Glass Lewis’ Research Approach in the Context of Russia’s Invasion of Ukraine

Like the rest of the world, we at Glass Lewis are shocked and saddened by the Russian invasion of Ukraine. Our thoughts are with the people of Ukraine, who have been needlessly targeted and victimized by this brutal and senseless war.

While Glass Lewis does not have offices or operations in Russia or Ukraine and therefore has not been directly affected by the conflict, it will affect our research coverage. Many of our customers invest in companies around the world and, to meet their needs, we have for years produced research on the annual and special meetings of Russian companies that trade on the Moscow Exchange and in other markets. While access to global markets has brought great benefits, it also poses unique challenges in the current situation as Russia’s aggression has prompted the world to quickly respond with sanctions and galvanized a collective response to isolate Russia from the global economy.

For our part, to help our customers navigate this challenging and evolving situation, we have been actively monitoring the changing environment and the sanctions being levied against Russian companies and individuals. In this blog post, we detail our approach to research on Russian companies and sanctioned individuals for the upcoming Russian proxy season, as well as how we will analyze international companies that have material operations in Russia.

Sanctioned Russian Companies and Individuals

An unprecedented array of sanctions has been imposed against Russian companies and individuals by a number of jurisdictions around the world. Due to the fluid nature of these sanctions, shortly after the invasion, we temporarily paused our issuance of any research on Russian companies, including those with a primary listing outside Russia.

On March 9, 2022, Glass Lewis resumed providing research and voting recommendations, after a brief pause, on certain Russian-incorporated and listed companies held by our customers. As further detailed below, this resumption is subject to two broad and important caveats:

• We will not provide research on companies that are subject to sanctions; and
• We will not provide vote recommendations on proposals that directly or indirectly concern an individual that is subject to sanctions.

For these purposes, we are tracking the sanctions imposed to date in response to Russia’s invasion of Ukraine by a range of jurisdictions, including the European Union, the United States, the United Kingdom, Japan, Australia, and others. If other major jurisdictions impose sanctions on Russian companies or individuals, we will seek to add those to our coverage.

We are also taking a broad, prudential approach to determining which Russian companies have been sanctioned. The exact nature of these sanctions differs by each jurisdiction and many of the major jurisdictions, including the United States and the European Union, have different tiers of sanctions. For example, in the United States, many Russian companies and their controlled affiliates have been added to OFAC’s Specially Designated Nationals and Blocked Persons List and are subject to “blocking” or “freezing” sanctions, which generally prohibit transactions with the designated or blocked persons. By contrast, other Russian companies are subject to less comprehensive sanctions at this point, such as prohibitions on certain new equity and debt financing transactions. While the exact nature of these sanctions varies across jurisdictions, given the fluidity and gravity of the situation, we will treat any partial sanction of this sort the same as a “blocking” or “freezing” sanction and will not provide research on the sanctioned company.

We are taking a similarly broad approach to determining which proposals relate to a sanctioned individual. We, of course, will not provide a recommendation on the election or re-election of a sanctioned individual to a board of directors, or on the ratification of the acts of a sanctioned individual. We will also not provide research or vote recommendations on proposals that indirectly concern a sanctioned individual, such as en bloc board ratification or approval of non-executive director fees of a board that includes a sanctioned individual. Here, too, Glass Lewis will not differentiate based on the degree of sanctions imposed on the individual. We will seek to identify such proposals at Russian companies and, although less likely to occur, also at companies with no connection to Russia apart from the sanctioned individual.

Finally, in any research we do on companies that are incorporated in Russia, or that have a primary listing on a Russian market and that have not been the subject of any sanctions to date, we will include a Disclosure Note in our Proxy Paper to draw our customers’ attention to the company’s Russian affiliation and current sanctions status. To the extent we have sufficient information, we will also seek to do the same for companies controlled by a Russian individual or entity or where the company is essentially Russian, but is listed or incorporated elsewhere, such as a Russian-headquartered company that has chosen for tax reasons to incorporate in the British Virgin Islands, Bermuda or Cyprus. At the request of some of our customers, we will also seek to identify and note directors at any company who also serve on the Board of a Russian company.

Our approach to this issue reflects our determination of how to comply with applicable sanctions regimes and policy choices we have made to play our part in global efforts to support Ukraine and isolate Russia from global capital markets. We are not aware of any jurisdiction that has specifically addressed the effect of their sanctions regime on stewardship activities, let alone proxy advice. We also have customers in many jurisdictions, and we recognize that the scope of sanctions, as well as the legal effect of the applicable sanctions in those jurisdictions on stewardship activities, may vary. Our approach should not be understood as legal advice to our customers on whether voting or not voting in any particular situation would be permissible. Likewise, while we believe we have a reliable process for identifying sanctioned companies and individuals, the need to transliterate Russian names complicates this effort and we cannot guarantee that we will always identify any sanctioned company or individual mentioned in one of our reports. Finally, we remain in close contact with other participants in the proxy voting chain, who all must consider their own responsibilities and determine their own approach to this issue. Those participants’ decisions could affect Glass Lewis’ ability to provide research and voting recommendations, as well as vote execution services, in certain instances.

Non-Russian Companies with Material Exposure to Russia

We are also mindful that the governance consequences of the war extend beyond sanctioned Russian companies and individuals. Many non-Russian companies that do business in Russia have had to decide whether to continue those activities. We believe that companies that continue to operate in Russia in the current political environment are likely to face increased stakeholder scrutiny of their approach, which may escalate to material reputational damage that could affect shareholder value.

Glass Lewis is closely monitoring the actions and responses of companies that are materially exposed to Russia. While we do not believe it is our position to make judgment calls on companies’ strategies with respect to their presence in Russia, we believe that, from a governance standpoint, shareholders can reasonably expect companies that have decided to maintain material activities or operations in Russia to provide extensive disclosure to the market, clearly outlining the basis on which this decision was made, the extent of the company’s exposure to Russia, and an evaluation of the risk associated with maintaining activities or operations in Russia, as well as any actions that have been taken to mitigate this risk. Further, we believe that shareholders can reasonably expect periodic updates from such companies as the war progresses.

Among other things, in analyzing a company’s approach to this issue, we may consider:

• Disclosure:
  • Has the company provided any disclosure on its perceived risks of continuing operations in Russia?
  • Has the company responded to any public stakeholder concerns on its approach?
• Industry/business model:
  • How difficult would it be for the company to discontinue its activities in Russia?
  • Is the company providing essential products or services to Russian citizens?

Accordingly, our research on companies that are materially exposed to Russia will include some analysis of the company’s exposure and its disclosures on this issue. In cases where we conclude that shareholders have not been provided with sufficient disclosure on the risk assessment made for continuing the company’s operations in Russia, we may recommend that shareholders vote against the chair of the governance committee or of the board of directors, as applicable.

Controversy Alerts

Glass Lewis may also issue a Controversy Alert to flag the meetings of companies with material exposure to Russia. Glass Lewis Controversy Alerts help our customers identify the most controversial issues at shareholder meetings across the globe, allowing them to focus on these issues and make better informed voting decisions. In the current environment, if a company has material exposure to Russia and has not made sufficient disclosure about its operations there or is receiving public stakeholder criticism of its continued Russian operations for other reasons, Glass Lewis has issued, and expects to continue to issue, Controversy Alerts highlighting this issue for our customers’ consideration.

Cybersecurity Safeguards

Lastly, in light of the potential risk for Russia to engage in malicious cyber activity, Glass Lewis has also taken a number of precautions to ensure the safety and integrity of its systems and customers’ data. In particular, we have been in touch with our key information technology providers on cybersecurity precautions, including DDoS mitigation and security of our cloud infrastructure, and have reinforced to our employees the importance of being vigilant to phishing attacks and suspicious activity.

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As the world continues to react to Russia’s egregious actions, the scope and nature of the sanctions imposed on Russian companies and individuals are still evolving, as are societal expectations for non-Russian businesses to sever ties with Russia. At Glass Lewis, we will continue to monitor these sanctions, as well as the broader governance implications of the conflict, and continue to consider how best to respond to these developments. Customers interested in learning more about Glass Lewis’ approach to this issue should contact their client service representative.

Chris Rushton also contributed to this post.