As Maryland public companies begin preparing for their 2024 annual meetings, we recommend that each consider the voting results of its 2023 annual meeting of shareholders. Maintaining awareness of institutional investor and proxy advisory services policies regarding voting results, and providing considered responses to voting results, is important to continuing relationships with shareholders.
Companies should pay particular attention to results of director elections, say-on-pay (“SOP”) proposals and shareholder proposals that were not supported by the board. Institutional Shareholder Services Inc. (“ISS”) and Glass Lewis & Co. (“Glass Lewis”) have policies that may result in their recommendations against some or all of a company’s directors based on voting results in prior elections. In addition, some institutional shareholders have their own voting policies that may be implicated by a prior year’s voting results. These policies often turn on the board’s responsiveness to a particular voting result, whether by making a governance or other change or by disclosure of significant shareholder engagement on the matter.
Related to these matters, this memorandum discusses these policies and provides a reminder on director duties under Maryland law and recommendations.
ISS Policies Regarding Voting Results
Precatory Proposals: If a prior year’s shareholder precatory proposal has received the support of a majority of votes cast but the board does not act on the proposal, ISS will consider recommending against directors, committee members or the entire board. If the board does not implement such a proposal, ISS will examine the outreach efforts of the board, any disclosure regarding the subject matter of the proposal, why the proposal was not implemented, the level of support for and opposition to the proposal in past meetings, action taken by the board in response to the vote (including its engagement with shareholders) and the continuation of the underlying issue as a voting item on the ballot. Despite the fact that ISS says its evaluation is case by case, we are not aware of any instance where a board decided not to implement a majority shareholder-approved proposal and ISS did not subsequently follow with a recommendation against the incumbent nominees, but we have seen institutional shareholders satisfied with the outreach efforts.
Director Elections: ISS will consider recommending against directors, committee members or the entire board if “at the previous board election, any director received more than 50 percent withhold/against votes of the shares [sic] cast and the company has failed to address the issue(s) that caused the high withhold/against vote.” Most companies have some form of resignation policy in place for when an incumbent director receives less than 50% support. These policies typically give the board discretion as to whether to accept the affected director’s offer to resign. If the board does not accept the offer, or at least make significant governance changes that, if known, were driving the low support, then ISS’s policy to recommend against directors at the next annual meeting will be triggered. As with shareholder proposals, despite the fact that ISS says its evaluation is case by case, we are not aware of any instance where a board decided not to accept a resignation or make significant governance changes and ISS did not follow in the next year with a recommendation against the incumbent nominees.
Say On Pay: ISS will vote case by case on compensation committee members and the SOP proposal if “the company’s previous say-on-pay received the support of less than 70 percent of votes cast.” In making its evaluation, ISS will consider disclosure of “engagement efforts with major institutional investors,” “specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition,” and “meaningful actions taken to address shareholders' concerns.” In our experience, it is important to thoroughly and clearly disclose outreach efforts, the lessons learned from such outreach and any and all material changes to the company’s compensation program in the next proxy statement.
Glass Lewis Policies Regarding Voting Results
Glass Lewis believes that a board should respond with increased disclosure and engagement with shareholders if 20% or more of votes cast are against any recommendation of the board. This 20% threshold applies to voting on director nominees, shareholder-submitted proposals not supported by the board and board proposals (including SOP and equity compensation plans). When a company receives a response where 20% of the vote or more is contrary to the board’s recommendation, increased outreach and/or disclosure relating to the company’s response can help prevent or alleviate a negative recommendation from Glass Lewis.
When a majority of votes are cast contrary to the board’s recommendation, Glass Lewis expects to see a more robust response from the board, and, in the case of a shareholder proposal, may expect board action “fully implementing” the shareholder proposal.
Institutional Shareholder Policies Regarding Voting Results
A company should be familiar with the voting policies of its largest institutional shareholders and evaluate those policies in the context of a prior year’s voting results. More and more institutional shareholders have developed their own voting policies, some of which address similar issues as the above-described ISS and Glass Lewis policies.
For instance, one institutional investor’s policy provides that it may vote against the chair of the governance committee if one or more nominees receive “against” votes from more than 25% of votes cast, and the board has not taken what the investor determines to be appropriate action. The investor will also consider voting against the lead independent director and/or members of the governance committee if the board fails to act on shareholder proposals that receive substantial support and have a material impact on the company.
Another institutional investor will vote against members of the relevant committee if the company does not adequately respond to proposals that received a majority of votes cast at the previous annual meeting, so long as the investor voted in favor of the proposal. This investor will also vote against compensation committee members when it votes against the SOP proposal in consecutive years unless the investor determines that meaningful improvements were made to the executive compensation program.
Reminder on Director Duties and Recommendations
The Maryland General Corporation Law (“MGCL”) requires a director of a Maryland corporation to act “[i]n good faith,” “[i]n a manner [the director] reasonably believes to be in the best interests of the corporation,” and “[w]ith the care that an ordinarily prudent person in a like position would use under similar circumstances.” Further, the MGCL provides that a director may rely on information and opinions of officers or professional advisors, assuming the director has no knowledge that would cause such reliance to be unwarranted. The Maryland REIT Law provides that these standards also apply to acts of trustees of Maryland real estate investment trusts. These duties apply to a board’s consideration of a voting result where a significant percentage or a majority of the votes cast vote against the board’s recommendation.
In addition, as discussed in more detail in our November 2022 memorandum, we have consistently advised that Maryland law does not require a board to take any action if a majority – even a significant majority – of the votes cast (or even of the votes entitled to be cast) are cast in favor of a shareholder precatory proposal, or against one of the board’s proposals.
We recommend that directors of Maryland corporations, as part of their ordinary prudence duty quoted above, give appropriate consideration to the merits of a proposal approved by shareholders and/or to the reasons for lack of shareholder support for a board proposal before the board makes a final decision on implementation. Conversations with shareholders, especially large shareholders that voted against a board’s recommendation, may provide more insight than just the vote result. In certain circumstances, outreach should continue after the decision in order to explain the board’s thinking on why the approved proposal was not implemented or why the board decided to not make another change in response to a low vote on a board proposal. This will allow the company to discuss any other responses the board may be considering and get a sense of any possible voting or other shareholder reactions at the next annual meeting. Often, shareholders will be satisfied with a thoughtful response. In addition, as suggested by the policies described above, the company will benefit from being able to describe shareholder outreach in the next year’s proxy statement, especially if the company can say that holders of a substantial percentage of shares expressed satisfaction with the board’s response.
We have often been asked by clients about outreach with proxy advisory services. In a recent panel with representatives from ISS and Glass Lewis, both mentioned that October and November are better times to request a conference, as conferences are much harder to schedule during the proxy season. The representatives from both proxy advisers also said that unless the company had significant changes to the governance profile or compensation program, ISS and/or Glass Lewis may decline the opportunity for a conference.
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As always, our colleagues and we are available at any time to discuss these or other matters of Maryland law.