Glass Lewis has published it 2023 proxy voting guidelines for the UK (the “2023 Guidelines“). The full guidelines can be read here. Updates made in the 2023 Guidelines reflect the trending topics at the forefront of investors and issuers’ minds, including oversight of climate and other environmental and social risks and board diversity and composition. Key changes to last year’s guidelines are summarised below.

External commitments of directors

The 2023 Guidelines stress that an uncommitted director can post a material risk to a company’s shareholders, particularly during periods of crisis.  

Glass Lewis will generally recommend that shareholders oppose the election of a director who:

  • serves as an executive officer of any public company while serving on more than one additional external public company board. (Glass Lewis previously considered a director to be overcommitted if they had more than two additional external roles on public company boards.) In addition, an executive officer should not take on more than one non-executive directorships in a FTSE 100 company or other significant appointment; or
  • serves as a non-executive director on more than five public company boards. (This remains unchanged from last year.)

Non-executive board chair positions at UK companies continue to count as two board seats given the increased time commitment associated with these roles. Accordingly, Glass Lewis would generally consider an executive officer of a public company that also serves as a non-executive chair of another UK company to have a potentially excessive level of commitments.

Guidance from last year remains – as executive directors will presumably devote their attention to the company where they serve as an executive, Glass Lewis will generally not recommend that shareholders vote against the election of a potentially overcommitted director at the company where they serve in an executive function. Similarly, Glass Lewis will generally not recommend that shareholders vote against the election of a potentially overcommitted director at a company where they hold the board chair position, except where the director:

• serves as an executive officer of another public company; or

• holds board chair positions at three or more public companies; or

• is being proposed for initial election as board chair at the company.

When is a director potentially overcommitted?

When determining whether a director’s service on an excess number of boards may limit the ability of the director to devote sufficient time to board duties, existing guidance remains. A company should consider relevant factors such as:

  • the size, location, and scope of operation of the other companies where the director serves on the board;
  • the nature of the role (including committee memberships) that the director holds at such other companies;
  • whether the director serves as an executive or non-executive director of any large privately-held companies; and
  • the director’s attendance record at all companies.

Mitigation – the right to reply

Pursuant to the 2023 Guidelines, if the company with a potentially overcommitted director provides:

  • a commitment that such director will sufficiently reduce their commitment level prior to the next annual general meeting; or
  • presents a compelling rationale for the director’s continued service on the board,

then Glass Lewis may refrain from recommending a vote against the election of such director.

Such rationale should allow shareholders to evaluate the scope of the director’s other commitments as well as their contributions to the board, including specialised knowledge of the company’s industry, strategy or key markets, the diversity of skills, perspective and background they provide, and other relevant factors.

Other exceptions to the recommended vote against election are:

  • a director who serves on an excessive number of boards within a consolidated group of companies in related industries; or
  • a director that represents a firm whose sole purpose is to manage a portfolio of investments which include the company.

In these cases, it is incumbent on companies to proactively address potential shareholder concerns regarding a director’s overall commitment level.

Director Accountability for Climate-related issues

In a new section of the guidelines, Glass Lewis has outlined its view that climate risk is a material risk for all companies and particularly those companies whose greenhouse gas emissions represent a financially material risk, should provide clear and comprehensive disclosure of their risks, including how they are being mitigated and overseen. Such information is crucial to allow investors to understand the company’s management of this issue, as well as the impact of a lower carbon future on the company’s operations.

For such companies with material exposure to climate risk stemming from their own operations, climate-related disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures should be provided to shareholders. The boards of these companies should have explicit and clearly defined oversight responsibilities for climate-related issues. As such, in instances where Glass Lewis finds either (or both) of these disclosures to be absent or significantly lacking, it may recommend voting against the chair of the committee (or board) charged with oversight of climate-related issues, or if no committee has been charged with such oversight, the chair of the governance committee. Glass Lewis may extend its recommendation on this basis to additional members of the responsible committee in cases where the committee chair is not standing for re-election, or based on other factors, including the company’s size and industry and its overall governance profile. In instances where appropriate directors are not standing for election, Glass Lewis may instead recommend shareholders vote against other matters that are up for a vote, such as the accounts and reports proposal.

Our thoughts

External commitments / overboarding – the change aligns Glass Lewis with the current Institutional Shareholder Services (ISS) Proxy Voting Guidelines which consider an executive director to be overboarded if they are also a non-executive chair at another company. We expect to see a continued focus on director overboarding in years to come and many companies are now implementing policies that address overboarding and tracking compliance with such policies. Companies should consider whether to incorporate provisions into their corporate governance framework to require pre-approval or otherwise notification of any changes in a director’s outside commitments.

We acknowledge that directors who serve on several boards can share their expertise and experiences across more companies. In addition, directors tend to see trends when they serve on more than one board. However, board service is a significant undertaking with much responsibility and board directors must, at a minimum, be able to dedicate the requisite amount of time to the task in hand without the company and its shareholders bearing the brunt of any potential over-commitments.    

Accountability for climate-related issues – we welcome this change which reinforces the importance of adequate and meaningful non-financial reporting. Earlier this year the FCA and FRC each published their observations following a review of the first TCFD aligned disclosures made by premium listed companies. The FRC’s thematic report included examples of better practice disclosures to be used as reference points. It is worth noting that last month ISS published its annual benchmark policy consultation seeking views on its approach to the 2023 AGM season. ISS proposes to extend its existing policy on climate board accountability globally. The policy was introduced to selected markets, including the UK last year and included a vote against the board chair. New changes may include the extension of a vote against what ISS considers to be the appropriate director(s) and/or other voting items available.