not only was the director not removed, but the
issues that raised shareholder concern were not corrected.
Board-level Risk Management Oversight
Glass Lewis evaluates the risk management function of a public company board on
a strictly case-by-case basis. Sound risk management, while necessary at all
companies, is particularly important at financial firms which inherently
maintain significant exposure to financial risk. We believe such financial firms
should have a chief risk officer reporting directly to the board and a dedicated
risk committee or a committee of the board charged with risk oversight.
Moreover, many non-financial firms maintain strategies which involve a high
level of exposure to financial risk. Similarly, since many non-financial firm
have significant hedging or trading strategies, including financial and
non-financial derivatives, those firms should also have a chief risk officer and
a risk committee.
Our views on risk oversight are consistent with those expressed by various
regulatory bodies. In its December 2009 Final Rule release on Proxy Disclosure
Enhancements, the SEC noted that risk oversight is a key competence of the board
and that additional disclosures would improve investor and shareholder
understanding of the role of the board in the organization's risk management
practices. The final rules, which became effective on February 28, 2010, now
explicitly require companies and mutual funds to describe (while allowing for
some degree of flexibility) the board's role in the oversight of risk.
------------
(30) In the absence of both a governance and a nominating committee, we will
recommend voting against the chairman of the board on this basis.
(31) Considering that shareholder discontent clearly relates to the director who
received a greater than 50% against vote rather than the nominating chair, we
review the validity of the issue(s) that initially raised shareholder concern,
follow-up on such matters, and only recommend voting against the nominating
chair if a reasonable analysis suggests that it would be most appropriate. In
rare cases, we will consider recommending against the nominating chair when a
director receives a substantial (i.e., 25% or more) vote against based on the
same analysis.
18
When analyzing the risk management practices of public companies, we take note
of any significant losses or writedowns on financial assets and/or structured
transactions. In cases where a company has disclosed a sizable loss or
writedown, and where we find that the company's board-level risk committee
contributed to the loss through poor oversight, we would recommend that
shareholders vote against such committee members on that basis. In addition, in
cases where a company maintains a significant level of financial risk exposure
but fails to disclose any explicit form of board-level risk oversight (committee
or otherwise), we will consider recommending to vote against
the chairman of the board on that basis. However, we generally would not
recommend voting against a combined chairman/CEO except in egregious cases.
Experience
We find that a director's past conduct is often indicative of future conduct and
performance. We often find directors with a history of overpaying executives or
of serving on boards where avoidable disasters have occurred appearing at
companies that follow these same patterns. Glass Lewis has a proprietary
database of every officer and director serving at 8,000 of the most widely held
U.S. companies. We use this database to track the performance of directors
across companies.
Voting Recommendations on the Basis of Director Experience
We typically recommend that shareholders vote against directors who have served
on boards or as executives of companies with records of poor performance,
inadequate risk oversight, overcompensation, audit- or accounting-related
issues, and/or other indicators of mismanagement or actions against the
interests of shareholders.
----------
(32) A committee responsible for risk management could be a dedicated risk
committee, or another board committee, usually the audit committee but
occasionally the finance committee, depending on a given company's board
structure and method of disclosure. At some companies, the entire board is
charged with risk management.
(33) We typically apply a three-year look-back to such issues and also research
to see whether the responsible directors have been up for election since the
time of the failure, and if so, we take into account the percentage of support
they received from shareholders.
19
Likewise, we examine the backgrounds of those who serve on key board committees
to ensure that they have the required skills and diverse backgrounds to make
informed judgments about the subject matter for which the committee is
responsible.
Other Considerations
In addition to the three key characteristics - independence, performance,
experience - that we use to evaluate board members, we consider
conflict-of-interest issues in making voting recommendations.
Conflicts of Interest
We believe board members should be wholly free of identifiable and substantial
conflicts of interest, regardless of the overall level of independent directors
on the board. Accordingly, we recommend that shareholders vote against the
following types of affiliated or inside directors:
1. A CFO who is on the board: In our view, the CFO holds a unique position
relative to financial reporting and disclosure to shareholders. Because of the
critical importance of financial disclosure and reporting, we believe the CFO
should report to the board and not be a member of it.
2. A director who is on an excessive number of boards: We will typically
recommend voting against a director who serves as an executive officer of any
public company while serving on more than two other public company boards and
any other director who serves on more than six public company boards typically
receives an against recommendation from Glass Lewis. Academic literature
suggests that one board takes up approximately 200 hours per year of each
member's time. We believe this limits the number of boards on which directors
can effectively serve, especially executives at other companies.
-----------
(34) Our guidelines are similar to the standards set forth by the NACD in its
"Report of the NACD Blue Ribbon Commission on Director Professionalism," 2001
Edition, pp. 14-15 (also cited approvingly by the Conference Board in its
"Corporate Governance Best Practices: A Blueprint for the Post-Enron Era," 2002,
p. 17), which suggested that CEOs should not serve on more than 2 additional
boards, persons with full-time work should not serve on more than 4 additional
boards, and others should not serve on more than six boards.
20
Further, we note a recent study has shown that the average number of outside
board seats held by CEOs of S&P 500 companies is 0.6, down from 0.9 in 2005 and
1.4 in 2000.
3. A director, or a director who has an immediate family member, providing
consulting or other material professional services to the company: These
services may include legal, consulting, or financial services. We question the
need for the company to have consulting relationships with its directors. We
view such relationships as creating conflicts for directors, since they may be
forced to weigh their own interests against shareholder interests when making
board decisions. In addition, a company's decisions regarding where to turn for
the best professional services may be compromised when doing business with the
professional services firm of one of the company's directors.
4. A director, or a director who has an immediate family member, engaging in
airplane, real estate, or similar deals, including perquisite-type grants from
the company, amounting to more than $50,000: Directors who receive these sorts
of payments from the company will have to make unnecessarily complicated
decisions that may pit their interests against shareholder interests.
5. Interlocking directorships: CEOs or other top executives who serve on each
other's boards create an interlock that poses conflicts that should be avoided
to ensure the promotion of shareholder interests above all else.
6. All board members who served at a time when a poison pill was adopted without
shareholder approval within the prior twelve months. Size of the Board of
Directors
While we do not believe there is a universally applicable optimum board size, we
do believe boards should have at least five directors to ensure sufficient
diversity in decision-making and to enable the formation of key board committees
with independent directors. Conversely, we believe that boards with more than 20
members will typically suffer under the weight of "too many cooks in the
kitchen" and have difficulty reaching consensus and making timely decisions.
Sometimes the presence of too many voices can make it difficult to draw on the
wisdom and experience in the room by virtue of the need to limit the discussion
so that each voice may be heard.
---------------
(35) Spencer Stuart Board Index, 2010, p. 8.
(36) We do not apply a look-back period for this situation. The interlock policy
applies to both public and private companies. We will also evaluate multiple
board interlocks among non-insiders (i.e. multiple directors serving on the same
boards at other companies), for evidence of a pattern of poor oversight.
21
To that end, we typically recommend voting against the chairman of the
nominating committee at a board with fewer than five directors. With boards
consisting of more than 20 directors, we typically recommend voting against all
members of the nominating committee (or the governance committee, in the absence
of a nominating committee).
Controlled Companies
Controlled companies present an exception to our independence recommendations.
The board's function is to protect shareholder interests; however, when an
individual or entity owns more than 50% of the voting shares, the interests of
the majority of shareholders are the interests of that entity or individual.
Consequently, Glass Lewis does not apply our usual two-thirds independence rule
and therefore we will not recommend voting against boards whose composition
reflects the makeup of the shareholder population.
Independence Exceptions
The independence exceptions that we make for controlled companies are as
follows:
1. We do not require that controlled companies have boards that are at least
two-thirds independent. So long as the insiders and/or affiliates are connected
with the controlling entity, we accept the presence of non-independent board
members.
2. The compensation committee and nominating and governance committees do not
need to consist solely of independent directors.
a. We believe that standing nominating and corporate governance
committees at controlled companies are unnecessary. Although
having a committee charged with the duties of searching for,
selecting, and nominating independent directors can be
beneficial, the unique composition of a controlled company's
shareholder base makes such committees weak and irrelevant.
--------------
(37) The Conference Board, at p. 23 in its report "Corporate Governance Best
Practices, Id.," quotes one of its roundtable participants as stating, "[w]hen
you've got a 20 or 30 person corporate board, it's one way of assuring that
nothing is ever going to happen that the CEO doesn't want to happen."
22
b. Likewise, we believe that independent compensation committees
at controlled companies are unnecessary. Although independent
directors are the best choice for approving and monitoring senior
executives' pay, controlled companies serve a unique shareholder
population whose voting power ensures the protection of its
interests. As such, we believe that having affiliated directors
on a controlled company's compensation committee is acceptable.
However, given that a controlled company has certain obligations
to minority shareholders we feel that an insider should not serve
on the compensation committee. Therefore, Glass Lewis will
recommend voting against any insider (the CEO or otherwise)
serving on the compensation committee.
3. Controlled companies do not need an independent chairman or an independent
lead or presiding director. Although an independent director in a position of
authority on the board - such as chairman or presiding director - can best carry
out the board's duties, controlled companies serve a unique shareholder
population whose voting power ensures the protection of its interests.
4. Where an individual or entity owns more than 50% of a company's voting power
but the company is not a "controlled" company as defined by relevant listing
standards, we apply a lower independence requirement of a majority of the board
but keep all other standards in place. Similarly, where an individual or entity
holds between 20-50% of a company's voting power, but the company is not
"controlled" and there is not a "majority" owner, we will allow for proportional
representation on the board and committees (excluding the audit committee) based
on the individual or entity's percentage of ownership.
Size of the Board of Directors
We have no board size requirements for controlled companies.
Audit Committee Independence
We believe that audit committees should consist solely of independent
directors. Regardless of a company's controlled status, the interests of
all shareholders must be protected by ensuring the integrity and accuracy
of the company's financial statements. Allowing affiliated directors to
oversee the preparation of financial reports could create an
insurmountable conflict of interest.
23
Exceptions for Recent IPOs
We believe companies that have recently completed an initial public offering
("IPO") should be allowed adequate time to fully comply with marketplace listing
requirements as well as to meet basic corporate governance standards. We believe
a one-year grace period immediately following the date of a company's IPO is
sufficient time for most companies to comply with all relevant regulatory
requirements and to meet such corporate governance standards. Except in
egregious cases, Glass Lewis refrains from issuing voting recommendations on the
basis of corporate governance best practices (eg. board independence, committee
membership and structure, meeting attendance, etc.) during the one-year period
following an IPO.
However, in cases where a board implements a poison pill preceding an IPO, we
will consider voting against the members of the board who served during the
period of the poison pill's adoption if the board (i) did not also commit to
submit the poison pill to a shareholder vote within 12 months of the IPO or (ii)
did not provide a sound rationale for adopting the pill and the pill does not
expire in three years or less. In our view, adopting such an anti-takeover
device unfairly penalizes future shareholders who (except for electing to buy or
sell the stock) are unable to weigh in on a matter that could potentially
negatively impact their ownership interest. This notion is strengthened when a
board adopts a poison pill with a 5-10 year life immediately prior to having a
public shareholder base so as to insulate management for a substantial amount of
time while postponing and/or avoiding allowing public shareholders the ability
to vote on the pill's adoption. Such instances are indicative of boards that may
subvert shareholders' best interests following their IPO.
Mutual Fund Boards
Mutual funds, or investment companies, are structured differently from regular
public companies (i.e., operating companies). Typically, members of a fund's
adviser are on the board and management takes on a different role from that of
regular public companies. Thus, we focus on a short list of requirements,
although many of our guidelines remain the same.
The following mutual fund policies are similar to the policies for regular
public companies:
1. Size of the board of directors: The board should be made up of between
five and twenty directors.
2. The CFO on the board: Neither the CFO of the fund nor the CFO of the
fund's registered investment adviser should serve on the board.
3. Independence of the audit committee: The audit committee should consist
solely of independent directors.
24
4. Audit committee financial expert: At least one member of the audit
committee should be designated as the audit committee financial expert.
The following differences from regular public companies apply at mutual funds:
1. Independence of the board: We believe that three-fourths of an
investment company's board should be made up of independent directors.
This is consistent with a proposed SEC rule on investment company boards.
The Investment Company Act requires 40% of the board to be independent,
but in 2001, the SEC amended the Exemptive Rules to require that a
majority of a mutual fund board be independent. In 2005, the SEC proposed
increasing the independence threshold to 75%. In 2006, a federal appeals
court ordered that this rule amendment be put back out for public comment,
putting it back into "proposed rule" status. Since mutual fund boards play
a vital role in overseeing the relationship between the fund and its
investment manager, there is greater need for independent oversight than
there is for an operating company board.
2. When the auditor is not up for ratification: We do not recommend voting
against the audit committee if the auditor is not up for ratification
because, due to the different legal structure of an investment company
compared to an operating company, the auditor for the investment company
(i.e., mutual fund) does not conduct the same level of financial review
for each investment company as for an operating company.
3. Non-independent chairman: The SEC has proposed that the chairman of the
fund board be independent. We agree that the roles of a mutual fund's
chairman and CEO should be separate. Although we believe this would be
best at all companies, we recommend voting against the chairman of an
investment company's nominating committee as well as the chairman of the
board if the chairman and CEO of a mutual fund are the same person and the
fund does not have an independent lead or presiding director. Seven former
SEC commissioners support the appointment of an independent chairman and
we agree with them that "an independent board chairman would be better
able to create conditions favoring the long-term interests of fund
shareholders than would a chairman who is an executive of the adviser."
(See the comment letter sent to the SEC in support of the proposed rule at
http://sec.gov/rules/proposed/s70304/s70304-179.pdf)
DECLASSIFIED BOARDS
Glass Lewis favors the repeal of staggered boards and the annual election of
directors. We believe staggered boards are less accountable to shareholders than
boards that are elected annually. Furthermore, we feel the annual election of
directors encourages board members to focus on shareholder interests.
25
Empirical studies have shown: (i) companies with staggered boards reduce a
firm's value; and (ii) in the context of hostile takeovers, staggered boards
operate as a takeover defense, which entrenches management, discourages
potential acquirers, and delivers a lower return to target shareholders.
In our view, there is no evidence to demonstrate that staggered boards improve
shareholder returns in a takeover context. Research shows that shareholders are
worse off when a staggered board blocks a transaction. A study by a group of
Harvard Law professors concluded that companies whose staggered boards prevented
a takeover "reduced shareholder returns for targets ... on the order of eight to
ten percent in the nine months after a hostile bid was announced." When a
staggered board negotiates a friendly transaction, no statistically significant
difference in premiums occurs. Further, one of those same professors found that
charter-based staggered boards "reduce the market value of a firm by 4% to 6% of
its market capitalization" and that "staggered boards bring about and not merely
reflect this reduction in market value." A subsequent study reaffirmed that
classified boards reduce shareholder value, finding "that the ongoing process of
dismantling staggered boards, encouraged by institutional investors, could well
contribute to increasing shareholder wealth."
Shareholders have increasingly come to agree with this view. In 2010
approximately 72% of S&P 500 companies had declassified boards, up from
approximately 51% in 2005.
------------
(38) Lucian Bebchuk, John Coates IV, Guhan Subramanian, "The Powerful
Antitakeover Force of Staggered Boards: Further Findings and a Reply to
Symposium Participants," 55 Stanford Law Review 885-917 (2002), page 1.
(39) Id. at 2 ("Examining a sample of seventy-three negotiated transactions from
2000 to 2002, we find no systematic benefits in terms of higher premia to boards
that have [staggered structures].").
(40) Lucian Bebchuk, Alma Cohen, "The Costs of Entrenched Boards" (2004).
(41) Lucian Bebchuk, Alma Cohen and Charles C.Y. Wang, "Staggered Boards and the
Wealth of Shareholders: Evidence from a Natural Experiment," SSRN:
http://ssrn.com/abstract=1706806 (2010), p. 26.
(42) Spencer Stuart Board Index, 2010, p. 14
26
Clearly, more shareholders have supported the repeal of classified boards.
Resolutions relating to the repeal of staggered boards garnered on average over
70% support among shareholders in 2008, whereas in 1987, only 16.4% of votes
cast favored board declassification.
Given the empirical evidence suggesting staggered boards reduce a company's
value and the increasing shareholder opposition to such a structure, Glass Lewis
supports the declassification of boards and the annual election of directors.
MANDATORY DIRECTOR RETIREMENT PROVISIONS
Director Term and Age Limits
Glass Lewis believes that director age and term limits typically are not in
shareholders' best interests. Too often age and term limits are used by boards
as a crutch to remove board members who have served for an extended period of
time. When used in that fashion, they are indicative of a board that has a
difficult time making "tough decisions."
Academic literature suggests that there is no evidence of a correlation between
either length of tenure or age and director performance. On occasion, term
limits can be used as a means to remove a director for boards that are unwilling
to police their membership and to enforce turnover. Some shareholders support
term limits as a way to force change when boards are unwilling to do so.
While we understand that age limits can be a way to force change where boards
are unwilling to make changes on their own, the long-term impact of age limits
restricts experienced and potentially valuable board members from service
through an arbitrary means. Further, age limits unfairly imply that older (or,
in rare cases, younger) directors cannot contribute to company oversight.
In our view, a director's experience can be a valuable asset to shareholders
because of the complex, critical issues that boards face. However, we support
periodic director rotation to ensure a fresh perspective in the boardroom and
the generation of new ideas and business strategies. We believe the board should
implement such rotation instead of relying on arbitrary limits. When necessary,
shareholders can address the issue of director rotation through director
elections.
We believe that shareholders are better off monitoring the board's approach to
corporate governance and the board's stewardship of company performance rather
than imposing inflexible rules that don't necessarily correlate with returns or
benefits for shareholders.
-----------
(43) Lucian Bebchuk, John Coates IV and Guhan Subramanian, "The Powerful
Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy," 54
Stanford Law Review 887-951 (2002).
27
However, if a board adopts term/age limits, it should follow through and not
waive such limits. If the board waives its term/age limits, Glass Lewis will
consider recommending shareholders vote against the nominating and/or governance
committees, unless the rule was waived with sufficient explanation, such as
consummation of a corporate transaction like a merger.
REQUIRING TWO OR MORE NOMINEES PER BOARD SEAT
In an attempt to address lack of access to the ballot, shareholders sometimes
propose that the board give shareholders a choice of directors for each open
board seat in every election. However, we feel that policies requiring a
selection of multiple nominees for each board seat would discourage prospective
directors from accepting nominations. A prospective director could not be
confident either that he or she is the board's clear choice or that he or she
would be elected. Therefore, Glass Lewis generally will vote against such
proposals.
SHAREHOLDER ACCESS
Shareholders have continuously sought a way to have a significant voice in
director elections in recent years. While most of these efforts have centered on
regulatory change at the SEC, Congress and the Obama Administration have
successfully placed "Proxy Access" in the spotlight of the U.S. Government's
most recent corporate-governance-related financial reforms.
In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the "Dodd-Frank Act"). The Dodd-Frank Act provides
the SEC with the authority to adopt rules permitting shareholders to use issuer
proxy solicitation materials to nominate director candidates. The SEC received
over 500 comments regarding its proposed proxy access rule, some of which
questioned the agency's authority to adopt such a rule. Nonetheless, in August
2010 the SEC adopted final Rule 14a-11, which under certain circumstances, gives
shareholders (and shareholder groups) who have collectively held at least 3% of
the voting power of a company's securities continuously for at least three
years, the right to nominate up to 25% of a boards' directors and have such
nominees included on the company's ballot and described (in up to 500 words per
nominee) in its proxy statement.
While final Rule 14a-11 was originally scheduled to take effect on November 15,
2010, on October 4, 2010, the SEC announced that it would delay the rule's
implementation following the filing of a lawsuit by the U.S. Chamber of Commerce
and the Business Roundtable on September 29, 2010. As a result, it is unlikely
shareholders will have the opportunity to vote on access proposals during the
2011 proxy season.
28
MAJORITY VOTE FOR THE ELECTION OF DIRECTORS
In stark contrast to the failure of shareholder access to gain acceptance,
majority voting for the election of directors is fast becoming the de facto
standard in corporate board elections. In our view, the majority voting
proposals are an effort to make the case for shareholder impact on director
elections on a company-specific basis.
While this proposal would not give shareholders the opportunity to nominate
directors or lead to elections where shareholders have a choice among director
candidates, if implemented, the proposal would allow shareholders to have a
voice in determining whether the nominees proposed by the board should actually
serve as the overseer-representatives of shareholders in the boardroom. We
believe this would be a favorable outcome for shareholders.
During 2010, Glass Lewis tracked just under 35 proposals to require a majority
vote to elect directors at annual meetings in the U.S., a slight decline from 46
proposals in 2009, but a sharp contrast to the 147 proposals tracked during
2006. The general decline in the number of proposals being submitted was a
result of many companies adopting some form of majority voting, including
approximately 71% of companies in the S&P 500 index, up from 56% in 2008.
During 2009 these proposals received on average 59% shareholder support (based
on for and against votes), up from 54% in 2008. The plurality vote standard
Today, most US companies still elect directors by a plurality vote standard.
Under that standard, if one shareholder holding only one share votes in favor of
a nominee (including himself, if the director is a shareholder), that nominee
"wins" the election and assumes a seat on the board. The common concern among
companies with a plurality voting standard was the possibility that one or more
directors would not receive a majority of votes, resulting in "failed
elections." This was of particular concern during the 1980s, an era of frequent
takeovers and contests for control of companies.
Advantages of a majority vote standard
If a majority vote standard were implemented, a nominee would have to receive
the support of a majority of the shares voted in order to be elected. Thus,
shareholders could collectively vote to reject a director they believe will not
pursue their best interests. We think that this minimal amount of protection for
shareholders is reasonable and will not upset the corporate structure nor reduce
the willingness of qualified shareholder-focused directors to serve in the
future.
-----------
(44) Spencer Stuart Board Index, 2010, p. 14
29
We believe that a majority vote standard will likely lead to more attentive
directors. Occasional use of this power will likely prevent the election of
directors with a record of ignoring shareholder interests in favor of other
interests that conflict with those of investors. Glass Lewis will generally
support proposals calling for the election of directors by a majority vote
except for use in contested director elections.
In response to the high level of support majority voting has garnered, many
companies have voluntarily taken steps to implement majority voting or modified
approaches to majority voting. These steps range from a modified approach
requiring directors that receive a majority of withheld votes to resign (e.g.,
Ashland Inc.) to actually requiring a majority vote of outstanding shares to
elect directors (e.g., Intel).
We feel that the modified approach does not go far enough because requiring a
director to resign is not the same as requiring a majority vote to elect a
director and does not allow shareholders a definitive voice in the election
process. Further, under the modified approach, the corporate governance
committee could reject a resignation and, even if it accepts the resignation,
the corporate governance committee decides on the director's replacement. And
since the modified approach is usually adopted as a policy by the board or a
board committee, it could be altered by the same board or committee at any time.
II. TRANSPARENCY AND
INTEGRITY OF FINANCIAL REPORTING
================================================================================
AUDITOR RATIFICATION
The auditor's role as gatekeeper is crucial in ensuring the integrity and
transparency of the financial information necessary for protecting shareholder
value. Shareholders rely on the auditor to ask tough questions and to do a
thorough analysis of a company's books to ensure that the information provided
to shareholders is complete, accurate, fair, and that it is a reasonable
representation of a company's financial position. The only way shareholders can
make rational investment decisions is if the market is equipped with accurate
information about a company's fiscal health. As stated in the October 6, 2008
Final Report of the Advisory Committee on the Auditing Profession to the U.S.
Department of the Treasury:
"The auditor is expected to offer critical and objective judgment on the
financial matters under consideration, and actual and perceived absence of
conflicts is critical to that expectation. The Committee believes that auditors,
investors, public companies, and other market participants must understand the
independence requirements and their objectives, and that auditors must adopt a
mindset of skepticism when facing situations that may compromise their
independence."
30
As such, shareholders should demand an objective, competent and diligent auditor
who performs at or above professional standards at every company in which the
investors hold an interest. Like directors, auditors should be free from
conflicts of interest and should avoid situations requiring a choice between the
auditor's interests and the public's interests. Almost without exception,
shareholders should be able to annually review an auditor's performance and to
annually ratify a board's auditor selection. Moreover, in October 2008, the
Advisory Committee on the Auditing Profession went even further, and recommended
that "to further enhance audit committee oversight and auditor accountability
.... disclosure in the company proxy statement regarding shareholder ratification
[should] include the name(s) of the senior auditing partner(s) staffed on the
engagement."
Voting Recommendations on Auditor Ratification
We generally support management's choice of auditor except when we believe the
auditor's independence or audit integrity has been compromised. Where a board
has not allowed shareholders to review and ratify an auditor, we typically
recommend voting against the audit committee chairman. When there have been
material restatements of annual financial statements or material weakness in
internal controls, we usually recommend voting against the entire audit
committee.
Reasons why we may not recommend ratification of an auditor include:
1. When audit fees plus audit-related fees total less than the tax fees
and/or other non-audit fees.
2. Recent material restatements of annual financial statements, including
those resulting in the reporting of material weaknesses in internal
controls and including late filings by the company where the auditor bears
some responsibility for the restatement or late filing.
-----------
(45) "Final Report of the Advisory Committee on the Auditing Profession
to the U.S. Department of the Treasury." p. VIII:20, October 6, 2008.
(46) An auditor does not audit interim financial statements. Thus, we generally
do not believe that an auditor should be opposed due to a restatement of interim
financial statements unless the nature of the misstatement is clear from a
reading of the incorrect financial statements.
31
3. When the auditor performs prohibited services such as tax-shelter work, tax
services for the CEO or CFO, or contingent-fee work, such as a fee based on a
percentage of economic benefit to the company.
4. When audit fees are excessively low, especially when compared with other
companies in the same industry.
5. When the company has aggressive accounting policies. 6. When the company has
poor disclosure or lack of transparency in its financial statements.
7. Where the auditor limited its liability through its contract with the company
or the audit contract requires the corporation to use alternative dispute
resolution procedures.
8. We also look for other relationships or concerns with the auditor that might
suggest a conflict between the auditor's interests and shareholder interests. We
typically support audit-related proposals regarding mandatory auditor rotation
when the proposal uses a reasonable period of time (usually not less than 5-7
years).
PENSION ACCOUNTING ISSUES
A pension accounting question often raised in proxy proposals is what effect, if
any, projected returns on employee pension assets should have on a company's net
income. This issue often arises in the executive-compensation context in a
discussion of the extent to which pension accounting should be reflected in
business performance for purposes of calculating payments to executives.
Glass Lewis believes that pension credits should not be included in measuring
income that is used to award performance-based compensation. Because many of the
assumptions used in accounting for retirement plans are subject to the company's
discretion, management would have an obvious conflict of interest if pay were
tied to pension income. In our view, projected income from pensions does not
truly reflect a company's performance.
III. THE LINK BETWEEN
COMPENSATION AND PERFORMANCE
================================================================================
Glass Lewis carefully reviews the compensation awarded to senior executives, as
we believe that this is an important area in which the board's priorities are
revealed. Glass Lewis strongly believes executive compensation should be linked
directly with the performance of the business the executive is charged with
managing. We believe the most effective compensation arrangements provide for an
appropriate mix of performance-based short- and long-term incentives in addition
to base salary.
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Glass Lewis believes that comprehensive, timely and transparent disclosure of
executive pay is critical to allowing shareholders to evaluate the extent to
which the pay is keeping pace with company performance. When reviewing proxy
materials, Glass Lewis examines whether the company discloses the performance
metrics used to determine executive compensation. We recognize performance
metrics must necessarily vary depending on the company and industry, among other
factors, and may include items such as total shareholder return, earning per
share growth, return on equity, return on assets and revenue growth. However, we
believe companies should disclose why the specific performance metrics were
selected and how the actions they are designed to incentivize will lead to
better corporate performance.
Moreover, it is rarely in shareholders' interests to disclose competitive data
about individual salaries below the senior executive level. Such disclosure
could create internal personnel discord that would be counterproductive for the
company and its shareholders. While we favor full disclosure for senior
executives and we view pay disclosure at the aggregate level (e.g., the number
of employees being paid over a certain amount or in certain categories) as
potentially useful, we do not believe shareholders need or will benefit from
detailed reports about individual management employees other than the most
senior executives.
ADVISORY VOTE ON EXECUTIVE COMPENSATION ("SAY-ON-PAY")
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the "Dodd-Frank Act"), providing for sweeping financial
and governance reforms. One of the most important reforms is found in Section
951(a) of the Dodd-Frank Act, which requires companies to hold an advisory vote
on executive compensation at the first shareholder meeting that occurs six
months after enactment (January 21, 2011). Further, since section 957 of the
Dodd-Frank Act prohibits broker discretionary voting in connection with
shareholder votes with respect to executive compensation, beginning in 2011 a
majority vote in support of advisory votes on executive compensation may become
more difficult for companies to obtain.
This practice of allowing shareholdes a non-binding vote on a company's
compensation report is standard practice in many non-US countries, and has been
a requirement for most companies in the United Kingdom since 2003 and in
Australia since 2005. Although Say-on-Pay proposals are non-binding, a high
level of "against" or "abstain" votes indicate substantial shareholder concern
about a company's compensation policies and procedures.
33
Given the complexity of most companies' compensation programs, Glass Lewis
applies a highly nuanced approach when analyzing advisory votes on executive
compensation. We review each company's compensation on a case-by-case basis,
recognizing that each company must be examined in the context of industry, size,
maturity, performance, financial condition, its historic pay for performance
practices, and any other relevant internal or external factors.
We believe that each company should design and apply specific compensation
policies and practices that are appropriate to the circumstances of the company
and, in particular, will attract and retain competent executives and other
staff, while motivating them to grow the company's long-term shareholder value.
Where we find those specific policies and practices serve to reasonably align
compensation with performance, and such practices are adequately disclosed,
Glass Lewis will recommend supporting the company's approach. If, however, those
specific policies and practices fail to demonstrably link compensation with
perfomance, Glass Lewis will generally recommend voting against the say-on-pay
proposal.
Glass Lewis focuses on four main areas when reviewing Say-on-Pay proposals:
o The overall design and structure of the Company's executive compensation
program including performance metrics;
o The quality and content of the Company's disclosure;
o The quantum paid to executives; and
o The link between compensation and performance as indicated by the
Company's current and past pay-for-performance grades
We also review any significant changes or modifications, and rationale for such
changes, made to the Company's compensation structure or award amounts,
including base salaries.
Say-on-Pay Voting Recommendations
In cases where we find deficiencies in a company's compensation program's
design, implementation or management, we will recommend that shareholders vote
against the Say-on-Pay proposal. Generally such instances include evidence of a
pattern of poor pay-for-performance practices (i.e., deficient or failing pay
for performance grades), unclear or questionable disclosure regarding the
overall compensation structure (e.g., limited information regarding benchmarking
processes, limited rationale for bonus performance metrics and targets, etc.),
questionable adjustments to certain aspects of the overall compensation
structure (e.g., limited rationale for significant changes to performance
targets or metrics, the payout of guaranteed bonuses or sizable retention
grants, etc.), and/or other egregious compensation practices.
34
Although not an exhaustive list, the following issues when weighed together may
cause Glass Lewis to recommend voting against a say-on-pay vote:
o Inappropriate peer group and/or benchmarking issues
o Inadequate or no rationale for changes to peer groups
o Egregious or excessive bonuses, equity awards or severance payments,
including golden handshakes and golden parachutes
o Guaranteed bonuses
o Targeting overall levels of compensation at higher than median without
adequate justification
o Bonus or long-term plan targets set at less than mean or negative
performance levels
o Performance targets not sufficiently challenging, and/or providing for
high potential payouts
o Performance targets lowered, without justification
o Discretionary bonuses paid when short- or long-term incentive plan
targets were not met
o Executive pay high relative to peers not justified by outstanding company
performance
o The terms of the long-term incentive plans are inappropriate (please see
"Long-Term Incentives" below)
In the instance that a company has simply failed to provide sufficient
disclosure of its policies, we may recommend shareholders vote against this
proposal solely on this basis, regardless of the appropriateness of compensation
levels.
In the case of companies that maintain poor compensation policies year after
year without any showing they took steps to address the issues, we may also
recommend that shareholders vote against the chairman and/or additional members
of the compensation committee. We may also recommend voting against the
compensation committee based on the practices or actions of its members, such as
approving large one-off payments, the inappropriate use of discretion, or
sustained poor pay for performance practices.
35
Short-Term Incentives
A short-term bonus or incentive ("STI") should be demonstrably tied to
performance. Whenever possible, we believe a mix of corporate and individual
performance measures is appropriate. We would normally expect performance
measures for STIs to be based on internal financial measures such as net profit
after tax, EPS growth and divisional profitability as well as non-financial
factors such as those related to safety, environmental issues, and customer
satisfaction. However, we accept variations from these metrics if they are tied
to the Company's business drivers.
Further, the target and potential maximum awards that can be achieved under STI
awards should be disclosed. Shareholders should expect stretching performance
targets for the maximum award to be achieved. Any increase in the potential
maximum award should be clearly justified to shareholders.
Glass Lewis recognizes that disclosure of some measures may include commercially
confidential information. Therefore, we believe it may be reasonable to exclude
such information in some cases as long as the company provides sufficient
justification for non-disclosure. However, where a short-term bonus has been
paid, companies should disclose the extent to which performance has been
achieved against relevant targets, including disclosure of the actual target
achieved.
Where management has received significant STIs but short-term performance as
measured by such indicators as increase in profit and/or EPS growth over the
previous year prima facie appears to be poor or negative, we believe the company
should provide a clear explanation why these significant short-term payments
were made.
Long-Term Incentives
Glass Lewis recognizes the value of equity-based incentive programs. When used
appropriately, they can provide a vehicle for linking an executive's pay to
company performance, thereby aligning their interests with those of
shareholders. In addition, equity-based compensation can be an effective way to
attract, retain and motivate key employees.
There are certain elements that Glass Lewis believes are common to most
well-structured long-term incentive ("LTI") plans. These include:
o No re-testing or lowering of performance conditions
o Performance metrics that cannot be easily manipulated by management
o Two or more performance metrics
o At least one relative performance metric that compares the company's
performance to a relevant peer group or index
o Performance periods of at least three years
o Stretching metrics that incentivize executives to strive for outstanding
performance
o Individual limits expressed as a percentage of base salary
36
Performance measures should be carefully selected and should relate to the
specific business/industry in which the company operates and, especially, the
key value drivers of the company's business.
Glass Lewis believes that measuring a company's performance with multiple
metrics serves to provide a more complete picture of the company's performance
than a single metric, which may focus too much management attention on a single
target and is therefore more susceptible to manipulation. External benchmarks
should be disclosed and transparent, such as total shareholder return ("TSR")
against a well-selected sector index, peer group or other performance hurdle.
The rationale behind the selection of a specific index or peer group should be
disclosed. Internal benchmarks (e.g. earnings per share growth) should also be
disclosed and transparent, unless a cogent case for confidentiality is made and
fully explained.
We also believe shareholders should evaluate the relative success of a company's
compensation programs, particularly existing equity-based incentive plans, in
linking pay and performance in evaluating new LTI plans to determine the impact
of additional stock awards. We will therefore review the company's
pay-for-performance grade, see below for more information, and specifically the
proportion of total compensation that is stock-based.
Pay for Performance
Glass Lewis believes an integral part of a well-structured compensation package
is a successful link between pay and performance. Therefore, Glass Lewis
developed a proprietary pay-for-performance model to evaluate the link between
pay and performance of the top five executives at US companies. Our model
benchmarks these executives' pay and company performance against four peer
groups and across seven performance metrics. Using a forced curve and a school
letter-grade system, we grade companies from A-F according to their
pay-for-performance linkage. The grades guide our evaluation of compensation
committee effectiveness and we generally recommend voting against compensation
committee of companies with a pattern of failing our pay-for-performance
analysis.
We also use this analysis to inform our voting decisions on say-on-pay
proposals. As such, if a company receives a failing grade from our proprietary
model, we are likely to recommend shareholders to vote against the say-on-pay
proposal. However, there may be exceptions to this rule such as when a company
makes significant enhancements to its compensation programs.
37
Recoupment ("Clawback") Provisions
Section 954 of the Dodd-Frank Act requires the SEC to create a rule requiring
listed companies to adopt policies for recouping certain compensation during a
three-year look-back period. The rule applies to incentive-based compensation
paid to current or former executives if the company is required to prepare an
accounting restatement due to erroneous data resulting from material
non-compliance with any financial reporting requirements under the securities
laws.
These recoupment provisions are more stringent than under Section 304 of the
Sarbanes-Oxley Act in three respects: (i) the provisions extend to current or
former executive officers rather than only to the CEO and CFO; (ii) it has a
three-year look-back period (rather than a twelve-month look-back period); and
(iii) it allows for recovery of compensation based upon a financial restatement
due to erroneous data, and therefore does not require misconduct on the part of
the executive or other employees.
Frequency of Say-on-Pay
The Dodd-Frank Act also requires companies to allow shareholders a non-binding
vote on the frequency of say-on-pay votes, i.e. every one, two or three years.
Additionally, Dodd-Frank requires companies to hold such votes on the frequency
of say-on-pay votes at least once every six years.
We believe companies should submit say-on-pay votes to shareholders every year.
We believe that the time and financial burdens to a company with regard to an
annual vote are relatively small and incremental and are outweighed by the
benefits to shareholders through more frequent accountability. Implementing
biannual or triennial votes on executive compensation limits shareholders'
ability to hold the board accountable for its compensation practices through
means other than voting against the compensation committee. Unless a company
provides a compelling rationale or unique circumstances for say-on-pay votes
less frequent than annually, we will generally recommend that shareholders
support annual votes on compensation.
Vote on Golden Parachute Arrangements
The Dodd-Frank Act also requires companies to provide shareholders with a
separate non-binding vote on approval of golden parachute compensation
arrangements in connection with certain change-in-control transactions. However,
if the golden parachute arrangements have previously been subject to a
say-on-pay vote which shareholders approved, then this required vote is waived.
Glass Lewis believes the narrative and tabular disclosure of golden parachute
arrangements will benefit all shareholders. Glass Lewis will analyze each golden
parachute arrangement on a case-by-case basis, taking into account, among other
items: the ultimate value of the payments, the tenure and position of the
executives in question, and the type of triggers involved (single vs double).
38
EQUITY-BASED COMPENSATION PLAN PROPOSALS
We believe that equity compensation awards are useful, when not abused, for
retaining employees and providing an incentive for them to act in a way that
will improve company performance. Glass Lewis evaluates option- and other
equity-based compensation plans using a detailed model and analytical review.
Equity-based compensation programs have important differences from cash
compensation plans and bonus programs. Accordingly, our model and analysis takes
into account factors such as plan administration, the method and terms of
exercise, repricing history, express or implied rights to reprice, and the
presence of evergreen provisions.
Our analysis is quantitative and focused on the plan's cost as compared with the
business's operating metrics. We run twenty different analyses, comparing the
program with absolute limits we believe are key to equity value creation and
with a carefully chosen peer group. In general, our model seeks to determine
whether the proposed plan is either absolutely excessive or is more than one
standard deviation away from the average plan for the peer group on a range of
criteria, including dilution to shareholders and the projected annual cost
relative to the company's financial performance. Each of the twenty analyses
(and their constituent parts) is weighted and the plan is scored in accordance
with that weight.
In our analysis, we compare the program's expected annual expense with the
business's operating metrics to help determine whether the plan is excessive in
light of company performance. We also compare the option plan's expected annual
cost to the enterprise value of the firm rather than to market capitalization
because the employees, managers and directors of the firm contribute to the
creation of enterprise value but not necessarily market capitalization (the
biggest difference is seen where cash represents the vast majority of market
capitalization). Finally, we do not rely exclusively on relative comparisons
with averages because, in addition to creeping averages serving to inflate
compensation, we believe that academic literature proves that some absolute
limits are warranted. We evaluate equity plans based on certain overarching
principles:
1. Companies should seek more shares only when needed.
2. Requested share amounts should be small enough that companies seek
shareholder approval every three to four years (or more frequently).
3. If a plan is relatively expensive, it should not grant options solely
to senior executives and board members.
4. Annual net share count and voting power dilution should be limited.
39
5. Annual cost of the plan (especially if not shown on the income
statement) should be reasonable as a percentage of financial results and
should be in line with the peer group.
6. The expected annual cost of the plan should be proportional to the
business's value.
7. The intrinsic value that option grantees received in the past should be
reasonable compared with the business's financial results.
8. Plans should deliver value on a per-employee basis when compared with
programs at peer companies.
9. Plans should not permit re-pricing of stock options.
10. Plans should not contain excessively liberal administrative or payment
terms.
11. Selected performance metrics should be challenging and appropriate,
and should be subject to relative performance measurements.
12. Stock grants should be subject to minimum vesting and/or holding
periods sufficient to ensure sustainable performance and promote
retention.
Option Exchanges
Glass Lewis views option repricing plans and option exchange programs with great
skepticism. Shareholders have substantial risk in owning stock and we believe
that the employees, officers, and directors who receive stock options should be
similarly situated to align their interests with shareholder interests.
We are concerned that option grantees who believe they will be "rescued" from
underwater options will be more inclined to take unjustifiable risks. Moreover,
a predictable pattern of repricing or exchanges substantially alters a stock
option's value because options that will practically never expire deeply out of
the money are worth far more than options that carry a risk of expiration.
In short, repricings and option exchange programs change the bargain between
shareholders and employees after the bargain has been struck. Re-pricing is
tantamount to re-trading.
There is one circumstance in which a repricing or option exchange program is
acceptable: if macroeconomic or industry trends, rather than specific company
issues, cause a stock's value to decline dramatically and the repricing is
necessary to motivate and retain employees. In this circumstance, we think it
fair to conclude that option grantees may be suffering from a risk that was not
foreseeable when the original "bargain" was struck. In such a circumstance, we
will recommend supporting a repricing only if the following conditions are true:
40
(i) officers and board members cannot not participate in the program;
(ii) the stock decline mirrors the market or industry price decline in
terms of timing and approximates the decline in magnitude;
(iii) the exchange is value-neutral or value-creative to shareholders
using very conservative assumptions and with a recognition of the adverse
selection problems inherent in voluntary programs; and
(iv) management and the board make a cogent case for needing to motivate
and retain existing employees, such as being in a competitive employment
market.
Option Backdating, Spring-Loading, and Bullet-Dodging
Glass Lewis views option backdating, and the related practices of spring-loading
and bullet-dodging, as egregious actions that warrant holding the appropriate
management and board members responsible. These practices are similar to
re-pricing options and eliminate much of the downside risk inherent in an option
grant that is designed to induce recipients to maximize shareholder return.
Backdating an option is the act of changing an option's grant date from the
actual grant date to an earlier date when the market price of the underlying
stock was lower, resulting in a lower exercise price for the option. Glass Lewis
has identified over 270 companies that have disclosed internal or government
investigations into their past stock-option grants.
Spring-loading is granting stock options while in possession of material,
positive information that has not been disclosed publicly. Bullet-dodging is
delaying the grants of stock options until after the release of material,
negative information. This can allow option grants to be made at a lower price
either before the release of positive news or following the release of negative
news, assuming the stock's price will move up or down in response to the
information. This raises a concern similar to that of insider trading, or the
trading on material non-public information.
The exercise price for an option is determined on the day of grant, providing
the recipient with the same market risk as an investor who bought shares on that
date. However, where options were backdated, the executive or the board (or the
compensation committee) changed the grant date retroactively. The new date may
be at or near the lowest price for the year or period. This would be like
allowing an investor to look back and select the lowest price of the year at
which to buy shares.
A 2006 study of option grants made between 1996 and 2005 at 8,000 companies
found that option backdating can be an indication of poor internal controls. The
study found that option backdating was more likely to occur at companies without
a majority independent board and with a long-serving CEO; both factors, the
study concluded, were associated with greater CEO influence on the company's
compensation and governance practices.
-------
(47) Lucian Bebchuk, Yaniv Grinstein and Urs Peyer. "LUCKY CEOs." November,
2006.
41
Where a company granted backdated options to an executive who is also a
director, Glass Lewis will recommend voting against that executive/director,
regardless of who decided to make the award. In addition, Glass Lewis will
recommend voting against those directors who either approved or allowed the
backdating. Glass Lewis feels that executives and directors who either benefited
from backdated options or authorized the practice have breached their fiduciary
responsibility to shareholders. Given the severe tax and legal liabilities to
the company from backdating, Glass Lewis will consider recommending voting
against members of the audit committee who served when options were backdated, a
restatement occurs, material weaknesses in internal controls exist and
disclosures indicate there was a lack of documentation. These committee members
failed in their responsibility to ensure the integrity of the company's
financial reports. When a company has engaged in spring-loading or
bullet-dodging, Glass Lewis will consider recommending voting against the
compensation committee members where there has been a pattern of granting
options at or near historic lows. Glass Lewis will also recommend voting against
executives serving on the board who benefited from the spring-loading or
bullet-dodging.
162(m) Plans
Section 162(m) of the Internal Revenue Code allows companies to deduct
compensation in excess of $1 million for the CEO and the next three most highly
compensated executive officers, excluding the CFO, upon shareholder approval of
the excess compensation. Glass Lewis recognizes the value of executive incentive
programs and the tax benefit of shareholder-approved incentive plans.
We believe the best practice for companies is to provide robust disclosure to
shareholders so that they can make fully-informed judgments about the
reasonableness of the proposed compensation plan. To allow for meaningful
shareholder review, we prefer that disclosure should include specific
performance metrics, a maximum award pool, and a maximum award amount per
employee. We also believe it is important to analyze the estimated grants to see
if they are reasonable and in line with the company's peers.
42
We typically recommend voting against a 162(m) plan where: a company fails to
provide at least a list of performance targets; a company fails to provide one
of either a total pool or an individual maximum; or the proposed plan is
excessive when compared with the plans of the company's peers.
The company's record of aligning pay with performance (as evaluated using our
proprietary pay-for-performance model) also plays a role in our recommendation.
Where a company has a record of setting reasonable pay relative to business
performance, we generally recommend voting in favor of a plan even if the plan
caps seem large relative to peers because we recognize the value in special pay
arrangements for continued exceptional performance.
As with all other issues we review, our goal is to provide consistent but
contextual advice given the specifics of the company and ongoing performance.
Overall, we recognize that it is generally not in shareholders' best interests
to vote against such a plan and forgo the potential tax benefit since
shareholder rejection of such plans will not curtail the awards; it will only
prevent the tax deduction associated with them.
Director Compensation Plans
Glass Lewis believes that non-employee directors should receive reasonable and
appropriate compensation for the time and effort they spend serving on the board
and its committees. Director fees should be competitive in order to retain and
attract qualified individuals. But excessive fees represent a financial cost to
the company and threaten to compromise the objectivity and independence of
non-employee directors. Therefore, a balance is required. We will consider
recommending supporting compensation plans that include option grants or other
equity-based awards that help to align the interests of outside directors with
those of shareholders. However, equity grants to directors should not be
performance-based to ensure directors are not incentivized in the same manner as
executives but rather serve as a check on imprudent risk-taking in executive
compensation plan design.
Glass Lewis uses a proprietary model and analyst review to evaluate the costs of
equity plans compared to the plans of peer companies with similar market
capitalizations. We use the results of this model to guide our voting
recommendations on stock-based director compensation plans.
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IV. GOVERNANCE STRUCTURE
AND THE SHAREHOLDER FRANCHISE
================================================================================
ANTI-TAKEOVER MEASURES
Poison Pills (Shareholder Rights Plans)
Glass Lewis believes that poison pill plans are not generally in shareholders'
best interests. They can reduce management accountability by substantially
limiting opportunities for corporate takeovers. Rights plans can thus prevent
shareholders from receiving a buy-out premium for their stock. Typically we
recommend that shareholders vote against these plans to protect their financial
interests and ensure that they have an opportunity to consider any offer for
their shares, especially those at a premium.
We believe boards should be given wide latitude in directing company activities
and in charting the company's course. However, on an issue such as this, where
the link between the shareholders' financial interests and their right to
consider and accept buyout offers is substantial, we believe that shareholders
should be allowed to vote on whether they support such a plan's implementation.
This issue is different from other matters that are typically left to board
discretion. Its potential impact on and relation to shareholders is direct and
substantial. It is also an issue in which management interests may be different
from those of shareholders; thus, ensuring that shareholders have a voice is the
only way to safeguard their interests.
In certain circumstances, we will support a poison pill that is limited in scope
to accomplish a particular objective, such as the closing of an important
merger, or a pill that contains what we believe to be a reasonable qualifying
offer clause. We will consider supporting a poison pill plan if the qualifying
offer clause includes the following attributes: (i) The form of offer is not
required to be an all-cash transaction; (ii) the offer is not required to remain
open for more than 90 business days; (iii) the offeror is permitted to amend the
offer, reduce the offer, or otherwise change the terms; (iv) there is no
fairness opinion requirement; and (v) there is a low to no premium requirement.
Where these requirements are met, we typically feel comfortable that
shareholders will have the opportunity to voice their opinion on any legitimate
offer.
NOL Poison Pills
Similarly, Glass Lewis may consider supporting a limited poison pill in the
unique event that a company seeks shareholder approval of a rights plan for the
express purpose of preserving Net Operating Losses (NOLs). While companies with
NOLs can generally carry these losses forward to offset future taxable income,
-------------
(48) Section 382 of the Internal Revenue Code limits companies' ability to use
NOLs in the event of a "change of ownership." Section 382 of the Internal
Revenue Code refers to a "change of ownership" of more than 50 percentage points
by one or more 5% shareholders within a three-year period. The statute is
intended to deter the "trafficking" of net operating losses.
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In this case, a company may adopt or amend a poison pill ("NOL pill") in order
to prevent an inadvertent change of ownership by multiple investors purchasing
small chunks of stock at the same time, and thereby preserve the ability to
carry the NOLs forward. Often such NOL pills have trigger thresholds much lower
than the common 15% or 20% thresholds, with some NOL pill triggers as low as 5%.
Glass Lewis evaluates NOL pills on a strictly case-by-case basis taking into
consideration, among other factors, the value of the NOLs to the company, the
likelihood of a change of ownership based on the size of the holding and the
nature of the larger shareholders, the trigger threshold and whether the term of
the plan is limited in duration (i.e., whether it contains a reasonable "sunset"
provision) or is subject to periodic board review and/or shareholder
ratification. However, we will recommend that shareholders vote against a
proposal to adopt or amend a pill to include NOL protective provisions if the
company has adopted a more narrowly tailored means of preventing a change in
control to preserve its NOLs. For example, a company may limit share transfers
in its charter to prevent a change of ownership from occurring.
Furthermore, we believe that shareholders should be offered the opportunity to
vote on any adoption or renewal of a NOL pill regardless of any potential tax
benefit that it offers a company. As such, we will consider recommending voting
against those members of the board who served at the time when an NOL pill was
adopted without shareholder approval within the prior twelve months and where
the NOL pill is not subject to shareholder ratification.
Fair Price Provisions
Fair price provisions, which are rare, require that certain minimum price and
procedural requirements be observed by any party that acquires more than a
specified percentage of a corporation's common stock. The provision is intended
to protect minority shareholder value when an acquirer seeks to accomplish a
merger or other transaction which would eliminate or change the interests of the
minority stockholders. The provision is generally applied against the acquirer
unless the takeover is approved by a majority of "continuing directors" and
holders of a majority, in some cases a supermajority as high as 80%, of the
combined voting power of all stock entitled to vote to alter, amend, or repeal
the above provisions.
The effect of a fair price provision is to require approval of any merger or
business combination with an "interested stockholder" by 51% of the voting stock
of the company, excluding the shares held by the interested stockholder. An
interested stockholder is generally considered to be a holder of 10% or more of
the company's outstanding stock, but the trigger can vary.
Generally, provisions are put in place for the ostensible purpose of preventing
a back-end merger where the interested stockholder would be able to pay a lower
price for the remaining shares of the company than he or she paid to gain
control. The effect of a fair price provision on shareholders, however, is to
limit their ability to gain a premium for their shares through a partial tender
offer or open market acquisition which typically raise the share price, often
significantly. A fair price provision discourages such transactions because of
the potential costs of seeking shareholder approval and because of the
restrictions on purchase price for completing a merger or other transaction at a
later time.
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Glass Lewis believes that fair price provisions, while sometimes protecting
shareholders from abuse in a takeover situation, more often act as an impediment
to takeovers, potentially limiting gains to shareholders from a variety of
transactions that could significantly increase share price. In some cases, even
the independent directors of the board cannot make exceptions when such
exceptions may be in the best interests of shareholders. Given the existence of
state law protections for minority shareholders such as Section 203 of the
Delaware Corporations Code, we believe it is in the best interests of
shareholders to remove fair price provisions.
REINCORPORATION
In general, Glass Lewis believes that the board is in the best position to
determine the appropriate jurisdiction of incorporation for the company. When
examining a management proposal to reincorporate to a different state or
country, we review the relevant financial benefits, generally related to
improved corporate tax treatment, as well as changes in corporate governance
provisions, especially those relating to shareholder rights, resulting from the
change in domicile. Where the financial benefits are de minimis and there is a
decrease in shareholder rights, we will recommend voting against the
transaction.
However, costly, shareholder-initiated reincorporations are typically not the
best route to achieve the furtherance of shareholder rights. We believe
shareholders are generally better served by proposing specific shareholder
resolutions addressing pertinent issues which may be implemented at a lower
cost, and perhaps even with board approval. However, when shareholders propose a
shift into a jurisdiction with enhanced shareholder rights, Glass Lewis examines
the significant ways would the Company benefit from shifting jurisdictions
including the following:
1. Is the board sufficiently independent?
2. Does the Company have anti-takeover protections such as a poison pill or
classified board in place?
3. Has the board been previously unresponsive to shareholders (such as
failing to implement a shareholder proposal that received majority
shareholder support)?
4. Do shareholders have the right to call special meetings of shareholders?
5. Are there other material governance issues at the Company?
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6. Has the Company's performance matched or exceeded its peers in the past
one and three years?
7. How has the Company ranked in Glass Lewis' pay-for-performance analysis
during the last three years?
8. Does the company have an independent chairman?
We note, however, that we will only support shareholder proposals to change a
company's place of incorporation in exceptional circumstances.
AUTHORIZED SHARES
Glass Lewis believes that adequate capital stock is important to a company's
operation. When analyzing a request for additional shares, we typically review
four common reasons why a company might need additional capital stock:
(i) Stock Split - We typically consider three metrics when evaluating
whether we think a stock split is likely or necessary: The historical
stock pre-split price, if any; the current price relative to the company's
most common trading price over the past 52 weeks; and some absolute limits
on stock price that, in our view, either always make a stock split
appropriate if desired by management or would almost never be a reasonable
price at which to split a stock.
(ii) Shareholder Defenses - Additional authorized shares could be used to
bolster takeover defenses such as a "poison pill." Proxy filings often
discuss the usefulness of additional shares in defending against or
discouraging a hostile takeover as a reason for a requested increase.
Glass Lewis is typically against such defenses and will oppose actions
intended to bolster such defenses.
(iii) Financing for Acquisitions - We look at whether the company has a
history of using stock for acquisitions and attempt to determine what
levels of stock have typically been required to accomplish such
transactions. Likewise, we look to see whether this is discussed as a
reason for additional shares in the proxy.
(iv) Financing for Operations - We review the company's cash position and
its ability to secure financing through borrowing or other means. We look
at the company's history of capitalization and whether the company has had
to use stock in the recent past as a means of raising capital.
Issuing additional shares can dilute existing holders in limited circumstances.
Further, the availability of additional shares, where the board has discretion
to implement a poison pill, can often serve as a deterrent to interested
suitors. Accordingly, where we find that the company has not detailed a plan for
use of the proposed shares, or where the number of shares far exceeds those
needed to accomplish a detailed plan, we typically recommend against the
authorization of additional shares.
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While we think that having adequate shares to allow management to make quick
decisions and effectively operate the business is critical, we prefer that, for
significant transactions, management come to shareholders to justify their use
of additional shares rather than providing a blank check in the form of a large
pool of unallocated shares available for any purpose.
ADVANCE NOTICE REQUIREMENTS
FOR SHAREHOLDER BALLOT PROPOSALS
We typically recommend that shareholders vote against proposals that would
require advance notice of shareholder proposals or of director nominees.
These proposals typically attempt to require a certain amount of notice before
shareholders are allowed to place proposals on the ballot. Notice requirements
typically range between three to six months prior to the annual meeting. Advance
notice requirements typically make it impossible for a shareholder who misses
the deadline to present a shareholder proposal or a director nominee that might
be in the best interests of the company and its shareholders.
We believe shareholders should be able to review and vote on all proposals and
director nominees. Shareholders can always vote against proposals that appear
with little prior notice. Shareholders, as owners of a business, are capable of
identifying issues on which they have sufficient information and ignoring issues
on which they have insufficient information. Setting arbitrary notice
restrictions limits the opportunity for shareholders to raise issues that may
come up after the window closes.
VOTING STRUCTURE
Cumulative Voting
Cumulative voting increases the ability of minority shareholders to elect a
director by allowing shareholders to cast as many shares of the stock they own
multiplied by the number of directors to be elected. As companies generally have
multiple nominees up for election, cumulative voting allows shareholders to cast
all of their votes for a single nominee, or a smaller number of nominees than up
for election, thereby raising the likelihood of electing one or more of their
preferred nominees to the board. It can be important when a board is controlled
by insiders or affiliates and where the company's ownership structure includes
one or more shareholders who control a majority-voting block of company stock.
Glass Lewis believes that cumulative voting generally acts as a safeguard for
shareholders by ensuring that those who hold a significant minority of shares
can elect a candidate of their choosing to the board. This allows the creation
of boards that are responsive to the interests of all shareholders rather than
just a small group of large holders.
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However, academic literature indicates that where a highly independent board is
in place and the company has a shareholder-friendly governance structure,
shareholders may be better off without cumulative voting. The analysis
underlying this literature indicates that shareholder returns at firms with good
governance structures are lower and that boards can become factionalized and
prone to evaluating the needs of special interests over the general interests of
shareholders collectively.
We review cumulative voting proposals on a case-by-case basis, factoring in the
independence of the board and the status of the company's governance structure.
But we typically find these proposals on ballots at companies where independence
is lacking and where the appropriate checks and balances favoring shareholders
are not in place. In those instances we typically recommend in favor of
cumulative voting.
Where a company has adopted a true majority vote standard (i.e., where a
director must receive a majority of votes cast to be elected, as opposed to a
modified policy indicated by a resignation policy only), Glass Lewis will
recommend voting against cumulative voting proposals due to the incompatibility
of the two election methods. For companies that have not adopted a true majority
voting standard but have adopted some form of majority voting, Glass Lewis will
also generally recommend voting against cumulative voting proposals if the
company has not adopted antitakeover protections and has been responsive to
shareholders.
Where a company has not adopted a majority voting standard and is facing both a
shareholder proposal to adopt majority voting and a shareholder proposal to
adopt cumulative voting, Glass Lewis will support only the majority voting
proposal. When a company has both majority voting and cumulative voting in
place, there is a higher likelihood of one or more directors not being elected
as a result of not receiving a majority vote. This is because shareholders
exercising the right to cumulate their votes could unintentionally cause the
failed election of one or more directors for whom shareholders do not cumulate
votes.
Supermajority Vote Requirements
Glass Lewis believes that supermajority vote requirements impede shareholder
action on ballot items critical to shareholder interests. An example is in the
takeover context, where supermajority vote requirements can strongly limit the
voice of shareholders in making decisions on such crucial matters as selling the
business. This in turn degrades share value and can limit the possibility of
buyout premiums to shareholders. Moreover, we believe that a supermajority vote
requirement can enable a small group of shareholders to overrule the will of the
majority shareholders. We believe that a simple majority is appropriate to
approve all matters presented to shareholders.
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TRANSACTION OF OTHER BUSINESS
AT AN ANNUAL OR SPECIAL MEETING OF SHAREHOLDERS
We typically recommend that shareholders not give their proxy to management to
vote on any other business items that may properly come before the annual
meeting. In our opinion, granting unfettered discretion is unwise.
ANTI-GREENMAIL PROPOSALS
Glass Lewis will support proposals to adopt a provision preventing the payment
of greenmail, which would serve to prevent companies from buying back company
stock at significant premiums from a certain shareholder. Since a large or
majority shareholder could attempt to compel a board into purchasing its shares
at a large premium, the anti-greenmail provision would generally require that a
majority of shareholders other than the majority shareholder approve the
buyback.
MUTUAL FUNDS: INVESTMENT POLICIES AND ADVISORY AGREEMENTS
Glass Lewis believes that decisions about a fund's structure and/or a fund's
relationship with its investment advisor or sub-advisors are generally best left
to management and the members of the board, absent a showing of egregious or
illegal conduct that might threaten shareholder value. As such, we focus our
analyses of such proposals on the following main areas:
o The terms of any amended advisory or sub-advisory agreement;
o Any changes in the fee structure paid to the investment advisor; and
o Any material changes to the fund's investment objective or strategy.
We generally support amendments to a fund's investment advisory agreement absent
a material change that is not in the best interests of shareholders. A
significant increase in the fees paid to an investment advisor would be reason
for us to consider recommending voting against a proposed amendment to an
investment advisory agreement. However, in certain cases, we are more inclined
to support an increase in advisory fees if such increases result from being
performance-based rather than asset-based. Furthermore, we generally support
sub-advisory agreements between a fund's advisor and sub-advisor, primarily
because the fees received by the sub-advisor are paid by the advisor, and not by
the fund.
In matters pertaining to a fund's investment objective or strategy, we believe
shareholders are best served when a fund's objective or strategy closely
resembles the investment discipline shareholders understood and selected when
they initially bought into the fund. As such, we generally recommend voting
against amendments to a fund's investment objective or strategy when the
proposed changes would leave shareholders with stakes in a fund that is
noticeably different than when originally contemplated, and which could
therefore potentially negatively impact some investors' diversification
strategies.
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V. COMPENSATION, ENVIRONMENTAL, SOCIAL AND
GOVERNANCE SHAREHOLDER INITIATIVES
================================================================================
Glass Lewis typically prefers to leave decisions regarding day-to-day management
and policy decisions, including those related to social, environmental or
political issues, to management and the board, except when there is a clear link
between the proposal and value enhancement or risk mitigation. We feel strongly
that shareholders should not attempt to micromanage the company, its businesses
or its executives through the shareholder initiative process. Rather, we believe
shareholders should use their influence to push for governance structures that
protect shareholders and promote director accountability. Shareholders should
then put in place a board they can trust to make informed decisions that are in
the best interests of the business and its owners, and then hold directors
accountable for management and policy decisions through board elections.
However, we recognize that support of appropriately crafted shareholder
initiatives may at times serve to promote or protect shareholder value.
To this end, Glass Lewis evaluates shareholder proposals on a case-by-case
basis. We generally recommend supporting shareholder proposals calling for the
elimination of, as well as to require shareholder approval of, antitakeover
devices such as poison pills and classified boards. We generally recommend
supporting proposals likely to increase and/or protect shareholder value and
also those that promote the furtherance of shareholder rights. In addition, we
also generally recommend supporting proposals that promote director
accountability and those that seek to improve compensation practices, especially
those promoting a closer link between compensation and performance.
The following is a discussion of Glass Lewis' approach to certain common
shareholder resolutions. We note that the following is not an exhaustive list of
all shareholder proposals.
COMPENSATION
Glass Lewis carefully reviews executive compensation since we believe that this
is an important area in which the board's priorities and effectiveness are
revealed. Executives should be compensated with appropriate base salaries and
incentivized with additional awards in cash and equity only when their
performance and that of the company warrants such rewards. Compensation,
especially when also in line with the compensation paid by the company's peers,
should lead to positive results for shareholders and ensure the use of
appropriate incentives that drives those results over time.
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However, as a general rule, Glass Lewis does not believe shareholders should be
involved in the approval and negotiation of compensation packages. Such matters
should be left to the board's compensation committee, which can be held
accountable for its decisions through the election of directors. Therefore,
Glass Lewis closely scrutinizes shareholder proposals relating to compensation
to determine if the requested action or disclosure has already accomplished or
mandated and whether it allows sufficient, appropriate discretion to the board
to design and implement reasonable compensation programs.
Disclosure of Individual Compensation
Glass Lewis believes that disclosure of information regarding compensation is
critical to allowing shareholders to evaluate the extent to which a company's
pay is based on performance. However, we recognize that the SEC currently
mandates significant executive compensation disclosure. In some cases, providing
information beyond that which is required by the SEC, such as the details of
individual employment agreements of employees below the senior level, could
create internal personnel tension or put the company at a competitive
disadvantage, prompting employee poaching by competitors. Further, it is
difficult to see how this information would be beneficial to shareholders. Given
these concerns, Glass Lewis typically does not believe that shareholders would
benefit from additional disclosure of individual compensation packages beyond
the significant level that is already required; we therefore typically recommend
voting against shareholder proposals seeking such detailed disclosure. We will,
however, review each proposal on a case by basis, taking into account the
company's history of aligning executive compensation and the creation of
shareholder value.
Linking Pay with Performance
Glass Lewis views performance-based compensation as an effective means of
motivating executives to act in the best interests of shareholders. In our view,
an executive's compensation should be specific to the company and its
performance, as well as tied to the executive's achievements within the company.
However, when firms have inadequately linked executive compensation and company
performance we will consider recommending supporting reasonable proposals
seeking that a percentage of equity awards be tied to performance criteria. We
will also consider supporting appropriately crafted proposals requesting that
the compensation committee include multiple performance metrics when setting
executive compensation, provided that the terms of the shareholder proposal are
not overly prescriptive. Though boards often argue that these types of
restrictions unduly hinder their ability to attract talent we believe boards can
develop an effective, consistent and reliable approach to remuneration utilizing
a wide range (and an appropriate mix) of fixed and performance-based
compensation.
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Retirement Benefits & Severance
As a general rule, Glass Lewis believes that shareholders should not be involved
in the approval of individual severance plans. Such matters should be left to
the board's compensation committee, which can be held accountable for its
decisions through the election of its director members.
However, when proposals are crafted to only require approval if the benefit
exceeds 2.99 times the amount of the executive's base salary plus bonus, Glass
Lewis typically supports such requests. Above this threshold, based on the
executive's average annual compensation for the most recent five years, the
company can no longer deduct severance payments as an expense, and thus
shareholders are deprived of a valuable benefit without an offsetting incentive
to the executive. We believe that shareholders should be consulted before
relinquishing such a right, and we believe implementing such policies would
still leave companies with sufficient freedom to enter into appropriate
severance arrangements.
Following the passage of the Dodd-Frank Wall Street Reform and Consumer
Protection Act ("Dodd-Frank"), the SEC proposed rules that would require that
public companies hold advisory shareholder votes on compensation arrangements
and understandings in connection with merger transactions, also known as "golden
parachute" transactions. However, the SEC has not finalized the rules in time
for the 2011 proxy season and therefore we expect to continue to see shareholder
proposals on merger-triggered severance agreements as well as those not related
to mergers.
Bonus Recoupments ("Clawbacks")
We believe it is prudent for boards to adopt detailed and stringent policies
whereby, in the event of a restatement of financial results, the board will
review all performance related bonuses and awards made to senior executives
during the period covered by a restatement and will, to the extent feasible,
recoup such bonuses to the extent that performance goals were not achieved.
While the Dodd-Frank Act mandates that all companies adopt clawback policies
that will require companies to develop a policy to recover compensation paid to
current and former executives erroneously paid during the three year prior to a
restatement, the SEC has yet to finalize the relevant rules. As a result, we
expect to see shareholder proposals regarding clawbacks in the upcoming proxy
season.
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When examining proposals requesting that companies adopt recoupment policies,
Glass Lewis will first review any relevant policies currently in place. When the
board has already committed to a proper course, and the current policy covers
the major tenets of the proposal, we see no need for further action. Further, in
some instances, shareholder proposals may call for board action that contravenes
legal obligations under existing employment agreements. In other cases proposals
may excessively limit the board's ability to exercise judgment and reasonable
discretion, which may or may not be warranted, depending on the specific
situation of the company in question. We believe it is reasonable that a
mandatory recoupment policy should only affect senior executives and those
directly responsible for the company's accounting errors.
We note that where a company is entering into a new executive employment
contract that does not include a clawback provision and the company has had a
material restatement in the recent past, Glass Lewis will recommend voting
against the responsible members of the compensation committee. The compensation
committee has an obligation to shareholders to include reasonable controls in
executive contracts to prevent payments in the case of inappropriate behavior.
Golden Coffins
Glass Lewis does not believe that the payment of substantial, unearned
posthumous compensation provides an effective incentive to executives or aligns
the interests of executives with those of shareholders. Glass Lewis firmly
believes that compensation paid to executives should be clearly linked to the
creation of shareholder value. As such, Glass Lewis favors compensation plans
centered on the payment of awards contingent upon the satisfaction of
sufficiently stretching and appropriate performance metrics. The payment of
posthumous unearned and unvested awards should be subject to shareholder
approval, if not removed from compensation policies entirely. Shareholders
should be skeptical regarding any positive benefit they derive from costly
payments made to executives who are no longer in any position to affect company
performance.
To that end, we will consider supporting a reasonably crafted shareholder
proposal seeking to prohibit, or require shareholder approval of, the making or
promising of any survivor benefit payments to senior executives' estates or
beneficiaries. We will not recommend supporting proposals that would, upon
passage, violate existing contractual obligations or the terms of compensation
plans currently in effect.
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Retention of Shares until Retirement
We strongly support the linking of executive pay to the creation of long-term
sustainable shareholder value and therefore believe shareholders should
encourage executives to retain some level of shares acquired through equity
compensation programs to provide continued alignment with shareholders. However,
generally we do not believe that requiring senior executives to retain all or an
unduly high percentage of shares acquired through equity compensation programs
following the termination of their employment is the most effective or desirable
way to accomplish this goal. Rather, we believe that restricting executives'
ability to exercise all or a supermajority of otherwise vested equity awards
until they leave the company may hinder the ability of the compensation
committee to both attract and retain executive talent. In our view, otherwise
qualified and willing candidates could be dissuaded from accepting employment if
he/she believes that his/her compensation could be dramatically affected by
financial results unrelated to their own personal performance or tenure at the
company. Alternatively, an overly strict policy could encourage existing
employees to quit in order to realize the value locked in their incentive
awards. As such, we will not typically recommend supporting proposals requiring
the retention of significant amounts of equity compensation following
termination of employment at target firms.
Tax Gross-Ups
Tax gross-ups can act as an anti-takeover measure, as larger payouts to
executives result in larger gross-ups, which could artificially inflate the
ultimate purchase price under a takeover or merger scenario. Additionally,
gross-ups can result in opaque compensation packages where shareholders are
unlikely to be aware of the total compensation an executive may receive.
Further, we believe that in instances where companies have severance agreements
in place for executives, payments made pursuant to such arrangements are often
large enough to soften the blow of any additional excise taxes. Finally, such
payments are not performance based, providing no incentive to recipients and, if
large, can be a significant cost to companies.
Given the above, we will typically recommend supporting proposals requesting
that a compensation committee adopt a policy that it will not make or promise to
make to its senior executives any tax gross-up payments, except those applicable
to management employees of the company generally, such as a relocation or
expatriate tax equalization policy.
Linking Executive Pay to Environmental and Social Criteria
We recognize that a company's involvement in environmentally sensitive and
labor-intensive industries influences the degree to which a firm's overall
strategy must weigh environmental and social concerns. However, we also
understand that the value generated by incentivizing executives to prioritize
environmental and social issues is difficult to quantify and therefore measure,
and necessarily varies among industries and companies.
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When reviewing such proposals seeking to tie executive compensation to
environmental or social practices, we will review the target firm's compliance
with (or contravention of) applicable laws and regulations, and examine any
history of environmental and social related concerns including those resulting
in material investigations, lawsuits, fines and settlements. We will also review
the firm's current compensation policies and practice. However, with respect to
executive compensation, Glass Lewis generally believes that such policies should
be left to the compensation committee.
GOVERNANCE
Declassification of the Board
Glass Lewis believes that classified boards (or "staggered boards") do not serve
the best interests of shareholders. Empirical studies have shown that: (i)
companies with classified boards may show a reduction in firm value; (ii) in the
context of hostile takeovers, classified boards operate as a takeover defense,
which entrenches management, discourages potential acquirers and delivers less
return to shareholders; and (iii) companies with classified boards are less
likely to receive takeover bids than those with single class boards. Annual
election of directors provides increased accountability and requires directors
to focus on the interests of shareholders. When companies have classified boards
shareholders are deprived of the right to voice annual opinions on the quality
of oversight exercised by their representatives.
Given the above, Glass Lewis believes that classified boards are not in the best
interests of shareholders and will continue to recommend shareholders support
proposals seeking their repeal.
Right of Shareholders to Call a Special Meeting
Glass Lewis strongly believes that shareholders should have the ability to call
meetings of shareholders between annual meetings to consider matters that
require prompt attention. However, in order to prevent abuse and waste of
corporate resources by a small minority of shareholders, we believe that
shareholders representing at least a sizable minority of shares must support
such a meeting prior to its calling. Should the threshold be set too low,
companies might frequently be subjected to meetings whose effect could be the
disruption of normal business operations in order to focus on the interests of
only a small minority of owners. Typically we believe this threshold should not
fall below 10-15% of shares, depending on company size.
In our case-by-case evaluations, we consider the following:
o Company size
o Shareholder base in both percentage of ownership and type of shareholder
(e.g., hedge fund, activist investor, mutual fund, pension fund, etc.)
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o Responsiveness of board and management to shareholders evidenced by
progressive shareholder rights policies (e.g., majority voting,
declassifying boards, etc.) and reaction to shareholder proposals
o Company performance and steps taken to improve bad performance (e.g., new
executives/directors, spin-offs, etc.)
o Existence of anti-takeover protections or other entrenchment devices
o Opportunities for shareholder action (e.g., ability to act by written
consent)
o Existing ability for shareholders to call a special meeting
Right of Shareholders to Act by Written Consent
Glass Lewis strongly supports shareholders' right to act by written consent. The
right to act by written consent enables shareholders to take action on important
issues that arise between annual meetings. However, we believe such rights
should be limited to at least the minimum number of votes that would be
necessary to authorize the action at a meeting at which all shareholders
entitled to vote were present and voting.
In addition to evaluating the threshold for which written consent may be used
(e.g. majority of votes cast or outstanding), we will consider the following
when evaluating such shareholder proposals:
o Company size
o Shareholder base in both percentage of ownership and type of shareholder
(e.g., hedge fund, activist investor, mutual fund, pension fund, etc.)
o Responsiveness of board and management to shareholders evidenced by
progressive shareholder rights policies (e.g., majority voting,
declassifying boards, etc.) and reaction to shareholder proposals
o Company performance and steps taken to improve bad performance (e.g., new
executives/directors, spin offs, etc.)
o Existence of anti-takeover protections or other entrenchment devices
o Opportunities for shareholder action (e.g., ability and threshold to call
a special meeting)
o Existing ability for shareholders to act by written consent
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Board Composition
Glass Lewis believes the selection and screening process for identifying
suitably qualified candidates for a company's board of directors is one which
requires the judgment of many factors, including the balance of skills and
talents, the breadth of experience and diversity of candidates and existing
board members. Diversity of skills, abilities and points of view can foster the
development of a more creative, effective and dynamic board. In general,
however, we do not believe that it is in the best interests of shareholders for
firms to be beholden to arbitrary rules regarding its board, or committee,
composition. We believe such matters should be left to a board's nominating
committee, which is generally responsible for establishing and implementing
policies regarding the composition of the board. Members of this committee may
be held accountable through the director election process. However, we will
consider supporting reasonable, well-crafted proposals to increase board
diversity where there is evidence a board's lack of diversity lead to a decline
in shareholder value.
Reimbursement of Solicitation Expenses
Where a dissident shareholder is seeking reimbursement for expenses incurred in
waging a contest or submitting a shareholder proposal and has received the
support of a majority of shareholders, Glass Lewis generally will recommend in
favor of reimbursing the dissident for reasonable expenses. In those rare cases
where a shareholder has put his or her own time and money into organizing a
successful campaign to unseat a poorly performing director (or directors) or
sought support for a shareholder proposal, we feel that the shareholder should
be entitled to reimbursement of expenses by other shareholders, via the company.
We believe that, in such cases, shareholders express their agreement by virtue
of their majority vote for the dissident (or the shareholder proposal) and will
share in the expected improvement in company performance.
Majority Vote for the Election of Directors
If a majority vote standard were implemented, shareholders could collectively
vote to reject a director they believe will not pursue their best interests. We
think that this minimal amount of protection for shareholders is reasonable and
will not upset the corporate structure nor reduce the willingness of qualified
shareholder-focused directors to serve in the future.
We believe that a majority vote standard will likely lead to more attentive
directors. Further, occasional use of this power will likely prevent the
election of directors with a record of ignoring shareholder interests. Glass
Lewis will generally support shareholder proposals calling for the election of
directors by a majority vote, except for use in contested director elections.
Cumulative Vote for the Election of Directors
Glass Lewis believes that cumulative voting generally acts as a safeguard for
shareholders by ensuring that those who hold a significant minority of shares
can elect a candidate of their choosing to the board. This allows the creation
of boards that are responsive to the interests of all shareholders rather than
just a small group of large holders. However, when a company has both majority
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voting and cumulative voting in place, there is a higher likelihood of one or
more directors not being elected as a result of not receiving a majority vote.
This is because shareholders exercising the right to cumulate their votes could
unintentionally cause the failed election of one or more directors for whom
shareholders do not cumulate votes.
Given the above, where a company (i) has adopted a true majority vote standard;
(ii) has simultaneously proposed a management-initiated true majority vote
standard; or (iii) is simultaneously the target of a true majority vote standard
shareholder proposal, Glass Lewis will recommend voting against cumulative
voting proposals due to the potential incompatibility of the two election
methods.
For companies that have not adopted a true majority voting standard but have
adopted some form of majority voting, Glass Lewis will also generally recommend
voting against cumulative voting proposals if the company has not adopted
antitakeover protections and has been responsive to shareholders.
Supermajority Vote Requirements
We believe that a simple majority is appropriate to approve all matters
presented to shareholders, and will recommend that shareholders vote
accordingly. Glass Lewis believes that supermajority vote requirements impede
shareholder action on ballot items critical to shareholder interests. In a
takeover context supermajority vote requirements can strongly limit the voice of
shareholders in making decisions on crucial matters such as selling the
business. These limitations in turn may degrade share value and can reduce the
possibility of buyout premiums for shareholders. Moreover, we believe that a
supermajority vote requirement can enable a small group of shareholders to
overrule the will of the majority of shareholders.
Independent Chairman
Glass Lewis views an independent chairman as better able to oversee the
executives and set a pro-shareholder agenda in the absence of the conflicts that
a CEO, executive insider, or close company affiliate may face. Separating the
roles of CEO and chairman may lead to a more proactive and effective board of
directors. The presence of an independent chairman fosters the creation of a
thoughtful and dynamic board, not dominated by the views of senior management.
We believe that the separation of these two key roles eliminates the conflict of
interest that inevitably occurs when a CEO, or other executive, is responsible
for self-oversight. As such, we will typically support reasonably crafted
shareholder proposals seeking the installation of an independent chairman at a
target company. However, we will not support proposals that include overly
prescriptive definitions of "independent."
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ENVIRONMENT
There are significant financial, legal and reputational risks to companies
resulting from poor environmental practices or negligent oversight thereof. We
believe part of the board's role is to ensure that management conducts a
complete risk analysis of company operations, including those that have
environmental implications. Directors should monitor management's performance in
mitigating environmental risks attendant with operations in order to eliminate
or minimize the risks to the company and shareholders.
When management and the board have displayed disregard for environmental risks,
have engaged in egregious or illegal conduct, or have failed to adequately
respond to current or imminent environmental risks that threaten shareholder
value, we believe shareholders should hold directors accountable. When a
substantial environmental risk has been ignored or inadequately addressed, we
may recommend voting against responsible members of the governance committee, or
members of a committee specifically charged with sustainability oversight.
With respect to environmental risk, Glass Lewis believes companies should
actively consider their exposure to:
Direct environmental risk: Companies should evaluate financial exposure to
direct environmental risks associated with their operations. Examples of direct
environmental risks are those associated with spills, contamination, hazardous
leakages, explosions, or reduced water or air quality, among others. Further,
firms should consider their exposure to environmental risks emanating from
systemic change over which they may have only limited control, such as insurance
companies affected by increased storm severity and frequency resulting from
climate change.
Risk due to legislation/regulation: Companies should evaluate their exposure to
shifts or potential shifts in environmental regulation that affect current and
planned operations. Regulation should be carefully monitored in all
jurisdictions within which the company operates. We look closely at relevant and
proposed legislation and evaluate whether the company has responded
appropriately.
Legal and reputational risk: Failure to take action on important issues may
carry the risk of damaging negative publicity and potentially costly litigation.
While the effect of high-profile campaigns on shareholder value may not be
directly measurable, in general we believe it is prudent for firms to evaluate
social and environmental risk as a necessary part in assessing overall portfolio
risk.
If there is a clear showing that a company has inadequately addressed these
risks, Glass Lewis may consider supporting appropriately crafted shareholder
proposals requesting increased disclosure, board attention or, in limited
circumstances, specific actions. In general, however, we believe that boards and
management are in the best position to address these important issues, and will
only rarely recommend that shareholders supplant their judgment regarding
operations.
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Climate Change and Green House Gas Emission Disclosure
Glass Lewis will consider recommending a vote in favor of a reasonably crafted
proposal to disclose a company's climate change and/or greenhouse gas emission
strategies when (i) a company has suffered financial impact from reputational
damage, lawsuits and/or government investigations, (ii) there is a strong link
between climate change and its resultant regulation and shareholder value at the
firm, and/or (iii) the company has inadequately disclosed how it has addressed
climate change risks. Further, we will typically recommend supporting proposals
seeking disclosure of greenhouse gas emissions at companies operating in carbon-
or energy- intensive industries, such basic materials, integrated oil and gas,
iron and steel, transportation, utilities, and construction. We are not
inclined, however, to support proposals seeking emissions reductions, or
proposals seeking the implementation of prescriptive policies relating to
climate change.
Sustainability Report
When evaluating requests that a firm produce a sustainability report, we will
consider, among other things:
o The financial risk to the company from the firm's environmental practices
and/or regulation;
o The relevant company's current level of disclosure;
o The level of sustainability information disclosed by the firm's peers;
o The industry in which the firm operates;
o The level and type of sustainability concerns/controversies at the
relevant firm, if any;
o The time frame within which the relevant report is to be produced; and
o The level of flexibility granted to the board in the implementation of
the proposal.
In general, we believe that firms operating in extractive industries should
produce sustainability reports, and will recommend a vote for reasonably crafted
proposals requesting that such a report be produced; however, as with all
shareholder proposals, we will evaluate sustainability report requests on a case
by case basis.
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Oil Sands
The procedure required to extract usable crude from oil sands emits
significantly more greenhouse gases than do conventional extraction methods. In
addition, development of the oil sands has a deleterious effect on the local
environment, such as Canada's boreal forests which sequester significant levels
of carbon. We believe firms should strongly consider and evaluate exposure to
financial, legal and reputational risks associated with investment in oil sands.
We believe firms should adequately disclose their involvement in the oil sands,
including a discussion of exposure to sensitive political and environmental
areas. Firms should broadly outline the scope of oil sands operations, describe
the commercial methods for producing oil, and discuss the management of
greenhouse gas emissions. However, we believe that detailed disclosure of
investment assumptions could unintentionally reveal sensitive information
regarding operations and business strategy, which would not serve shareholders'
interest. We will review all proposals seeking increased disclosure of oil sands
operations in the above context, but will typically not support proposals
seeking cessation or curtailment of operations.
Sustainable Forestry
Sustainable forestry provides for the long-term sustainable management and use
of trees and other non-timber forest products. Retaining the economic viability
of forests is one of the tenets of sustainable forestry, along with encouraging
more responsible corporate use of forests. Sustainable land use and the
effective management of land are viewed by some shareholders as important in
light of the impact of climate change. Forestry certification has emerged as a
way that corporations can address prudent forest management. There are currently
several primary certification schemes such as the Sustainable Forestry
Initiative ("SFI") and the Forest Stewardship Council ("FSC").
There are nine main principles that comprise the SFI: (i) sustainable forestry;
(ii) responsible practices; (iii) reforestation and productive capacity; (iv)
forest health and productivity; (v) long-term forest and soil productivity; (vi)
protection of water resources; (vii) protection of special sites and
biodiversity; (viii) legal compliance; and (ix) continual improvement.
The FSC adheres to ten basic principles: (i) compliance with laws and FSC
principles; (ii) tenure and use rights and responsibilities; (iii) indigenous
peoples' rights; (iv) community relations and workers' rights; (v) benefits from
the forest; (vi) environmental impact; (vii) management plan; (viii) monitoring
and assessment; (ix) maintenance of high conservation value forests; and (x)
plantations.
Shareholder proposals regarding sustainable forestry have typically requested
that the firm comply with the above SFI or FSC principles as well as to assess
the feasibility of phasing out the use of uncertified fiber and increasing the
use of certified fiber. We will evaluate target firms' current mix of certified
and uncertified paper and the firms' general approach to sustainable forestry
practices, both absolutely and relative to its peers but will only support
proposals of this nature when we believe that the proponent has clearly
demonstrated that the implementation of this proposal is clearly linked to an
increase in shareholder value.
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SOCIAL ISSUES
Non-Discrimination Policies
Companies with records of poor labor relations may face lawsuits,
efficiency-draining turnover, poor employee performance, and/or distracting,
costly investigations. Moreover, as an increasing number of companies adopt
inclusive EEO policies, companies without comprehensive policies may face
damaging recruitment, reputational and legal risks. We believe that a pattern of
making financial settlements as a result of lawsuits based on discrimination
could indicate investor exposure to ongoing financial risk. Where there is clear
evidence of employment practices resulting in negative economic exposure, Glass
Lewis may support shareholder proposals addressing such risks.
MacBride Principles
To promote peace, justice and equality regarding employment in Northern Ireland,
Dr. Sean MacBride, founder of Amnesty International and Nobel Peace laureate,
proposed the following equal opportunity employment principles:
1. Increasing the representation of individuals from underrepresented
religious groups in the workforce including managerial, supervisory,
administrative, clerical and technical jobs;
2. Adequate security for the protection of minority employees both at the
workplace and while traveling to and from work;
3. The banning of provocative religious or political emblems from the
workplace;
4. All job openings should be publicly advertised and special recruitment
efforts should be made to attract applicants from underrepresented
religious groups;
5. Layoff, recall, and termination procedures should not, in practice,
favor particular religious groupings;
6. The abolition of job reservations, apprenticeship restrictions, and
differential employment criteria, which discriminate on the basis of
religion or ethnic origin;
7. The development of training programs that will prepare substantial
numbers of current minority employees for skilled jobs, including the
expansion of existing programs and the creation of new programs to train,
upgrade, and improve the skills of minority employees;
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8. The establishment of procedures to assess, identify and actively recruit
minority employees with potential for further advancement; and
9. The appointment of senior management staff member to oversee the
company's affirmative action efforts and setting up of timetables to carry
out affirmative action principles.
Proposals requesting the implementation of the above principles are typically
proposed at firms that operate, or maintain subsidiaries that operate, in
Northern Ireland. In each case, we will examine the company's current equal
employment opportunity policy and the extent to which the company has been
subject to protests, fines, or litigation regarding discrimination in the
workplace, if any. Further, we will examine any evidence of the firm's specific
record of labor concerns in Northern Ireland.
Human Rights
Glass Lewis believes explicit policies set out by companies' boards of directors
on human rights provides shareholders with the means to evaluate whether the
company has taken steps to mitigate risks from its human rights practices. As
such, we believe that it is prudent for firms to actively evaluate risks to
shareholder value stemming from global activities and human rights practices
along entire supply chains. Findings and investigations of human rights abuses
can inflict, at a minimum, reputational damage on targeted companies and have
the potential to dramatically reduce shareholder value. This is particularly
true for companies operating in emerging market countries in extractive
industries and in politically unstable regions. As such, while we typically rely
on the expertise of the board on these important policy issues, we recognize
that, in some instances, shareholders could benefit from increased reporting or
further codification of human rights policies.
Military and US Government Business Policies
Glass Lewis believes that disclosure to shareholders of information on key
company endeavors is important. However, we generally do not support resolutions
that call for shareholder approval of policy statements for or against
government programs, most of which are subject to thorough review by the federal
government and elected officials at the national level. We also do not support
proposals favoring disclosure of information where similar disclosure is already
mandated by law, unless circumstances exist that warrant the additional
disclosure.
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Foreign Government Business Policies
Where a corporation operates in a foreign country, Glass Lewis believes that the
company and board should maintain sufficient controls to prevent illegal or
egregious conduct with the potential to decrease shareholder value, examples of
which include bribery, money laundering, severe environmental violations or
proven human rights violations. We believe that shareholders should hold board
members, and in particular members of the audit committee and CEO, accountable
for these issues when they face reelection, as these concerns may subject the
company to financial risk. In some instances, we will support appropriately
crafted shareholder proposals specifically addressing concerns with the target
firm's actions outside its home jurisdiction.
Health Care Reform Principles
Health care reform in the United States has long been a contentious political
issue and Glass Lewis therefore believes firms must evaluate and mitigate the
level of risk to which they may be exposed regarding potential changes in health
care legislation. Over the last several years, Glass Lewis has reviewed multiple
shareholder proposals requesting that boards adopt principles for comprehensive
health reform, such as the following based upon principles reported by the
Institute of Medicine:
o Health care coverage should be universal;
o Health care coverage should be continuous;
o Health care coverage should be affordable to individuals and families;
o The health insurance strategy should be affordable and sustainable for
society; and
o Health insurance should enhance health and well-being by promoting access
to high-quality care that is effective, efficient, safe, timely,
patient-centered and equitable.
In general, Glass Lewis believes that individual corporate board rooms are not
the appropriate forum in which to address evolving and contentious national
policy issues. The adoption of a narrow set of principles could limit the
board's ability to comply with new regulation or to appropriately and flexibly
respond to health care issues as they arise. As such, barring a compelling
reason to the contrary, we typically do not support the implementation of
national health care reform principles at the company level.
Tobacco
Glass Lewis recognizes the contentious nature of the production, procurement,
marketing and selling of tobacco products. We also recognize that tobacco
companies are particularly susceptible to reputational and regulatory risk due
to the nature of its operations. As such, we will consider supporting uniquely
tailored and appropriately crafted shareholder proposals requesting increased
information or the implementation of suitably broad policies at target firms on
a case-by-case basis. However, we typically do not support proposals requesting
that firms shift away from, or significantly alter, the legal production or
marketing of core products.
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Reporting Contributions and Political Spending
While corporate contributions to national political parties and committees
controlled by federal officeholders are prohibited under federal law,
corporations can legally donate to state and local candidates, organizations
registered under 26 USC Sec. 527 of the Internal Revenue Code and state-level
political committees. There is, however, no standardized manner in which
companies must disclose this information. As such, shareholders often must
search through numerous campaign finance reports and detailed tax documents to
ascertain even limited information. Corporations also frequently use trade
associations, which are not required to report funds they receive for or spend
on political activity, as a means for corporate political action.
Further, in 2010 the Citizens United v. Federal Election Commission decision by
the Supreme Court affirmed that corporations are entitled to the same free
speech laws as individuals and that it is legal for a corporation to donate to
political causes without monetary limit. While the decision did not remove bans
on direct contributions to candidates, companies are now able to contribute
indirectly, and substantially, to candidates through political organizations.
Therefore, it appears companies will enjoy greater latitude in their political
actions by this recent decision.
When evaluating whether a requested report would benefit shareholders, Glass
Lewis seeks answers to the following three key questions:
o Is the Company's disclosure comprehensive and readily accessible?
o How does the Company's political expenditure policy and disclosure
compare to its peers?
o What is the Company's current level of oversight?
Glass Lewis will consider supporting a proposal seeking increased disclosure of
corporate political expenditure and contributions if the firm's current
disclosure is insufficient, or if the firm's disclosure is significantly lacking
compared to its peers. We will also consider voting for such proposals when
there is evidence of inadequate board oversight. Given that political donations
are strategic decisions intended to increase shareholder value and have the
potential to negatively affect the company, we believe the board should either
implement processes and procedures to ensure the proper use of the funds or
closely evaluate the process and procedures used by management. We will also
consider supporting such proposals when there is verification, or credible
allegations, that the company is mismanaging corporate funds through political
donations. If Glass Lewis discovers particularly egregious actions by the
company, we will consider recommending voting against the governance committee
members or other responsible directors.
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Animal Welfare
Glass Lewis believes that it is prudent for management to assess potential
exposure to regulatory, legal and reputational risks associated with all
business practices, including those related to animal welfare. A high profile
campaign launched against a company could result in shareholder action, a
reduced customer base, protests and potentially costly litigation. However, in
general, we believe that the board and management are in the best position to
determine policies relating to the care and use of animals. As such, we will
typically vote against proposals seeking to eliminate or limit board discretion
regarding animal welfare unless there is a clear and documented link between the
board's policies and the degradation of shareholder value.
Internet Censorship
Legal and ethical questions regarding the use and management of the Internet and
the worldwide web have been present since access was first made available to the
public almost twenty years ago. Prominent among these debates are the issues of
privacy, censorship, freedom of expression and freedom of access. Glass Lewis
believes that it is prudent for management to assess its potential exposure to
risks relating to the internet management and censorship policies. As has been
seen at other firms, perceived violation of user privacy or censorship of
Internet access can lead to high-profile campaigns that could potentially result
in decreased customer bases or potentially costly litigation. In general,
however, we believe that management and boards are best equipped to deal with
the evolving nature of this issue in various jurisdictions of operation.
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