Written By Kristopher Hanc, Bruce Hibbard, John Piasta and Adam Weryha
Glass, Lewis & Co (Glass Lewis) and Institutional Shareholder Services (ISS) have both released updates to their Canadian proxy voting guidelines for the 2023 proxy season. The Glass Lewis updates apply to shareholder meetings of publicly traded Canadian companies held on or after January 1, 2023, while the ISS updates apply generally to meetings occurring on or after February 1, 2023.
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.
The most significant changes in the Glass Lewis and ISS policies relate to board diversity, environmental and climate related matters and executive compensation. These changes are summarized below.
Gender Diversity (Glass Lewis & ISS)
ISS and Glass Lewis have both updated their policies related to board diversity.
As was announced in 2022, Glass Lewis is transitioning from a fixed numerical approach to board gender diversity to a percentage-based approach. For meetings occurring on or after January 1, 2023, Glass Lewis will generally recommend voting against the nominating committee chair of any TSX company board that is not at least 30 percent gender diverse or the entire nominating committee of a board with no gender diverse directors. As in past years, Glass Lewis may refrain from making a negative recommendation where the board provides sufficient rationale or a plan to address the lack of board diversity.
ISS made similar updates to its gender diversity policy. Effective February 1, 2023, ISS will recommend voting against the chair of the nominating committee (or its equivalent) at S&P/TSX Composite companies where women represent less than 30 percent of the board. ISS will make an exception for companies that:
- joined the S&P/TSX Composite Index and were not previously subject to a 30 percent representation of women on the board requirement; or
- fell below the 30 percent threshold due to an extraordinary circumstance after having achieved such level of representation at the preceding annual meeting.
In such cases the companies must have also provided a publicly-disclosed written commitment to achieve at least 30 percent women on the board at or prior to their next annual meeting.
For TSX companies which are not also S&P/TSX Composite Index constituents, ISS will generally vote withhold for the chair of the nominating committee (or its equivalent) if there are no women on the board of directors. ISS will not apply the policy to newly publicly-listed companies within the current or prior fiscal year, to companies that have graduated from the TSX Venture exchange within the current or prior fiscal year or companies having less than four directors, assuming the companies publicly disclose a commitment to add at least one woman to the board at or prior to their next annual meeting.
Ethnic/Racial Diversity (ISS)
Notably, ISS announced that it will be broadening its Canadian policy on diversity beyond gender to include racial and/or ethnic diversity1 requirements.
Beginning in 2024, ISS will generally recommend voting against the nominating committee chair (or its equivalent) at S&P/TSX Composite Index companies that have no apparent racially or ethnically diverse members on the board. ISS will make an exception if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm public commitment to appoint at least one racial and/or ethnically diverse member at or before the next annual meeting.
ISS is the first major proxy advisor in the Canadian market to expand its diversity policy beyond gender. The new requirement broadly aligns with amendments to the Canada Business Corporations Act (CBCA) that came into effect on January 1, 2020. Those CBCA amendments broadened disclosure requirements on board diversity beyond gender for publicly traded corporations under the CBCA—for more information see our previous insight, New Diversity Disclosure Requirements for Public CBCA Corporations.
Environmental and Social Risk Oversight (Glass Lewis)
Continuing with its 2022 update regarding board-level oversight of environmental and social issues, for meetings held after January 1, 2023, Glass Lewis will generally recommend voting against the governance committee chair of any company in the S&P/TSX Composite that fails to provide explicit disclosure concerning the board's role in overseeing environmental and social issues. Glass Lewis continues to be of the view companies should determine the best structure for this oversight.
Director Accountability for Climate-related Issues (Glass Lewis & ISS)
Both ISS and Glass Lewis have added new sections pertaining specifically to climate risk and related disclosure.
In Glass Lewis' view, companies with material exposure to climate risk, such as those that have been identified by Climate Action 100+, should provide clear and comprehensive disclosure regarding such risks, including how they are being mitigated and overseen. In line with this view, Glass Lewis believes that companies whose material exposure to climate risk stems from their own operations, should provide shareholders thorough climate-related disclosure that aligns with the recommendations of the Task Force on Climate-Related Financial Disclosures. Glass Lewis also believes that the boards of these companies should have explicit and clearly defined oversight responsibilities for climate-related issues.
Beginning January 1, 2023, Glass Lewis may recommend voting against the chair of the committee (or board) charged with oversight of climate-related issues—or if no committee has been charged with such oversight, the chair of the governance committee—where disclosures related to either climate risk or oversight, or both, are found to be absent or significantly lacking. Glass Lewis may extend its recommendation to additional members of the responsible committee in certain circumstances.
By contrast, the ISS policy targets companies that are significant greenhouse gas (GHG) emitters and is more focused on disclosure.
Effective February 1, 2023, ISS will generally recommend voting against or withhold from the chair of the responsible committee (or other directors on a case-by-case basis) at companies that are significant GHG emitters (either through their operations or their value chain) and that are not taking the minimum steps required to understand, assess, and mitigate risks related to climate change.
As a minimum, ISS expects companies to provide (1) detailed disclosure of climate-related risks in line with the Task Force on Climate-related Financial Disclosures recommendations, including board governance measures, corporate strategy, risk management analyses and metrics and targets, and (2) appropriate GHG emissions reduction targets. In ISS' view, medium-term GHG reduction targets or net zero-by-2050 GHG reduction targets relating to a company's operations (Scope 1) and electricity use (Scope 2) will satisfy the second step. To align with the ISS policy both these minimum criteria must be met.
Shareholder Proposals—Social and Environmental Issues (ISS)
ISS clarified its approach to evaluating social and environmental proposals by codifying certain criteria that ISS considers when assessing such proposals. Beginning in 2023, ISS will consider (1) whether the issues presented in a proposal are being appropriately or effectively dealt with through legislation or government regulation, and (2) whether there are significant controversies, fines, penalties or litigation associated with the company's practices related to the issue(s) raised in the proposal. The first change takes into account whether or not regulation or legislation is likely to occur and the second change clarifies that only controversies related to the issue raised in the proposal will be considered relevant.
Long-Term Incentive Awards (Glass Lewis)
In line with market trends, Glass Lewis increased its threshold for the minimum percentage of long-term incentive grants that should be performance-based from 33 percent to 50 percent.
Beginning January 1, 2023, Glass Lewis will note as a concern executive pay programs where less than half of an executive's long-term incentive awards are subject to performance-based vesting conditions. Glass Lewis may refrain from a negative recommendation in the absence of other significant issues with the program's design or operation, but notes that where performance-based awards are rolled back or eliminated from a company's long-term incentive plan it may result in an unfavorable recommendation.
Non-Employee Director Deferred Share Unit Plans (ISS)
In an effort to align its policy with shareholder expectations, ISS updated its policy for TSX-listed companies related to non-employee director (NED) deferred share unit plans. Under these types of plans shares are only issued to NEDs and only in lieu of director fees that would otherwise be payable in cash. ISS believes that such plans may assist in aligning the interests of NEDs with shareholders by developing an equity stake commensurate with directors' established fee structure.
Beginning February 1, 2023, ISS will recommend voting for NED deferred compensation plans:
- if deferred share units (DSUs) may only be granted in lieu of cash fees on a value-for-value basis (no discretionary or other grants are permitted); and
- that permit discretionary grants (not only in lieu of cash fees) if potential dilution, together with all other equity-based compensation, is 10 percent of the outstanding common shares or less or, if the plan includes a company matching or top-up provision, the shareholder value transfer (SVT) cost of the plan does not exceed the company's allowable cap; NED participation is acceptably limited; and certain amendments to the plan require shareholder approval, such as changes to eligibility, increases in the number of shares reserved for issuance or amendments to the plan amendment provisions.
Front-Loaded Awards (Glass Lewis)
Glass Lewis expanded its guidance related to front-loaded award practices. The updates address the rise in the use of "mega-grants" (being, outsized front-loaded awards to one particular individual), the increased restraint faced by boards when responding to unforeseen factors and situations where the use of front-loaded awards is intended to cover only the time-based or performance-based portion of an executive's long-term incentive awards.
The firm notes that it will weigh "mega-grants" with additional scrutiny. Where "mega-grants" have been granted and the awards present concerns such as excessive quantum, lack of sufficient performance conditions, and/or are excessively dilutive, among others, Glass Lewis may recommend withholding votes from the chair of the compensation committee.
If your business or organization has questions regarding the 2023 ISS and Glass Lewis updates, please contact the authors of this blog or a member of the Bennett Jones Capital Markets group.
1 For the purposes of the policy, ISS defines racial and/or ethnic diversity as Aboriginal peoples (persons who are Indigenous, Inuit or Métis) and members of visible minorities (persons, other than Aboriginal peoples, who are non-Caucasian in race or non-white in colour).