2023 Proxy Advisors’ Policy Updates - Continental Europe

Given the influence that proxy advisors exert on the voting of institutional investors, it's vital to remain up to date on their current policies. IVOX, Glass Lewis and ISS published their policy updates in many key markets on Nov. 10th, 17th and 30th, respectively. S&P Global reviewed the new guidelines for Continental Europe and the UK and has summarised the most essential updates to ensure that you remain informed of the significant developments in proxy advisor methodology. The key updates include:

ISS - Continental Europe & UK / Ireland

Climate Accountability

ISS is expanding its policy to target high emitting companies on the Climate Action 100+ Focus Group list. The policy, first implemented in select markets in 2022, will now be applied to all markets (including, naturally continental European markets). In cases where the company is a significant emitter and is not taking adequate steps to 'understand, assess, and mitigate risks' related to climate change, ISS will vote against responsible directors. The exact directors who will be targeted vary on a market-by-market basis due to market norms and the availability of voting items.

Unequal Voting Rights in Continental Europe

ISS has revised its approach to board accountability, mostly triggered by developments in unequal voting rights given the introduction of new loyalty share structure in various European markets. Effective from Feb. 2024, ISS will recommend against directors or the discharge of directors at widely held companies that employ a stock structure with unequal voting rights. Some exceptions have been introduced to this policy: newly public companies (max. seven years from going public), situations where the distortion between voting and economic power does not exceed 10% or situations where the company provides sufficient protections for minority shareholders.

Virtual-Only Meetings in Continental Europe

Proposals that would allow companies to hold virtual-only meetings will be reviewed on a case-by-case basis, considering whether the company's rationale and any disclosed safeguards, such as a commitment that virtual meetings will not preclude in-person or hybrid meetings, ensuring that shareholders' rights would be protected and any possible time restriction for this authorization. ISS prefers that shareholders have a regular vote on such authorizations so that they can reevaluate the company's use of virtual meetings and raise concerns if necessary.

Board Diversity in the UK & Ireland

ISS updated policy incorporates the April 2022 update to the FCA Listing Rules in respect of board diversity requirements. Existing ISS guidelines will continue to apply but the new requirements will apply for companies with accounting periods beginning on or after Apr. 1, 2022. The new FCA Listing Rules requires standard and premium listed companies to meet the following targets: (i) at least 40% of women-on-board; (ii) at least one of the senior board positions is a woman; and (iii) at least one member of the board is from a minority ethnic background. In respect of ISEQ20 constituents and AIM-listed companies with a market capitalisation of over GBP 500 million, ISS requires companies to have at least one woman and one individual from an ethnic minority background on the board.

For non-compliant companies, the chair of the nomination committee will be targeted. The policy includes mitigating factors such as compliance with the relevant board diversity stand at the preceding AGM and a firm commitment, publicly available, to comply with the relevant standard within a year.

Capital Issuances in the UK & Ireland

In the United Kingdom and Ireland, ISS will, following the Pre-Emption Group's endorsement of the Secondary Capital Raising Review's recommendations, accept share issuances of up to 20% (10% of ordinary share capital and 10% extra to be used either for acquisitions or specific capital investments) without preemptive rights. In addition, a further 2% of share capital may be issued for each the general and the specific disapplication authority for the purposes of a follow-on offer. Previously, ISS had only accepted a 10%-limit (5%+5%).

Glass Lewis - Continental Europe & Individual Markets

Climate Accountability

Starting in 2023, companies identified with 'material exposure' to climate risk will be expected to provide 'clear and comprehensive' TCFD-aligned climate-related disclosure regarding the risks and the steps companies are taking to mitigate them. Companies that do not provide this disclosure may have board members (either the relevant committee chair or board chair) targeted for dissent. Glass Lewis is not specific about the exact universe of companies to be targeted under this new policy but does mention using lists such as Climate Action 100+ as a metric for assessing increased risk exposure.

Multi-Class Share Structures

Glass Lewis will begin recommending against the chair of the governance committee (or equivalent) if a board adopts a multi-class share structure where the share with superior rights is unlisted (typically the case in connection with an IPO, spin off or direct listing within the past year). Important to note is that GL will not recommend sanctioning companies with an existing multi-class structure unless there is evidence that the company is unresponsive to minority shareholder concerns.

Voting Results Disclosure

Also concerning governance accountability, Glass Lewis will sanction blue-chip or mid-cap companies that do notdisclose vote results from previous meetings. This policy will be applied to companies that do not disclose voting results for their 2023 general meetings (meaning the first sanctions would begin in 2024) and targeted will be the chair of the governance committee or equivalent.

Cyber Risk

The management of cyber risk is becoming an increasingly relevant topic in all markets, and Glass Lewis has reflected this in their 2023 policy. While there will not be any preemptive targeting for inadequate cyber risk management, the new policy clarifies that Glass Lewis will recommend against appropriate directors where insufficient oversight or disclosure has caused shareholders material harm.

Overboarding Methodology

Finally, Glass Lewis has updated its overboarding methodology by creating a distinction between full-fledged executive mandates and mandates where the director is an 'executive member of the board.' Executive directors with additional responsibilities on the executive team will now only be allowed one additional external public board mandate. Executive members of the board with no additional responsibilities (e.g., an executive chair without CEO responsibilities) will be allowed, as before, twoexternal mandates. In addition, Glass Lewis will count non-executive board chair mandates at North American companies as one position, whereas all non-executive board chair mandates were counted as two board seats previously regardless of the market.

Term of Mandate in Germany

In Germany, in addition to DAX companies, also MDAX companies will be expected to cap director terms at four years unless a compelling rationale is provided for a five-year term. Glass Lewis will recommend against the nomination committee chair at non-compliant companies. For non-compliant CDAX companies, a concern will be noted, and the nomination committee chair could be targeted due to further concerns with the committee composition.

Capital Proposals in Switzerland

Following the Swiss law amendment, shareholders may delegate the power to increase/decrease the share capital of the board by +/- 50% over a period of five years. Given the greater flexibility of this new capital band, Glass Lewis considers the worst-case scenario where companies could potentially first reduce their share capital down to the limit set in the proposed authority and then increase capital by issuing shares without preemptive rights up to the original ceiling of the capital band, which was determined based on the company's share capital prior to the reduction. Therefore, Glass Lewis will grant exceptions to this policy if companies provide a commitment that issuances without preemptive rights are capped at 20% of share capital at the time of any issuance across all previously existing or proposed capital authorities.

Remuneration-Related Changes

The primary point of discussion in the 2023 policy update concerned combined STI/LTI incentive plans. These plans are becoming more common in many European markets and typically feature a short-term performance period followed by a deferral. In general, Glass Lewis will recommend against when a policy is moving from a traditional LTI structure to this combined structure unless the plan has a minimum vesting period of three years, equity instruments in the payout mix, underpins or performance gateways and a strategic rationale.

For German companies, Glass Lewis has specified that they expect specific disclosure on which fixed and variable elements may be included in the calculation of the severance cap and that excluding the value of future LTI award grants from said calculation is expected. For remuneration reports, Glass Lewis will take into account the disclosure provided on the determination of a severance payment and the treatment of outstanding awards when assessing the appropriateness of termination payments.

In France, when a board submits a proposal to establish an employee savings plan merely in order to fulfill legal requirements and recommends shareholders to vote against, Glass Lewis will generally follow the board's recommendation.

IVOX - Germany

Sustainable Corporate Governance

In line with the reform of the German Corporate Governance Code (GCGC), IVOX has committed to pay attention to sustainability expertise on the supervisory board. The sanctions for a lack of sustainability will be evaluated holistically but may affect both elections and discharge. In addition, the absence of ESG targets in compensation as well as the absence of sustainable reporting will both be seen critically. Finally, the BVI expects companies to comply with the new qualification matrix in the GCGC for supervisory board elections. Candidates that do not meet these qualification requirements will be viewed critically.

Virtual-Only Meetings

IVOX, which references the BVI's Analysis Guidelines for Shareholder Meetings (ALHV), also updated its policy handling virtual general meetings. In terms of amending the articles of association to allow virtual-only general meetings, the BVI notes that it will consider these amendments acceptable so long as they are for no longer than two years and that they clearly list the conditions under which management will make use of the authority.

Generally, the guidelines consider a restriction on the total maximum number of shareholder questions prior to an AGM as unacceptable and seek to guarantee that questions on agenda items are made possible during the main meeting.

By Braedon Lehman and Paula Graullera Castillejos.

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.