In preparing for the upcoming proxy season, it is important for issuers to be familiar with the current Canadian proxy voting guidelines prepared by Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. (Glass Lewis). This bulletin briefly addresses a few of the key corporate governance matters covered by the ISS voting policies and Glass Lewis proxy guidelines for the 2015 proxy season with respect to issuers listed on the Toronto Stock Exchange (TSX).
For information concerning the Canadian Securities Administrators’ continuing review of comments received regarding proposed National Policy 25-201 Guidance for Proxy Advisory Firms, see our July 2014 Blakes Bulletin: Horns Locked Between Investors and Issuers Over Proxy Advisory Firm Regulation.
ROLE OF PROXY ADVISORY FIRMS
Proxy advisory firms offer a variety of services to their clients, who are typically institutional investors. Primarily, proxy advisors review and analyze matters put forward for consideration at shareholder meetings and make voting recommendations concerning such matters. The items considered range from routine matters to highly complex merger and acquisition transactions that involve a voting decision, and cover both management initiatives and shareholder proposals. A voting recommendation is generally based on the issuer’s compliance with the governance practices and standards contained in the proxy advisor’s general voting guidelines (or further customized guidelines) for that proxy season.
ADVANCE NOTICE PROVISIONS
During the 2012 proxy season, the adoption of advance notice provisions gained a foothold in Canada (see our September 2013 Blakes Bulletin: Blakes Proxy Contest Study: Preparing for 2013), and the number of issuers implementing such provisions increased during the 2013 proxy season (particularly among smaller issuers) and the 2014 proxy season (reflecting adoption by larger issuers). Advance notice provisions are comprised of amendments to corporate bylaws or articles, or policies adopted by boards of directors, which require notice of director nominations to be provided to management in advance of a shareholder meeting.
For the 2015 proxy season, ISS has updated its proxy voting guidelines concerning advance notice provisions and published a related “frequently asked questions” document. The revised guidelines continue to provide that ISS will consider advance notice provisions on a case-by-case basis but also now list features that may be considered problematic including: (1) any maximum for the applicable notice period (previously, a 65-day maximum was permissible); (2) any restriction of the notification period to that established for the originally scheduled meeting in the event that the meeting has been adjourned or postponed; (3) requirements to provide information regarding director nominees that goes beyond applicable securities law and the level of information disclosed regarding management’s nominees, or where there is no indication that such information will be made publicly available to shareholders; and (4) any other feature determined by ISS as having a negative impact on shareholders' interests and being outside the purview of the stated purpose of the advance notice provision.
Glass Lewis’ proxy guidelines for the 2015 proxy season also generally reflect the foregoing changes made by ISS. However, it is important to note that many of these changes are reflected in a December 30, 2014, update to the guidelines and not in the version released by Glass Lewis in November 2014.
New for its 2015 Canadian proxy voting guidelines, ISS has also noted: (1) it will recommend against supporting the adoption or amendment of advance notice provisions if the full text thereof is neither included in the applicable proxy circular nor otherwise available on SEDAR; (2) issuers with shareholder-approved advance notice provisions are expected to summarize such provisions in their proxy circulars for subsequent shareholder meetings; (3) in order to support notice-and-access provisions, ISS may accept timeframes of up to 40 days as the minimum for the applicable notice period (otherwise a 30-day minimum is the permitted standard); and (4) it will generally recommend that votes be withheld in respect of individual directors, committee members or the entire board, as appropriate, in situations where an advance notice policy (rather than bylaw provisions) has been adopted by an issuer’s board (a practice followed by some issuers incorporated under the Business Corporations Act (British Columbia)) and the policy is not being submitted for ratification at the next shareholders' meeting. While issuers currently with advance notice provisions are not required to amend such provisions during the 2015 proxy season in order to comply with ISS’s updated proxy voting guidelines, ISS will generally recommend that shareholders vote in favour of amendment proposals only if the bylaws are compliant.
INDEPENDENCE OF FORMER CHIEF EXECUTIVE OFFICER (CEO)
For the 2015 proxy season, ISS has updated its proxy voting guidelines to introduce a five-year cooling-off period after which ISS will consider a former CEO of a TSX-listed issuer as being an independent member of the issuer’s board if the former CEO does not otherwise have a relationship that could be reasonably perceived to interfere with the exercise of his or her independent judgment. ISS has indicated that “[a] five-year cooling-off period for the CEO generally better reflects a reasonable time period for reducing a former CEO's potential influence on the board….” Previously, ISS would deem a former CEO to be permanently non-independent in respect of the issuer.
As in 2014, Glass Lewis’ proxy guidelines for the 2015 proxy season continue to provide for a five-year cooling-off period for a former CEO of an issuer.
PRIVATE PLACEMENT ISSUANCES
In its 2015 TSX-listed company benchmark voting policies, ISS has outlined additional criteria it will consider when making a voting recommendation concerning private placements of securities. ISS would previously generally recommend that shareholders vote in favour of private placements if the use of proceeds has been disclosed and the issuance represents no more than 30% of the issuer’s outstanding shares. For 2015, ISS will also now take into account, on a case-by-case basis: (1) whether other resolutions are bundled with the issuance; (2) whether the rationale for the private placement issuance is disclosed; (3) the level of dilution to existing shareholders' position; (4) the discount/premium in issuance price to the unaffected share price before the announcement of the private placement; (5) the market's response to the proposed private placement; and (6) other applicable factors, including conflict of interest, change in control/management and evaluation of other alternatives. The new voting policies also indicate that ISS will generally recommend that shareholders vote in favour of a private placement issuance if it is expected that the issuer will file for bankruptcy if the transaction is not approved or the issuer’s auditor/management has indicated that the issuer has going-concern issues.
As in 2014, Glass Lewis’ proxy guidelines for the 2015 proxy season continue to provide that Glass Lewis will “consider whether the company is offering the securities at a discount” and where “a company has not detailed a plan for the use of the proposed shares, or when the number of shares is excessive,” it will typically recommend that shareholders vote against the issuance.
New for the 2015 proxy season, Glass Lewis’ proxy guidelines provide that it will typically recommend withholding votes from the election of a director who has received two withhold recommendations from Glass Lewis for identical reasons within the prior year at different companies, and the same reason also applies in respect of the issuer.
As in 2014, ISS’ 2015 proxy voting guidelines, continue to provide that, under extraordinary circumstances, ISS will recommend that shareholders withhold their votes in respect of directors individually, one or more committee members or the entire board, due to “[e]gregious actions related to the director(s)’ service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.”
In its updated Canadian voting guidelines, Glass Lewis has included a new discussion regarding its beliefs that: (1) shareholders should generally be wary of awards granted outside of the standard incentive schemes, as such awards “have the potential to undermine the integrity of a company’s regular incentive plans, the link between pay and performance or both”; (2) if the existing incentive programs fail to provide adequate incentives to executives, issuers should redesign their compensation programs rather than make additional grants; (3) in certain circumstances, additional incentives may be appropriate, but issuers should provide a thorough description of the awards, including a cogent and convincing explanation of their necessity and why existing awards do not provide sufficient motivation, and such awards should be tied to future service and performance whenever possible; and (4) issuers making supplemental awards should also describe if and how the regular compensation arrangements will be affected by these supplemental awards.
As in 2014, ISS’ 2015 TSX-listed company benchmark voting policies do not specifically address one-off awards.
SHAREHOLDER RIGHTS PLANS
For the 2015 proxy season, Glass Lewis has updated its proxy voting guidelines concerning shareholder rights plans to provide that: (1) it will consider supporting a plan if the plan prohibits the issuer’s board from amending material provisions without shareholder approval; and (2) it will review the definition of beneficial ownership in such plans to ensure that ownership is strictly defined as shares held and not as including shares that are not owned but can be directed to vote by a shareholder (i.e., is not a “voting pill”).
As in 2014, ISS’ 2015 proxy voting guidelines continue to provide for the matters covered by the foregoing changes made by Glass Lewis.
OTHER CONSIDERATIONS FOR 2015 SHAREHOLDER MEETINGS
- The TSX now requires each director of TSX-listed issuers, other than issuers that are majority controlled, to be elected by a majority (50% plus one vote) of the votes cast with respect to his or her election, other than at contested meetings. See our February 2014 Blakes Bulletin: TSX Requires Majority Voting for Election of Directors.
- Certain Canadian jurisdictions now require applicable issuers to provide disclosure relating to gender diversity on boards and in senior management and director tenure. See our October 2014 Blakes Bulletin: Just in Time for 2015 Proxy Season: Disclosure Requirements for Gender Diversity, Director Tenure.
- Glass Lewis’ 2015 proxy guidelines expand on the 2014 guidelines by noting that, rather than instituting age or tenure limits, boards should evaluate the need for changes to their composition based on an analysis of necessary skills and experience as well as the result of evaluations that are, ideally, performed “independently by an external firm.”
- ISS’ 2015 Canadian Compensation Policy FAQs have revised ISS’ “Pay-TSR Alignment” test, which measures the long-term alignment of pay changes relative to total shareholder returns, to set lower thresholds for triggering a high-concern rating by ISS.