Written by John Piasta, Jon Truswell, Steven Bodi and Hind Masri
Institutional Shareholder Services ("ISS") and Glass, Lewis & Co ("Glass Lewis") have both released their updates to their respective Canadian proxy voting guidelines for the 2020 proxy season. The ISS updates apply to shareholder meetings of publicly traded Canadian companies occurring on or after February 1, 2020, while Glass Lewis updates apply to meetings that are held on or after January 1, 2020.
Recommendations from proxy advisory firms such as ISS and Glass Lewis can have a significant impact on the outcome of business conducted at shareholder meetings, especially if institutional investors comprise a significant portion of the company's shareholder base. Canadian public companies should review the updates with their legal counsel to determine the impact on disclosure and governance practices, and take steps to mitigate any potential adverse voting recommendations from ISS or Glass Lewis.
A. Director Considerations (Glass Lewis & ISS)
Director Attendance and Committee Meeting Disclosure
Starting in 2020, Glass Lewis will generally recommend voting against a governance committee chair where board and committee meeting attendance is not publicly disclosed in an issuer's information circular.
Starting in 2021, Glass Lewis will generally recommend voting against:
- the governance committee chair, when the number of audit committee meetings that took place during the most recent year is not disclosed; and
- the audit committee chair, if the audit committee has not met least four times during the most recent year.
Similarly, ISS will continue making "withhold" recommendations on a case-by-case basis for individual director nominees of a TSX-listed company if:
- a company has not adopted a majority voting policy and an individual director has attended less than 75% of the board and key committee meetings (audit, compensation and nominating) in the past year, without a valid reason; or
- a company has adopted a majority voting policy and an individual director has attended less than 75% of such meetings and demonstrated a pattern of low attendance in prior years.
ISS emphasized that its 75% attendance threshold is calculated on the aggregate of a director's board and key committee meetings attendance. It has also clarified that, when evaluating director attendance for TSX-listed companies, exceptions will be made on a case-by-case basis for director nominees who have only served for part of the fiscal year, if they are a nominee at a recently listed issuer or of an issuer that has recently graduated to the TSX.
Board Skills (Glass Lewis)
In line with its 2019 update, Glass Lewis will now use a board skill matrix when evaluating board competencies and identifying potential deficiencies. The board skills matrix was updated earlier this month (available here) and provides an overview of the skills considered broadly applicable to S&P/TSX 60 Index companies, as well as specific skills required in certain economic sectors. Glass Lewis expects S&P/TSX 60 Index companies to provide meaningful disclosure of board skills and competencies, and may recommend voting against the chair of the nominating committee (or the equivalent) if a board has failed to address any material gaps regarding the mix of skills and experience of its board members.
Director Overboarding (ISS)
ISS' updated its overboarding policy to introduce a limited exception in circumstances where a director nominee has publicly disclosed in a company's proxy circular that he/she will be stepping off a board at its next annual meeting. Conversely, ISS will also include new commitments, even if the shareholder meeting in connection with his/her election to the new board has not yet taken place.
Further to its 2019 guidelines, ISS considers an individual director nominee to be "overboarded" if: (i) in the case of a CEO, he/she sits on the board of more than two public companies (including the company of which he/she is CEO); and (ii) in the case of other directors, he/she sits on more than five public company boards.
B. Majority Owned Companies (Glass Lewis & ISS)
Glass Lewis expanded its policy on independence standards, providing that controlled companies are not required to meet their minimum board size threshold (five directors for TSX issuers and four directors for TSX-V issuers).
ISS clarified that its policy of supporting director nominees on a case-by-case basis who are, or who represent, a controlling shareholder of a majority-owned company applies only to non-management director nominees. ISS has emphasized that this policy exemption will not apply if any of ISS' specified independence and governance criteria are not met.1
C. Executive Compensation (Glass Lewis & ISS)
Compensation Practices (Glass Lewis)
Glass Lewis has clarified its approach on several executive compensation topics and how these factor into its voting recommendations, including: (i) contractual payments and arrangements; and (ii) company responsiveness to "say-on-pay" proposals. Beyond quantum of contractual payments, Glass Lewis considers the design of executive compensation and in general, does not favour agreements that are excessively restrictive to the benefit of the executive or could incentivize behaviours that are not in the best interest of a company. Below are examples that may drive a negative voting recommendation:
- An excessively broad definition of change of control or lack of a double-trigger requirement for any benefit to the executive;
- Inappropriate or excessive severance payments (typically any multiple over three);
- Inadequately explained or excessive sign-on awards or arrangements;
- Multi-year guaranteed bonuses or awards; and
- Failing to address concerning practices when amending employment agreements.
Glass Lewis also identified additional practices, such as: (1) targeting overall levels of compensation at higher than median without adequate justification; and (2) payment of discretionary bonuses when short or long-term incentive plan targets were not met, that may cause a negative vote recommendation.
Responsiveness to Say-on-Pay Votes (Glass Lewis)
Glass Lewis expanded its discussion of appropriate response following low shareholder support on a say-on-pay proposal. For companies that receive a significant level of opposition (i.e. 20% or greater), Glass Lewis recommends that the board engage with its shareholders to explore concerns. Suggested engagement includes entering dialogue with large shareholders to identify concerns and, where reasonable, implementing changes to the company's compensation program.
Expectations regarding appropriate engagement in such instances will correspond to the level of shareholder opposition, both in the most recent year and through persistent shareholder discontent. In the absence of evidence the board is actively engaging shareholders, Glass Lewis may recommend voting against compensation committee members. Glass Lewis expects robust disclosure of engagement activities and specific changes made in response to shareholder feedback. Failure to provide such disclosure may result Glass Lewis recommending voting against an upcoming say-on-pay proposal.
ISS updated is Financial Performance Assessment ("FPA") secondary screen. The FPA screen will now be based on new Economic Value Added ("EVA") metrics instead of generally accepted accounting principles ("GAAP") metrics used previously. GAAP metrics will continue to be displayed on research reports for informational purposes but will no longer be part of the quantitative screen. Although these metrics may continue to inform its overall evaluation of alignment between long-term pay and performance. ISS believes EVA metrics may offer a valuable tool to supplement Total Shareholder Return ("TSR") to help investors better assess pay and performance alignment. ISS commented in its updated Executive Compensation FAQ released this month that TSR will remain the most impactful performance measure.
D. Equity Plans for Venture Issuers (ISS)
ISS introduced a new policy pertaining to "evergreen plans" for venture issuers that enable auto-replenishment of share reserves without requiring periodic shareholder approval at least every three years. The policy was introduced in response to the increasing number of listings on the Canadian Securities Exchange, where such issuers (unlike TSX and TSXV-listed issuers) are not required to periodically seek shareholder reconfirmation of evergreen plans. The new policy will take effect after a one-year transition period. Beginning in 2021, ISS will generally vote "withhold" for the compensation committee members – or the board chair, if the issuer does not have a compensation committee – if the company maintains an evergreen plan and has not sought shareholder approval in the past two years and does not plan to request approval at the upcoming annual meeting.
E. Excessive Non-audit Fees (Glass Lewis & ISS)
In determining whether the standard "non-audit (other) fee" category is excessive, ISS will now review circumstances where such fees relate to significant one-time capital events, including an initial public offering, emergence from bankruptcy, spinoffs and M&A transactions. In instances where a company makes public disclosure of the amount and nature of fees for such events, ISS will make an exception where such fees may be excluded from the non-audit (other) fee when determining whether non-audit fees are excessive. Generally, non-audit (other) fees will be considered excessive if these fees exceed audit, audited-related and tax compliance or preparation fees.
Glass Lewis also clarified its policy, and will generally recommend voting against a company's audit committee members if a company has excessive non-audit fees for two consecutive years.
F. CEO/CFO on Audit/Compensation Committee (ISS)
ISS updated its policy on former CEOs and CFOs serving on the audit and/or compensation committee of a TSX-listed company. The update extends its "withhold" recommendation for director nominees to include directors who served as the CEO of an affiliate or newly acquired company within the past five years or three years in the case of the CFO. Accordingly, ISS will generally recommend that shareholder vote "withhold" for:
- director nominees who served as the CEO of the company or its affiliates within the past five years (or as CEO of a company acquired within the past five years) and is a member of the audit or compensation committee of the board of directors.
- director nominees who served as the CFO of the company or its affiliates within the past three years (or as CFO of a company acquired within the past three years) and is a member of the audit or compensation committee of the board of directors.
ISS will continue to evaluate on a case-by-case basis whether support is warranted for any former CEO on the audit or compensation committee following the five-year period.
G. Board Diversity (Glass Lewis)
In keeping with the intention of the gender diversity policies of the Canadian Securities Administrators in National Instrument 58-101 Disclosure of Corporate Governance Practices ("NI 58-101"), certain amendments to the Canada Business Corporations Act ("CBCA") came into force on January 1, 2020. These amendments impose new disclosure obligations regarding diversity of directors and senior management for all CBCA-incorporated reporting issuers.
The amendments broaden disclosure requirements beyond gender to include other "designated groups". CBCA-incorporated reporting issuers are now required to disclose the number and percentage of women, Aboriginal persons, members of visible minorities and persons with disabilities on the board of directors and within senior management. Unlike disclosure requirements under NI 58-101, venture issuers are not exempted from these new requirements under the CBCA. For further information about the amendments, please see our earlier discussion about the expanded diversity disclosure here and other amendments here.
While neither ISS nor Glass Lewis have altered their guidelines based on these amendments, Glass Lewis specifically stated that it intends to review any new diversity disclosure, and where relevant, reflect such expanded disclosure in its voting recommendations for director nominees of TSX-listed issuers.