Institutional Shareholder Services (ISS) and Glass Lewis have issued their Canadian proxy voting guidelines for the upcoming proxy season. The ISS Proxy Voting Guideline Updates are generally applicable as indicated below to shareholder meetings of TSX and TSX-V issuers held on or after February 1, 2017.
This year ISS addresses the following key issues: excessive non-employee director compensation, characterization of tax fees paid to external auditors and director independence in the face of certain relationships. The Glass Lewis 2017 Proxy Paper Guidelines provide updates to policies on failed say-on-pay votes, equity compensation plans involving "full value" awards such as RSUs, DSUs and share award plans, and director overboarding. Both ISS and Glass Lewis have updated their policies on shareholder rights plans (poison pills) to reflect the new Canadian take-over bid regime introduced in 2016.
ISS and Glass Lewis recommendations can have a substantial effect on the outcome of shareholder meetings, particularly for issuers with a significant institutional investor shareholder base. Issuers are encouraged to review the ISS and Glass Lewis updates with their advisors and legal counsel to prevent any potential negative voting recommendations at their upcoming meetings.
Compensation for non-employee directors (TSX). ISS has introduced a new case-by-case policy to identify problematic non-employee director compensation. Such compensation may include the issuance of excessive inducement grants that may impair a director's judgment and performance-based equity awards that can potentially result in a divergence of a director's interests with those of shareholders. ISS will recommend shareholders withhold their votes for election of directors who are compensation committee members where compensation practices pose a risk of compromising non-employee director independence.
Shareholder rights plans (TSX/TSX-V). ISS has amended its voting guidelines on shareholder rights plans to reflect the new take-over bid regime introduced in May 2016, which provides for a minimum bid period of 105 days. ISS recommends voting against a rights plan with a permitted bid minimum period of greater than 105 days (instead of its prior minimum bid period of 60 days, which reflected the then-existing law). Our client update that discusses the state of shareholder rights plans in proxy season 2017 in light of the new take-over regime can be accessed here.
Tax fees paid to external auditors (TSX/TSX-V). ISS has further clarified its policy on excessive non-audit fees. ISS advises that it will now scrutinize tax fees paid to an external auditor to ensure tax fees not directly related to tax compliance or preparation services are reallocated to "other" fees when determining the total amount of non-audit fees. ISS will recommend not ratifying the appointment of an external auditor and withholding voting for members of the audit committee if non-audit and "other" fees (including fees for tax advice, planning and consulting) exceed the total fees paid for the audit, any audit-related services and any tax compliance/preparation services.
Director independence in the context of transactional, professional, financial and charitable relationships (TSX/TSX-V). ISS has clarified the definition of a non-independent director in the context of a director who, or whose family member: (i) provides professional services to the company, (ii) is a significant customer or supplier of the company; (iii) is a trustee, director or employee of a charity or non-profit organization that receives significant amounts from the company; or (iv) is connected with an organization that has a transactional relationship with the company. ISS has clarified that independence will be affected if any such relationship existed at any time within the most recently completed financial year and/or has been identified at any time up to and including the AGM.
Overboarded directors (TSX). Last year ISS announced it was changing its definition of overboarded for directors of TSX-listed companies to mean:
- for CEOs: sitting on more than 1 outside public company board; and
- for non-CEOs: sitting on more than 4 public company boards.
ISS generally recommends withholding voting for a director who is overboarded and whose attendance record at board and committee meetings is less than 75% and will provide cautionary language in its reports where directors are overboarded regardless of attendance. The new definition of overboarded will take effect February 2017.
Glass Lewis updates
Shareholder rights plans (TSX/TSX-V).
Like ISS, Glass Lewis updated its voting guidelines on shareholder rights plans to reflect the 105-day minimum bid period provided in the new take-over bid regime. Glass Lewis will generally recommend voting against a rights plan with a permitted bid minimum period of greater than 105 days (instead of its prior 90-day period).
Failed say-on-pay votes (TSX/TSXV). For issuers who have adopted a say-on-pay vote, Glass Lewis may recommend voting against compensation committee members if the committee failed to address the shareholder concerns that resulted in a previous failure to obtain majority approval of a say-on-pay proposal. Even if the proposal was approved, if there was a significant shareholder vote against the proposal (greater than 25% of votes cast) and the board has not responded sufficiently to address the lack of support, Glass Lewis will consider recommending a vote against the election of directors who are compensation committee members.
"Full-value-at-no-cost" equity compensation plans (TSX/TSXV). Glass Lewis has strengthened its policy on equity compensation plans where executives receive the full value of vested awards at no cost, such as occurs with "Restricted Share Plans," "Deferred Share Plans," "Share Award Plans" and "Incentive Compensation Plans." Glass Lewis will generally recommend voting against such plans if they seek to set a share limit above a rolling maximum of 5% of the company's share capital.
Overboarded directors (TSX). Further to its announcement of last year, Glass Lewis has amended its definition of "overboarded" for directors of TSX-listed issuers to mean:
- for executive officers: sitting on more than 2 public company boards; and
- for non-executive officers: sitting on more than 5 public company boards.
Glass Lewis generally recommends withholding voting for a director who is overboarded. Where the new definition of overboarded resulted in a note of concern for meetings held in 2016, it will now result in a withhold vote for meetings held in 2017.
Glass Lewis generally permits directors of TSXV-listed companies to sit on up to 9 boards.
Copies of the guidelines can be accessed below.
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