Written by Jon C. Truswell, Brent W. Kraus, Karen Keck 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 upcoming 2018 proxy season. The ISS updates apply to shareholder meetings of publicly traded Canadian companies occurring on or after February 1, 2018, while Glass Lewis updates apply to meetings that are held on or after January 1, 2018.
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. Gender Diversity (ISS and Glass Lewis)
In keeping with the intention of the gender diversity policies in National Instrument 58-101 – Disclosure of Corporate Governance Practices (NI 58-101), ISS and Glass Lewis are taking steps to increase the representation of women on boards and in executive positions.
ISS has adopted a gender diversity policy. Pursuant to this policy, ISS generally will recommend to vote withhold for the chair of the nominating committee or the committee designated with the responsibility of a nominating committee (or, if no such committee or committee chair has been identified, for the chair of the board) if:
- a company has not adopted a formal written gender diversity policy per NI 58-101; and
- no female directors serve on its board.
The gender diversity policy should include a clear commitment to increase board gender diversity using measurable goals and/or targets to be achieved within a reasonable period of time. Boilerplate or contradictory language in a gender diversity policy may result in a recommendation to vote withhold. To assess a company's commitment to gender diversity, ISS will also consider a board's approach to considering gender diversity in executive officer positions, its goals and/or targets and programs and/or processes for advancing women in executive officer roles, and how the success of such programs and/or processes are monitored.
The ISS gender diversity policy will be applicable to S&P/TSX Composite Index companies in 2018 and to all TSX-listed company issuers in 2019, but will not apply to:
- newly publicly listed companies within the current or prior fiscal year;
- companies that have transitioned from the TSXV within the current or prior fiscal year; or
- companies with four or fewer directors.
Commencing in 2019, Glass Lewis generally will recommend to vote withhold for the chair of the nominating committee if a company does not have at least one woman on the board or has not adopted a formal written diversity policy. A negative recommendation may be extended to the entire nominating committee depending on the size of the company, the industry in which the company operates and the company's governance profile. However, Glass Lewis may not recommend to vote withhold if the company is not a S&P/TSX Composite Index issuer, or the company has either disclosed a sufficient rationale for not having any female board members or a plan to address the lack of diversity on the board.
B. Director Overboarding (ISS and Glass Lewis)
ISS currently considers an individual director nominee to be "overboarded" if:
- 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
- in the case of directors other than the CEO, he/she sits on more than four public company boards.
However, ISS will only issue a recommendation to vote withhold for an individual director nominee that is overboarded if such nominee has attended less than 75 percent of his/her respective board and committee meetings held within the past year without a valid reason for these absences.
Commencing on February 1, 2019, ISS will no longer consider attendance and will issue a recommendation to vote withhold for an individual director nominee if:
- in the case of any executive, he or she sits on the board of more than three public companies (including the company of which he/she is CEO); and
- in the case of non-executive directors, he/she sits on more than five public company boards.
In the case of CEOs, however, ISS will only issue a recommendation to vote withhold in respect of their outside boards.
Currently, Glass Lewis generally recommends to vote withhold for a director nominee if:
- in the case of an executive, he/she serves on more than two TSX-listed public company boards; and
- in the case of non-executive directors, he/she serves on more than five TSX-listed public company boards.
However, Glass Lewis may refrain from issuing a negative voting recommendation if: (i) it determines that a director can devote sufficient time to board duties, which determination is made by taking into account a number of factors, including the size and location of all the companies where the director serves as a director, the director's board roles at the companies in question, whether the director serves on the board of any large privately-held companies, the director's tenure on the boards in question, and the director's attendance record at all companies; or (ii) the company provides sufficient rationale for the director's continued board service.
Glass Lewis did not make any changes to its policy, but has clarified that, in the case of an executive other than a CEO, it will evaluate the specific duties and responsibilities of the executive's role in determining whether an exception is warranted to Glass Lewis' limit of two total board memberships for executives.
C. Advance Notice Requirements (ISS)
ISS has modified its policy in respect of advance notice requirements to provide that it will issue a recommendation to vote against any advance notice provision that: (i) calls for a nominating shareholder's presence at the meeting regardless of the number of votes obtained by his or her nominee; or (ii) would give the company broad discretion to require excessive additional information that, if requested and received, will be made publicly available to shareholders.
D. Pay for Performance (ISS)
To assess pay for performance, ISS begins with a quantitative screening tool, which includes the following measures:
- Relative Degree of Alignment, which compares the relative pay for performance alignment against ISS peers over three years;
- Multiple of Median, which compares the absolute size of pay package against ISS peers over one year; and
- Pay-TSR Alignment, which measures pay changes trends relative to shareholder value creation trends over five years.
The results of the quantitative analysis provides ISS with a low, medium or high level of concern, which dictates the level of scrutiny that applies when conducting the qualitative review of the compensation discussion and analysis that follows.
ISS has updated the quantitative screening tool to include the relative alignment between CEO pay and a company's financial performance. More specifically, the financial performance assessment compares the company's financial and operational performance relative to ISS peers over a two or three-year period. The financial performance is measured using the following metrics, selected and weighted by industry: return on invested capital, return on assets, return on equity, EBITDA growth and operative cash flow growth. The inclusion of the financial performance assessment in the quantitative analysis may impact the overall level of concern produced by this initial quantitative screening tool.
For 2018, ISS is also slightly modifying its TSR methodology. Instead of using a single date for the beginning and ending stock price in the TSR calculation, ISS will average the stock prices for trading days in the beginning month and the closing month used for the calculation.
E. Equity Scorecard Methodology (ISS)
ISS uses a scorecard to evaluate an equity plan based on the cost to shareholders, the historical grant practices (i.e., the use of equity) and governance features. Each of these pillars is scored and a score of 50 points out of 100 points will result in a recommendation to vote in favor of an equity plan as long as the equity plan does not have any "deal-breaker" identified by ISS (i.e., discretionary or insufficiently limited non-employee director participation, an amendment provision which fails to adequately restrict the company's ability to amend the plan without shareholder approval or a history of repricing stock options without shareholder approval). For 2018, ISS has updated the manner in which points are allocated under the grant practices pillar in respect of the requirement for S&P Composite Index companies to apply a post-exercise or post-settlement hold period to an executive's shares. Full points will be received for the hold period criteria if a 12-month hold period is applied after an option has been exercised or an award has settled. Previously points were awarded on a sliding scale for hold periods of twelve to 36 months in length.
F. Board Responsiveness to Shareholder Dissent (Glass Lewis)
Glass Lewis is of the view that the board has an imperative to respond to shareholder dissent from a proposal at an annual meeting of more than 20 percent of votes cast. In the event that 20 percent or more of shareholders withhold votes from a director nominee, vote against a management-sponsored proposal or vote for a shareholder proposal, Glass Lewis expects a board to respond appropriately. For example, if a say on pay proposal receives less than 80 percent support, the company should disclose, in detail, its outreach efforts to shareholders and any actions taken in respect of this outreach. Similarly, if a director nominee or an equity plan receives less than 80 percent support, the company should engage with its largest shareholders to identify the source of the concern and then take steps to demonstrate that it understands the concern. While the 20 percent threshold alone will not automatically generate a negative vote recommendation on a future proposal, it may be a contributing factor to vote against management's recommendation in the event Glass Lewis determines that the board did not respond appropriately.
G. Dual-Class Share Structures (Glass Lewis)
Glass Lewis added a discussion to their 2018 policy as to their consideration of dual-class voting structures when analyzing a company's governance. Glass Lewis is of the belief that such voting structures are typically not in the best interest of common shareholders. As such, Glass Lewis added the presence of dual-class share structures to the list of factors that it will consider in determining whether to issue negative recommendation on director elections at newly public companies.
H. Virtual Shareholder Meeting (Glass Lewis)
Glass Lewis has introduced a new policy regarding virtual shareholder meetings. In 2018, Glass Lewis will not make voting recommendations solely on the basis that a company is holding a virtual-only meeting; however, beginning in 2019, Glass Lewis will recommend voting against members of the governance committee where the board is planning to hold a virtual-only shareholder meeting and the company does not provide disclosure in its circular which assures shareholders that they will be afforded the same rights and opportunities to participate in virtual shareholder meetings as they would at an in-person meeting.
I. Proxy Access (Glass Lewis)
Glass Lewis has clarified that they will evaluate all proxy access proposals on a case-by-case basis. When these resolutions are proposed, Glass Lewis will examine the regulatory landscape to assess if existing proxy access rights are sufficient or preferable to those requested by the proposal. In instances where Glass Lewis believes that existing laws, policies or regulations either provide shareholders with adequate proxy access rights or would prohibit a company's adoption of the requested provision, they will recommend that shareholders vote against such proposals.