Written by John Piasta, Kristopher Hanc, Hind Masri, William Payne
Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) have both released updates to their respective Canadian proxy voting guidelines for the 2021 proxy season. The ISS updates apply to shareholder meetings of publicly traded Canadian companies occurring on or after February 1, 2021, while the Glass Lewis updates apply to meetings that are held on or after January 1, 2021.
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
Gender Diversity (ISS and Glass Lewis)
Both ISS and Glass Lewis outline enhanced policies regarding gender diversity. Such policies are in line with amendments to the Canada Business Corporations Act (CBCA) that came into effect on January 1, 2020, and imposed heightened disclosure obligations regarding diversity of directors and senior management for all CBCA-incorporated reporting issuers.
Starting on January 1, 2021, Glass Lewis will note as a concern boards consisting of fewer than two female directors. The current requirement of at least one female board member to avoid a negative voting recommendation will remain for 2021.
Starting on January 1, 2022, Glass Lewis will generally recommend voting against the nominating committee chair if the board has fewer than two female directors. The current policy for companies with fewer than six directors will remain: at least one female board member is required to avoid a negative recommendation.
In both 2021 and 2022, Glass Lewis may refrain from making a negative recommendation if the board provides sufficient rationale or a plan to address the lack of board diversity.
ISS places similar emphasis on gender diversity. Effective February 1, 2022, ISS will recommend voting against the chair of the nominating committee (or its equivalent) where women represent less than 30 percent of the board and:
- The company has not disclosed a formal written gender diversity policy; or
- The company's formal written gender diversity policy does not include a commitment to achieve at least 30 percent women on the board over a reasonable timeframe.
The 2022 ISS policy represents a strengthened stance, as the current mandate is to recommend a vote against the chair of the nominating committee (or its equivalent) if:
- The company has not disclosed a formal written gender diversity policy; and
- There are no female directors on the board of directors.
Board Skills (Glass Lewis)
Continuing with its 2019 update, Glass Lewis employs the use of a skills matrix to evaluate board competencies and identify potential deficiencies. The board skills matrix was updated in January 2020 and divides companies into five broad sectors: Financial, Industrial, Consumer, Pharmaceutical, and Resources. Glass Lewis identifies core skills within each industry to generate a matrix of skills applicable to TSX Index 60 companies, and expects adequate disclosure of board skills and competencies. Should a board fail to address any material insufficiencies regarding the board's skills and competencies, Glass Lewis may recommend voting against the chair of the nominating committee (or its equivalent).
Board Refreshment (Glass Lewis)
Glass Lewis will implement a policy supporting board refreshment to allow for new and different ideas. Beginning in 2021, Glass Lewis will note as a potential concern instances where the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board within the past five years. Glass Lewis will not make negative recommendations solely on this basis, though insufficient board refreshment may be a contributing factor in potentially negative recommendations if other board-related concerns have been identified.
Financial Expertise (Glass Lewis)
The 2021 Glass Lewis policies have a stronger scrutiny on professional financial expertise concerning audit committees than previous policy guidelines. Glass Lewis is of the view that at least one member of the audit committee should have experience as a certified public accountant, Chief Financial Officer, corporate controller or a similar position. This criterion is slightly stricter than the CSA's definition of "financial literacy" and is closer to the SEC's for "audit committee financial experts". Audit committees deemed to have insufficient financial expertise will be flagged as a concern. However, Glass Lewis will generally refrain from making recommendations based solely on financial expertise, or lack thereof, except where Glass Lewis identifies other concerns with the performance of the audit committee.
Attendance/Committee Meeting Disclosures (Glass Lewis)
Continuing with its announcement in 2020, and beginning in 2021, Glass Lewis will recommend voting against the governance committee when: (i) records for boards and committee meeting attendance are not disclosed; and (ii) the number of audit committee meetings that took place during the most recent year is not disclosed. Additionally, Glass Lewis will recommend voting against the audit committee chair if the audit committee did not meet at least four times during the year.
Exclusive Forum (ISS & Glass Lewis)
In response to an increase in the number of issuers proposing exclusive forum amendments to their constating documents, both Glass Lewis and ISS have released corresponding voting guidelines. Exclusive forum provisions are set out in an issuer’s articles or by-laws and restrict a shareholder’s ability to commence legal proceedings against the issuer to a specific jurisdiction. While both firms recognize that such provisions may help reduce the high costs accrued through litigation, as well as avoiding potentially frivolous and opportunistic lawsuits, in general, ISS and Glass Lewis view curtailing the jurisdictions in which shareholders may pursue legal remedies as not serving the best interests of the shareholders.
ISS recommends voting on a case-by-case basis regarding proposals to adopt an exclusive forum provision. Assessment of an exclusive forum provision relies, in part, on a company's past performance regarding corporate governance and shareholder rights. An exclusive forum provision is not likely to win a positive voting recommendation if there is no compelling rationale and evidence of harm due to shareholder proceedings outside of the jurisdiction of incorporation. ISS accounts for:
- Jurisdiction of incorporation;
- Board rationale for adopting exclusive forum;
- Legal actions subject to the exclusive forum provisions;
- Evidence of past harm as a result of shareholder legal action against the company originating outside the jurisdiction of incorporation;
- Company corporate governance provisions and shareholder rights; and
- Any other problematic provisions that raise concerns regarding shareholder rights.
Glass Lewis, meanwhile, recommends that shareholders vote against any amendments to bylaws or articles seeking to implement exclusive forum provisions unless the company:
- Provides a compelling argument on why the provision would directly benefit shareholders;
- Provides evidence of abuse of legal process in other, non-favoured jurisdictions;
- Narrowly tailors such provisions to the risks involved; and
- Maintains a strong record of good corporate governance practices.
Under Glass Lewis guidelines, if a board seeks shareholder approval of an exclusive forum clause as part of a package of amendments, rather than a stand-alone document, Glass Lewis will assess the importance of the accompanying provisions in determining the vote recommendation for the proposal.
B. Disclosure Practices
Environmental and Social Risk Oversight (Glass Lewis)
Glass Lewis has updated its guidelines concerning board-level oversight of environmental and social issues. As of January 1, 2021, Glass Lewis will note as a concern when boards of companies in the TSX 60 index do not provide clear disclosure concerning the board-level oversight given to environmental and social issues. This policy will be enhanced by January 1, 2022, when Glass Lewis will generally recommend voting against the governance chair of a company in the TSX 60 index that fails to provide explicit disclosure regarding the board's role in overseeing environmental and social issues.
Poor Disclosure (Glass Lewis)
Glass Lewis has updated and expanded its policies regarding poor corporate disclosure. The firm will enact a stricter voting policy where disclosure standards are poor, unclear, outdated or contradictory. This enhanced policy also captures the quality and clarity of disclosure for CBCA companies as it relates to the disclosure of representation of Designated Groups in board and management-level positions. Glass Lewis will assign responsibility to the chair of the governance committee for poor disclosure practices.
C. Change of Continuance (Glass Lewis)
Glass Lewis has updated its corporate governance policies to require information on proposals for a change of continuance in which a company proposes to cease to operating as an entity in one Canadian province in favor of another. Underpinning this development is a goal of transparency. Specifically, Glass Lewis expects shareholders be presented with a comparison of the changes between the two jurisdictions, allowing shareholders to weigh the advantages and disadvantages of each option. Glass Lewis will evaluate each change individually to determine whether the proposed change is ultimately in the best interests of the company and its shareholders.
If your business or organization has questions regarding the 2021 ISS and Glass Lewis updates, please contact the authors of this blog or a member of the Bennett Jones Capital Markets group.