The Advisors' Blog

Severance policy proposals made a comeback during the 2022 proxy season and need to be on your radar for 2023. Over on the Proxy Season Blog on TheCorporateCounsel.net, I recently noted a new Glass Lewis voting policy on this topic. I’m pleased to follow up with more detail via this guest post from Orrick’s J.T. Ho and Bobby Bee:

We blogged back in August about a spike in a 14a-8 proposal that requests companies implement policies to seek shareholder approval of any executive pay packages providing for severance or termination payments exceeding 2.99 times the sum of base salary plus bonus. As discussed in that blog post, the activists define severance or termination payments as including not only cash payments but also the value of equity awards that accelerate upon a separation event. Despite proxy advisors’ historical support of such proposals, most companies faced with these proposals have been able to secure a shareholder vote rejecting it. In justifying their “no” vote recommendations, companies have pointed to existing practices or policies, which provide that they will seek shareholder approval for any cash severance payments exceeding 2.99 times the sum of an executives’ salary and bonus, while providing for no such limit on equity acceleration benefits.

In a helpful position update, when Glass Lewis issued its 2023 voting guidelines for ESG Initiatives, it disclosed the following with respect to such proposals going forward (emphasis added):

“Retirement Benefits and Severance

We have updated our approach to proposals requesting that companies adopt a policy whereby shareholders must approve severance payments exceeding 2.99 times the amount of the executive’s base salary plus bonus. Although we are generally supportive of these policies, we have updated our guidelines to reflect that we may recommend shareholders vote against these proposals in instances where companies have adopted policies whereby they will seek shareholder approval for any cash severance payments exceeding 2.99 times the sum of an executives’ salary and bonus.”

The revised approach by Glass Lewis is welcome news and further supports the position most companies have taken when faced with these shareholder proposals. As suggested in our earlier post, companies without existing severance limitation policies should consider, and may benefit from adopting and publicizing, a formal severance policy that requires shareholder approval for cash severance payments to 2.99 times the sum of base salary plus bonus. Such action may put companies in a better position to avoid receiving such a proposal and would also position them in line with the updated Glass Lewis recommendations.

Thanks to J.T. and Bobby for this analysis of the new policy! One note of caution: before you jump in, it is worth thinking through any unintended consequences that could result from policies that limit severance – at least so that you’re prepared for questions that others might pose. Also, see my blog last month for more detail on Glass Lewis’s overall policy guidelines, which accompany these ESG policies.

– Liz Dunshee