Written by Jon Truswell, Karen Keck, Brad Markel and Kismat Nijjar
Institutional Shareholder Services (ISS) and Glass, Lewis & Co (Glass Lewis) have both released their updates to their respective Canadian proxy voting guidelines for the upcoming 2017 proxy season. The ISS updates apply to shareholder meetings of publicly traded Canadian companies occurring on or after February 1, 2017, while Glass Lewis updates apply to meetings that are held in 2017.
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 component of the company's shareholder base. Canadian public companies should review the updates with their legal counsel to determine the likely impact and take steps to mitigate any potential adverse voting recommendations from ISS or Glass Lewis.
A. Director Overboarding Policy (ISS/GL – TSX Listed Issuers)
As we noted in our 2016 update, ISS and Glass Lewis announced tighter rules for director overboarding, which will be implemented in 2017. ISS and Glass Lewis have each adopted thresholds in which they will consider directors to be overboarded and define these thresholds for CEO's and non-CEO directors as follows:
- CEO: If the CEO sits on the board of more than two (>2) public companies (including the board of the company where they are CEO) for ISS and this applies to all executives for Glass Lewis.1
- Non-CEO directors: If the director sits on more than four (>4) public company boards for ISS and more than five (>5) public company boards for Glass Lewis.
ISS and Glass Lewis will make the following voting recommendations for overboarded directors:
- ISS: In the absence of a valid reason, ISS will issue a negative voting recommendation if an overboarded director attends less than 75% of his or her board and committee meetings.
- Glass Lewis: In making a voting recommendation against a specific director, Glass Lewis will consider a number of factors, including the size and location of the other public companies that the director serves as a board member, the director's role on such other boards and the attendance record of the director at each board meeting.
The Director Overboarding Policies do not apply to Reporting Issuers listed on the TSX Venture Exchange.
B. Shareholder Rights Plan Policy (ISS/GL – TSX and TSXV)
ISS and Glass Lewis have each revised their position on shareholder rights plans in light of the 2016 amendments to the take-over bid regime in National Instrument 62-104 – Take-Over Bids and Issuer Bids and National Policy 62-203 – Take-Over Bids and Issuer Bids. Among other changes, these amendments now require all non-exempt take-over bids to remain open for a minimum of 105 days (as opposed to 35 days under the old regime).
Under their updated policies, each of ISS and Glass Lewis will not support shareholder rights plans that require take-over bids to remain open for a minimum period of greater than 105 days.2
C. Director Compensation Practices (ISS/GL – TSX)
ISS will now recommend that shareholders withhold votes for members of the compensation committee (or potentially, the board chair or full board) if director compensation practices threaten a non-employee director's independence or are generally "problematic". Problematic director compensation practices include:
- excessive inducement grants to new directors (i.e., grants that are greater than standard market practice), which could compromise such director's judgment; and
- performance-based equity grants to independent directors (i.e., performance share units), which may result in the misalignment of the interests of independent directors and the interests of shareholders.
ISS has not provided guidance on what inducement grants they would consider to be "excessive" nor what performance-based equity grants may result in a "misalignment of interests."
Glass Lewis did not make changes to director compensation practices, but has previously stated that non-employee directors should receive "reasonable and appropriate" compensation and that equity grants to non-employee directors should not be tied to performance conditions.
D. Excessive Non-Audit Fees (ISS – TSX and TSXV)
ISS reviews all non-audit related fees of public companies to ensure that auditor independence is not compromised. Previously, ISS recommended withholding votes for individual directors that are members of the audit committee if the sum of non-audit fees paid to the external audit firm exceeded the sum of audit and audit-related fees. Under the new ISS updates, ISS will now issue negative recommendations against proposals to ratify auditors, and the election of individual audit committee members, if the sum of non-audit ("other") fees exceeds the sum of the audit fees, audit-related fees and tax compliance/preparation fees.
The new recommendations are rooted in a recognition by ISS that tax compliance and preparation services (two examples being the preparation of tax returns and refund claims) are most efficiently provided by a company's auditor and, consequently, such fees should not be included under "non-audit" fees for the purpose of the above calculation, while fees for tax advice, planning or consulting will continue to be included in "non-audit" fees. The ISS guidelines also note that in order for ISS to analyze whether a company's tax fees fall within its definition of "tax compliance and preparation services", companies should provide a sufficiently detailed breakdown for its tax fees.
Glass Lewis did not make any changes to its policy on non-audit fees from its 2016 policy. In its 2016 guidelines, Glass Lewis stated that it may recommend a withhold vote appointing the auditor when the sum of audit fees and audit-related fees total less than 50% of the company's overall fees to its auditor (excluding fees resulting from one-time transactions).
E. Board Responsiveness To Failed Advisory Role / Say-on-Pay (GL)
Glass Lewis is of the view that if more than 50% of the votes cast by shareholders opposed a say-on-pay proposal, shareholder concerns to such proposal should be addressed. Glass Lewis may recommend a vote against members of the compensation committees if the committee fails to address shareholder concerns.
ISS does not address say-on-pay proposals in its 2017 updates. However, in its 2016 Proxy Voting Guidelines for TSX-listed companies, ISS states that it will take into account a company's response to a say-on-pay vote that received less than 70% support.
F. Equity Compensation Plans (GL)
Glass Lewis previously opposed using the 10% rolling maximum limit typically set for Canadian stock option plans for full-value award plans (i.e., restricted share plans), given the greater costs to the company of issuing such full-value awards. Under the new guidelines, Glass Lewis specifies that full-value award plans with rolling limits above 5% are excessive, and may result in a Glass Lewis recommendation to vote against such plans.
G. 2017 Pay-For-Performance Evaluation and Peer Submission (ISS)
In a separate press release, ISS announced several changes to the methodology for its 2017 pay-for-performance evaluation. For 2017, ISS will use six financial metrics (return on invested capital (ROIC), return on assets (ROA), return on equity (R), revenue growth, EBITDA growth and growth in cash flow from operations), along with Total Shareholder Return, to evaluate a company's performance over a three-year period. Although ISS has previously evaluated the financial performance of a company relative to its peers, this update will allow the results of the evaluation to be compiled into a standardized table, which will be helpful in determining a company's relative financial performance.
ISS also announced that a peer submission group window will run from November 28, 2016 to December 9, 2016 to allow companies to submit their self-determined peer groups to ISS. This will allow ISS to take this information into account when determining the ISS peer group.
- The thresholds adopted by ISS and Glass Lewis for director overboarding in the context of a CEO are similar, but have been phrased differently.
- The bid period length adopted by ISS and Glass Lewis in relation to a shareholder rights plan are similar, but have been phrased differently.