Written by Jon C. Truswell, John E. Piasta 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 2019 proxy season. The ISS updates apply to shareholder meetings of publicly traded Canadian companies occurring on or after February 1, 2019, while Glass Lewis updates apply to meetings that are held on or after January 1, 2019.
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 have taken additional steps to increase the representation of women on boards and in executive positions.
ISS' gender diversity policy was previously applicable only to S&P/TSX Composite Index companies. It has now been expanded to apply to all "widely held" companies, defined by ISS as S&P/TSX Composite Index companies, as well as other TSX-listed companies designated as such by ISS based on the number of ISS clients holding securities in the company. ISS has indicated that a company should consult with ISS to determine whether it falls under ISS' "widely held" category.
Pursuant to this policy, ISS generally will recommend a withhold vote 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.
A company's gender diversity policy should continue to include a clear commitment to increasing 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 of a withhold vote. ISS will also consider a board's approach to considering gender diversity in executive officer positions, its goals, targets, programs and/or processes for advancing women in executive officer roles, and how the success of such programs and/or processes are monitored.
As with meetings held in 2018, an exemption to ISS' gender diversity policy continues to 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.
In contrast to ISS' gender diversity policy, Glass Lewis generally will recommend a withhold vote for the chair of the nominating committee if a company does not have at least one woman on the board but may also recommend voting against the chair of the nominating committee if board has not adopted a formal written diversity policy. A negative recommendation may be extended to the other members of a nominating committee depending on the size of the company, the industry in which the company operates, the degree of gender diversity on the management team, the company's governance profile and whether there are other concerns regarding the board's composition. However, Glass Lewis may not recommend a withhold vote if the company is not a S&P/TSX Composite Index issuer, or if 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. Environmental and Social Risk Oversight (ISS and Glass Lewis)
Environmental and social ("E&S") disclosure has continued to attract the attention of securities regulators, corporate governance advisors and institutional investors. In light of this, ISS and Glass Lewis have provided clarifications and amendments to their voting recommendations for meetings held in 2019.
ISS will continue making voting recommendations on a case-by-case basis in respect of E&S shareholder proposals and will assess certain prescribed factors when evaluating the likelihood that a shareholder proposal will protect or enhance shareholder value. Such factors include:
- whether the issue(s) presented in a shareholder proposal are more appropriately dealt with through legislation or government regulation;
- whether a company has already responded appropriately to the issue(s) raised in the proposal;
- whether a proposal is unduly burdensome or inordinately inflexible on the company;
- whether a company's approach to a proposal is comparative to industry standard practice for addressing the issue(s) raised; and
- if the proposal requests increased disclosure or greater transparency, whether sufficient information is already available to shareholders from either company or other publicly available sources and whether implementation of the request would reveal confidential information that could place a company at a competitive disadvantage.
ISS' 2019 policy has been updated to reflect that, in addition to the factors listed above, it will also be considering whether there are any significant controversies, fines, penalties or litigation associated with the company's existing environmental or social practices.
In its 2019 guidelines, Glass Lewis has formalized its approach to reviewing how boards are overseeing E&S issues. Glass Lewis' new policy requires that large-cap companies make annual, fulsome disclosure of relevant E&S risks and to clearly identify directors or board-level committees charged with oversight of such issues. If Glass Lewis determines that the mismanagement of E&S issues has resulted in a detriment to shareholder value, it will recommend that shareholders vote against directors responsible for the oversight of the identified E&S issue. Glass Lewis has also indicated that in the absence of explicit board oversight of E&S issues, they may recommend that shareholders vote against members of the audit committee. Certain mitigating factors may be taken into account when making this determination, including whether any corrective measures have been taken by the company and the effect such E&S issue may have on shareholder value.
C. Director Overboarding (ISS)
ISS has increased the number of permissible directorships that a director may hold without being "overboarded" and now 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 five public company boards.
While ISS previously issued a withhold recommendation for an "overboarded" individual director if the nominee 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, ISS has updated its policy and will no longer consider attendance.
- Glass Lewis did not make any changes to its existing policy and will generally recommend a withhold vote for a director nominee if: in the case of an executive officer, he/she serves on more than two TSX-listed company boards; and
- in all other cases, he/she serves on more than five TSX-listed company boards.
D. Executive Compensation (Glass Lewis)
Glass Lewis has expanded its discussion of several executive compensation topics and how these factor into its voting recommendations, including: (i) contractual payments and arrangements; (ii) grants of front-loaded awards; and (iii) "claw-back" provisions.
- Contractual payments and arrangements: Glass Lewis' updated policy states that contractual payments and sign-on arrangements, including a meaningful explanation of the payments and the process by which the amounts were reached, should be clearly disclosed by companies. In addition, Glass Lewis has indicated that it will assess excessive severance or generous sign-on bonuses which it believes are contrary to the pay-for-performance principle and may support a negative recommendation on say-on-pay proposals.
- Grants of front-loaded awards: Some companies have chosen to provide larger grant awards that are intended to serve as compensation for multiple years rather than utilizing annual grants of cash and equity awards. Glass Lewis cautions against using this approach on the basis that front-loaded awards may preclude improvements or changes reflective of evolving business strategies. When evaluating the risks associated with grants of front-loaded awards, Glass Lewis will take quantum, design and the company's rationale for granting awards under this structure into consideration when evaluating a company's say-on-pay proposal.
- "Claw-back" (recoupment) provisions: Glass Lewis continues to support the use of claw-back provisions and has expanded on its existing claw-back policy by focusing more on the specific terms of an issuer's particular recoupment policy. The inclusion of appropriately robust policies informs Glass Lewis' overall view of a company's compensation program, although the specific terms and conditions associated with a company's recoupment policy (or lack thereof) are not directly determinative of its say-on-pay recommendation.
Glass Lewis is of the view that a single factor is unlikely to result in a negative recommendation on a company's say-on-pay proposal; rather, Glass Lewis will apply a reasonableness standard when assessing these factors.
E. Virtual Shareholder Meeting (Glass Lewis)
While Glass Lewis will not make voting recommendations solely on the basis that a company holds virtual-only meetings (without the option of attending the meeting in person), it has expanded on its policy by clarifying that it will now recommend voting against members of a governance committee where the board is planning to hold a virtual-only shareholder meeting and the company does not provide adequate 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.
Specifically, the following factors will be reviewed by Glass Lewis when determining whether effective disclosure has been provided for in a company's circular:
- addressing the ability of shareholders to ask questions during the meeting;
- procedures for posting appropriate questions received during the meeting, and the company's answers, on the investor page of its website as soon as is practical after the meeting;
- addressing technical and logistical issues related to accessing the virtual meeting platform; and
- procedures for accessing technical support in the event of any difficulties accessing the virtual meeting.
Glass Lewis may recommend a withhold vote for members of the governance committee if the disclosure in a company's circular is found to insufficiently to address the points listed above.
F. Board Skills (Glass Lewis)
Glass Lewis has introduced a policy that will include the use of a board skill matrix (which has not been made publicly available) to assist in evaluating board competencies and any potential deficiencies at S&P/TSX 60 Index companies.
G. Director and Officer Indemnification (Glass Lewis)
Glass Lewis has added a discussion to their 2019 policy regarding their consideration of director and officer indemnification. While Glass Lewis maintains the position that directors and officers should be held to the highest standard when carrying out their duties, some degree of protection from liability is found to be reasonable in order to allow directors and officers to feel comfortable taking measured risks that may benefit shareholders. Accordingly, Glass Lewis may find it appropriate for a company to provide directors and officers with indemnification and/or to enroll them in liability insurance, provided that the terms of such agreements are reasonable.
H. Ratification of Auditor (Glass Lewis)
Glass Lewis has codified specific factors it will take into consideration when reviewing auditor ratification proposals. Specifically, Glass Lewis will assess an auditor's tenure, patterns of inaccurate audits, and any ongoing litigation or significant controversies that call into question an auditor's effectiveness. These factors may contribute to a negative voting recommendation against auditor ratification in limited circumstances.