During the past year, several boards of public companies in the U.S. have amended their bylaws in order to disqualify from board service any nominees who receive compensation—aside from costs or indemnification–in connection with their board service or candidacy or service. (In general, the board of a public company in the U.S. can amend the corporate bylaws without the approval of shareholders.)

These bylaw amendments were recommended to boards by famed corporate law firm Wachtell, Lipton, Rosen & Katz after last spring’s proxy contest for board seats at Hess Corporation, in which the dissident shareholder formed a performance-based incentive arrangement with its board nominees that would have supplemented their director compensation had they been elected.

But the scope of the bylaw provisions at issue is not tailored to this situation. Rather, their wording appears to prevent a shareholder who wishes to nominate an individual for board service from forming any compensation arrangement—performance-based or not—with that individual.

Glass Lewis recognizes that unequal compensation arrangements—like that proposed by the Hess shareholder—among directors can harm shareholders by impeding board cohesion and by creating conflicts of interests for directors who have received supplemental pay from a shareholder in consideration for their board service.

However, given that a proxy contest can require an extensive time commitment from a dissident director nominee—and expose him or her to public criticism and negative attacks—these restrictive bylaws could hamper the ability of shareholders to recruit attractive candidates for board service.

We believe that shareholder board nominations can provide an important mechanism for shareholders to effect change at a company that suffers from poor management or where the board has acted contrary to shareholder interests. Thus, in some cases, these restrictions on compensation for dissident board nominees may deter beneficial shareholder activism.

Further, many companies’ bylaws already require disclosure of any compensation arrangements maintained by director nominees. So if a nominee is party to a problematic deal, shareholders can render judgment on it by voting against the nominee in the director election.

In light of these considerations, we think the best governance practice for boards wishing to implement a restriction on dissident nominee pay is to allow shareholders to vote upon the ratification of such a bylaw. As such, we will recommend that shareholders vote against members of the corporate governance committee at annual meetings if the board has adopted a bylaw that disqualifies director nominees with outside compensation arrangements and has done so without seeking shareholder approval.

To date, no board has put such a proposal to the shareholders. However, at least two companies that have adopted these bylaws appear to have had second thoughts, as the boards of both International Game Technology (which held a contested election at its last shareholder meeting) and Schnitzer Steel Industries have repealed similar provisions just months after inserting them into their bylaws. IGT stated that its deletion of the bylaw was motivated by concerns voiced by shareholders that it could promote board entrenchment.

More evidence that shareholders don’t like these provisions occurred last week when the board at Rockwell Automation, following conversations with shareholders regarding their version of the bylaw—and perhaps in anticipation of a significant level of negative votes at its shareholder meeting held February 4–stated that it would put the provision up for vote at the 2015 annual meeting.

So, while it may be too early to predict the viability of these broad restrictions on compensation for dissident board nominees as an enduring governance reform, the early returns suggest that shareholders want some level of input on board actions that diminish their rights in this area.

Glass Lewis’ policy with regard to the adoption of bylaws restricting director compensation is addressed in our 2014 U.S. Proxy Paper Guidelines.