As an early step in preparing 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). This bulletin addresses certain of the updated topics covered by the ISS benchmark policy recommendations and Glass Lewis proxy guidelines regarding issuers listed on the Toronto Stock Exchange for the 2017 proxy season.
PROXY ADVISORY FIRMS’ ROLE
Proxy advisory firms review and analyze matters put forward for consideration at shareholder meetings and make voting recommendations concerning such matters to their clients, who are typically institutional investors. 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 alignment with the practices and standards contained in the proxy advisory firm’s voting guidelines for that proxy season.
BOARD MEMBERS GUIDELINES
Governance commentators continue to be concerned about director overboarding and, in this regard, ISS notes that “[d]irectors must be able to devote sufficient time and energy to a board in order to be effective representatives of shareholders’ interests”, while Glass Lewis states that “an overcommitted director can pose a material risk to a company’s shareholders”. Accordingly, as forewarned in 2015, for the 2017 proxy season, ISS and Glass Lewis have both implemented new policies concerning director overboarding.
ISS will now generally issue a withhold recommendation in respect of electing a director where that individual: is a CEO of a public company and sits on more than one outside public company board in addition to the company of which he/she is CEO (2016: two) or is not a CEO of a public company and sits on more than four total public company boards (2016: six), and attended less than 75 per cent of his/her board and committee (2016: board and key committee) meetings held within the past year without a valid reason. Although raised for discussion earlier in the 2017 policy formulation process, ISS has not provided special consideration to service on subsidiary boards within the context of overboarding.
Glass Lewis will now generally recommend that shareholders withhold their votes in respect of a director who is an executive officer of any public company while serving on a total of more than two public company boards (2016: three) or any other director who serves on more than five public company boards (2016: six). Glass Lewis further adds that it may also consider the director’s attendance record at all companies on which the director serves on the board, the size and location of the companies, the director’s board duties at the companies in question, whether the director serves on the board of any large privately-held companies and the director’s tenure on the boards in question, as well as any publicly disclosed rationale provided for the director’s continued board service.
In its 2017 Canadian proxy voting guidelines, ISS has added a guideline concerning problematic practices relating to director compensation. Director compensation has been receiving more attention from governance commentators in the past few years, with particular focus on the fact that it is the directors themselves who are determining their own compensation. ISS will now generally issue a withhold voting recommendation for members of an issuer’s compensation committee if the issuer’s director compensation practices pose a risk of compromising a non-employee director’s independence or otherwise appear problematic from the perspective of shareholders. In particular, ISS identifies as problematic examples: excessive (relative to standard market practice) inducement grants issued upon the appointment or election of a new director (which may also “foster divergent incentives between those directors who have recently received such awards and those who have not”); and granting of performance-based equity to non-employee directors.
For the 2017 proxy season, ISS has refined the formula it uses to assess whether non-audit fees paid to an issuer’s auditors are comparatively excessive and therefore could risk “potential conflicts of interest and possible compromise of auditor independence”. ISS now recognizes that certain tax compliance and preparation services (i.e., preparation of original and amended tax returns, refund claims and tax payment planning) are most economically provided by an issuer’s audit firm. Accordingly, a withhold recommendation will now generally be recommended for election of each member of the prior year’s audit committee and the appointment of auditors where non-audit (other) fees paid to the issuer’s audit firm exceed the sum of audit fees, audit-related fees and tax compliance/preparation fees. In the view of ISS, non-audit (other) fees still include tax advice, planning or consulting fees paid to the issuer’s audit firm.
Issuers should consider disclosing not just the aggregate tax fees in their annual information form (as required by Form 52-110F1), but also the fees associated with the different types of tax services provided by their audit firm.
Shareholder Rights Plans
Reflecting recent amendments to National Instrument 62-104 (see our February 2016 Blakes Bulletin: Finish Line in Sight: New Take-Over Bid Rules Are Coming) to support implementation or amendments to a shareholder rights plan, ISS and Glass Lewis will now require that the minimum period for a “permitted bid” (i.e., a take-over bid that does not trigger the plan) be not greater than 105 days (ISS 2016: 60 days; Glass Lewis 2016: 90 days).
Compensation Committee Performance
In its 2017 proxy voting guidelines, Glass Lewis has made a number of changes to its assessment criteria concerning compensation committee performance. In particular, Glass Lewis may recommend that shareholders withhold their votes from:
- All members of the compensation committee if the committee fails to address shareholder concerns following an issuer’s failure to secure majority approval of a say-on-pay proposal, and
- The compensation committee chair or all members of the compensation committee if the prior year’s say-on-pay proposal was approved, but greater than 25 per cent of votes were cast against the proposal, and the issuer’s board did not subsequently respond sufficiently to the vote, including by actively engaging shareholders on this issue
In addition, Glass Lewis has revised its guidelines to provide that they will recommend that shareholders withhold their votes from the compensation committee chair or all members of the compensation committee in a variety of situations, even if a say-on-pay vote is held (2016: only if no say-on-pay vote), including if the compensation discussion and analysis disclosure in an issuer’s management proxy circular is viewed as being deficient, the issuer has entered into excessive employment or severance agreements, performance goals are changed when employees fail to meet them, or excessive employee perquisites and benefits are allowed.
Full Value Awards
For 2017, Glass Lewis has clarified its approach to equity compensation plans that provide “full value” awards (i.e., restricted stock units or performance shares). Generally, Glass Lewis will not support the adoption or amendment of full value award plans with a rolling maximum share limit set above five per cent of the issuer’s share capital (2016: threshold was, ambiguously, “significantly lower” than 10 per cent). While Glass Lewis may accept issuers having stock option plans with a 10 per cent rolling maximum share limit, they note that full value award grants have a substantially greater cost.
OTHER 2017 POLICY CHANGES TO BE CONSIDERED
- ISS has clarified that when assessing the impact of transactional, professional, financial and charitable relationships on a director’s independence, its definitional criteria will be triggered by any such relationship within the most recently completed fiscal year and/or having been identified at any time up to, and including, the annual shareholders’ meeting.
- ISS has added guidelines concerning when it will support the adoption of management deferred share unit plans and non-employee director deferred share unit plans.