In preparation for the upcoming proxy season, issuers should familiarize themselves with the Canadian proxy voting guidelines recently published by Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. (Glass Lewis), respectively. This bulletin addresses certain topics covered by the ISS benchmark policy recommendations and Glass Lewis's proxy guidelines and shareholder initiatives guidelines, respectively, in each case for the 2020 proxy season in respect of issuers listed on the Toronto Stock Exchange (TSX).
PROXY ADVISORY FIRMS' ROLE
Proxy advisory firms review and analyze matters put forward for consideration at shareholder meetings and make highly influential voting recommendations concerning such matters to their clients, who are typically institutional investors. The items considered range from routine matters, such as the appointment of auditors, to proxy contests and complex business acquisition transactions that involve a voting decision, covering both management initiatives and shareholder proposals. A voting recommendation is generally based on the issuer's adherence to the practices and standards contained in the proxy advisory firm's voting guidelines for that proxy season.
In its 2019 guidelines, ISS stated that it will generally recommend that shareholders "withhold" votes from the election of individual director nominees in two situations related to attendance:
- The issuer has not adopted a majority voting director resignation policy and the director has attended less than 75 per cent of the board and key committee meetings held within the past year without a valid reason for those absences; or
- The issuer has adopted a majority voting director resignation policy, the director has attended less than 75 per cent of the board and key committees held in the past year without a valid reason for those absences and there is a pattern of low attendance in prior years.
ISS has clarified its director attendance policy for the 2020 proxy season by providing that it may not apply the foregoing voting recommendation standards where (i) the nominee served as a director of the issuer for only part of the fiscal year, or (ii) the issuer is a newly publicly listed company or recently graduated to the TSX. ISS also further clarified that it evaluates whether directors have attended at least 75 per cent of the aggregate of their board and key committee meetings held within the past year.
Glass Lewis has not changed its director attendance policy for the 2020 proxy season, and so will continue to typically recommend that shareholders "withhold" votes from the election of an individual director nominee who has served for at least one full year and fails to attend 75 per cent of board and/or committee meetings without a reasonable explanation. However, Glass Lewis's 2020 guidelines provide that, commencing with the 2020 proxy season, Glass Lewis will generally recommend that shareholders "withhold" votes from the election of the governance committee chair when records for board and committee meeting attendance are not disclosed. The 2020 guidelines also provide that, beginning in 2021, Glass Lewis will generally recommend that shareholders "withhold" votes from the election of the audit committee chair if the audit committee did not meet at least four times during the year. Further, beginning in 2021, Glass Lewis has announced that it will generally recommend that shareholders "withhold" votes from the election of the governance committee chair when the number of audit committee meetings that took place during the most recent year is not disclosed.
In its 2019 guidelines, ISS stated that it may recommend that shareholders vote in favour of the election of director nominees who are or who represent a controlling shareholder of a majority-owned issuer—excluding dual class share companies—under modified board and committee independence policies, if the controlled company meets specified independence and governance criteria. In its 2020 guidelines, ISS has clarified that the modified board and committee independence policies apply only to non-management directors and is not intended to circumvent ISS voting guidelines otherwise applicable to management director nominees. For example, the modified policy provides that a majority of the audit and nominating committees at such controlled companies should be either independent directors or, in addition to at least one independent director, may be non-management directors who are related to the controlling shareholder.
For the 2020 proxy season, Glass Lewis has expanded upon its approach to controlled companies by providing that such issuers are not required to meet Glass Lewis's minimum board size threshold (i.e., five directors for TSX-listed issuers).
Excessive Non-Audit Fees
In its 2019 guidelines, ISS stated that it will generally recommend a "withhold" voting recommendation for individual directors who are members of the audit committee if non-audit ("other") fees paid to the external audit firm exceed audit fees plus audit-related fees plus tax compliance/preparation fees. "Other" fees excluded fees related to the following significant one-time capital restructuring events: initial public offerings, emergence from bankruptcy and spinoffs. For the 2020 proxy season, ISS has revised its excessive non-audit fees policy by including these specified significant one-time capital restructuring events as examples only, meaning that other similar events—such as an M&A transaction—may now also fall under the exemption.
Glass Lewis has a similar excessive non-audit fee policy. In its 2019 guidelines, Glass Lewis stated that it may issue a "withhold" voting recommendation from the chair of the audit committee that served during the audit if audit-related fees are less than 50 per cent of the total fees billed by the auditor. Glass Lewis's 2020 guidelines expand the scope of this policy, stating that it may issue a "withhold" voting recommendation from all members of the audit committee who served during the period in question in the second consecutive year of excessive non-audit fees.
Glass Lewis has made changes to its executive compensation policy for the upcoming 2020 proxy season, clarifying that the following practices may result in a negative recommendation:
- Excessively broad change in control triggers, as well as single-trigger or modified single-trigger arrangements
- Inappropriate severance entitlements, such as exceeding a multiple of three times salary and bonus, or including long-term incentives in cash severance calculations
- Inadequately explained or excessive sign-on arrangements
- Guaranteed bonuses, especially as a multi-year occurrence
- A failure to address any concerning practices when amending employment agreements
Glass Lewis has also expanded on its policy in the area of company responsiveness following low shareholder support for say-on-pay proposals, noting its expectations regarding differing levels of responsiveness depending on the severity and persistence of shareholder opposition. Absent such disclosure, Glass Lewis may consider recommending that shareholders votes "against" an upcoming say-on-pay proposal.
For the 2020 proxy season, ISS has changed its Financial Performance Assessment (FPA) secondary pay-for-performance modifier screen to be based on Economic Value Added (EVA) metrics, instead of the generally accepted accounting principles (GAAP) metrics used in 2019. The GAAP metrics will continue to be displayed on ISS research reports for informational purposes. The four EVA metrics to be used by ISS in the FPA will be EVA Margin, EVA Spread, EVA Momentum vs. Sales and EVA Momentum vs. Capital.
Gender Pay Equity
Glass Lewis has codified its approach to shareholder proposals, requesting that issuers disclose the difference between male and female median earnings. On a case-by-case basis, Glass Lewis will review such proposals and generally recommend that shareholders vote "against" resolutions where issuers have provided sufficient information regarding (i) their diversity initiatives and (ii) how they are ensuring that men and women are paid equally for equal work.
Former CEO/CFO on Audit/Compensation Committee
For the 2020 proxy season, ISS has aligned its former CEO/CFO on Audit/Compensation Committee policy with its definition of director independence. The current policy recommends that shareholders withhold from voting for directors that served as the CEO/CFO of the issuer within the past five/three years, as applicable. In addition, the new policy outlines that where such director is also a member of the issuer's audit or compensation committee, ISS will recommend that shareholders withhold from voting for a director who served as the CEO/CFO of an affiliate of the issuer—or a company acquired by the issuer—within the past five/three years, as applicable.
Advance Notice Requirements
For 2020, ISS has also published an updated Advance Notice Requirements (ANR) FAQ for Canada, wherein its expresses new skepticism regarding the actual use of ANR by issuers; the ISS finds that ANRs are primarily adopted for the purpose of providing the issuer and its board of directors with notice that a dissident wants board change and to prevent a proxy contest at or shortly before the shareholder meeting, while the benefit to shareholders appears minimal at best. It will be interesting to see if ISS issues more "against" recommendations concerning the adoption of ANRs or amendments to by-laws containing ANRs going forward.
CANADA BUSINESS CORPORATIONS ACT AMENDMENTS
Issuers incorporated under the Canada Business Corporations Act (CBCA) are reminded of recent amendments requiring them to provide, in 2020 for the first time, additional diversity disclosure in connection with their next annual meeting of shareholders that effectively broadens the current "comply-or-explain" disclosure regime in Form 58-101F1 under the Canadian Securities Administrators's National Instrument 58-101 – Disclosure of Corporate Governance Practices to include such disclosure in respect of Aboriginal peoples, persons with disabilities, members of visible minorities and women, being the "designated groups," as defined under the Employment Equity Act (Canada).
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