While the Canadian Securities Administrators continue to consider comments received from market participants regarding whether there is a need to regulate proxy advisory firms (see our June 2012 Blakes Bulletin: CSA Invite Comments on Regulating Proxy Advisory Firms and our September 2012 Blakes Bulletin: CSA Extends Deadline for Comments on Regulating Proxy Advisory Firms), in preparing for the 2013 proxy season, it remains important to be familiar with the latest Canadian voting guidelines as prepared by two of North America’s largest proxy advisory firms: 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 corporate governance policies and Glass Lewis proxy guidelines for the 2013 proxy season. We have also included references to bulletins prepared by Blakes which provide additional information on the items discussed.
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 corporate governance 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.
Effective December 31, 2012, the Toronto Stock Exchange (TSX) amended its Company Manual to require listed issuers to, among other things: conduct individual director elections; hold annual director elections; and provide “comply or explain” disclosure in their management information circulars regarding the adoption (or non-adoption) of majority voting policies for the election of directors for uncontested meetings. For more information on these recent changes implemented by the TSX, see our October 2012 Blakes Bulletin: TSX Adopts, and Proposes, New Director Election Requirements.
Notably, as a result of the foregoing TSX amendments, Glass Lewis has updated its Canadian voting guidelines to provide that it will recommend that shareholders withhold votes from all members of a company’s governance committee if the company is in the S&P/ TSX Composite Index and elects to “explain”, rather than adopt a majority voting policy under the new TSX rules.
Further, reflecting the recent TSX amendments, ISS and Glass Lewis have also updated their Canadian voting guidelines concerning slate ballots for director elections (which are now generally prohibited for TSXlisted issuers) and Glass Lewis notes that it favours the repeal of staggered boards, which it believes are less accountable to shareholders than boards that are elected annually.
Advance Notice Provisions
During the 2012 proxy season, the adoption of advance notice provisions gained a foothold in Canada. Such provisions are comprised of amendments to corporate by-laws or articles, or policies adopted by boards of directors, which require notice of director nominations and detailed information about nominees and dissident shareholders to be provided to management in advance of an annual or special meeting. For more information on the adoption of advance notice provisions in 2012, see our October 2012 Blakes Bulletin: Proxy Contests: Lessons from 2012 Proxy Season.
For the 2013 proxy season, ISS has established a Canadian policy on proposals to adopt advance notice provisions. ISS is generally supportive of such proposals and has determined to provide vote recommendations on a case-by-case basis. In its update, ISS noted it will support proposals that provide a reasonable framework for shareholders to nominate directors by allowing shareholders to submit director nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review. Under ISS’s guidelines, to be reasonable, the company’s deadline for notice of shareholders’ director nominations must not be more than 65 days and not less than 30 days prior to the meeting date. As rationale for the update, ISS notes that all shareholders should be provided with sufficient disclosure and time to make appropriate decisions on the election of their board representatives.
Glass Lewis has also updated its Canadian proxy voting guidelines in respect of advance notice provisions. It will generally support policies that require a nominating shareholder to provide notice of any director nominations not less than 30 and not more than 65 days prior to the date of the annual meeting. Glass Lewis notes that while it recognizes the increased burden that could be placed on small shareholders that wish to nominate directors under an advance notice provision, it believes that these costs are minimal compared with the potential negative impact resulting from an overhaul of a company’s incumbent board.
The implementation of shareholder say-on-pay votes on the compensation practices of public companies in Canada started in 2009, when the major Canadian banks announced that they would give shareholders an advisory say-on-pay vote. For an overview on say‑on‑pay voting in Canada, see our September 2011 Blakes Bulletin: Say-On-Pay – What’s Next?
In its 2013 Canadian proxy voting guidelines, ISS has adopted a new two-step methodology to be applied to all companies in the S&P/TSX Composite Index and for all management say-on-pay resolutions to measure potential long-term pay-for-performance alignment. Step one of the new process is a quantitative screen, which includes a relative and absolute analysis on pay for performance, and step two is a qualitative assessment of the chief executive officer’s (CEO) pay and company performance. The new process can lead to a recommendation to vote against management say-on-pay proposals and/ or to withhold votes in respect of the election of compensation committee members (or, in rare cases where the full board is deemed responsible, all directors including the CEO), and/or to vote against an equitybased incentive plan proposal. ISS notes that it evaluates executive pay and practices on a case-by-case basis.
Glass Lewis provides in its 2013 Canadian proxy voting guidelines that it applies a “highly nuanced” approach when analyzing say-on-pay votes, reviewing each advisory vote on a case-by-case basis, and examining each company in the context of its industry, size, financial condition, historic pay-for-performance practices, and any other mitigating internal or external factors. If a company fails to provide sufficient disclosure of its policies, Glass Lewis may recommend that shareholders vote against a say-on-pay proposal solely on this basis, regardless of the appropriateness of the company’s compensation levels.
Considerations for majority-owned companies
In October 2011, the Canadian Coalition for Good Governance (CCGG), an organization representing institutional shareholders and asset managers, released new governance guidelines entitled Governance Differences of Equity Controlled Corporations (the CCGG Controlled Company Guidelines). Recognizing the “legitimate governance differences of equity controlled corporations”, the CCGG Controlled Company Guidelines are intended to supplement CCGG’s governance policies for public companies. An overview of the CCGG Controlled Company Guidelines can be found in our October 2011 Blakes Bulletin: CCGG Releases Governance Guidelines for Equity Controlled Corporations.
ISS previously applied its general policy considerations regarding board structure, committee composition and independence when making vote recommendations with respect to equity controlled companies, the same as it does for widely held companies. Drawing in part from the CCGG Controlled Company Guidelines, ISS has updated its guidelines for the 2013 proxy season to provide that it will generally support director nominees who are, or who “represent”, a controlling shareholder of an equity controlled company (Related Directors) if, among other things: the number of Related Directors does not exceed the proportion of the common shares controlled by the controlling shareholder, to a maximum of two-thirds; a majority of the members of the audit and nominating committees are either independent directors or Related Directors who are independent of management of the issuer; all members of the compensation committee are independent of management of the issuer; and the issuer adopts a majority voting policy for the election of directors for uncontested elections or commits publicly to adopting such a policy if the controlling shareholder ceases to control 50% or more of the issuer’s common shares. ISS further notes in its update that the foregoing policy is subject to modification in cases where an equity controlled company’s CEO is related to the controlling shareholder.
In its updated Canadian voting guidelines, Glass Lewis also provides for equity controlled companies the following exceptions from its general policies: the standard independence thresholds for board composition do not apply in specified situations; certain non-independent directors are permitted to be on the compensation, nominating and governance committees; standing nominating and corporate governance committees are not required; and neither an independent chairman nor a lead director is required. The Glass Lewis voting guidelines, however, do not provide independence exceptions in respect of the composition of the audit committees of equity controlled companies (i.e., such committees must consist solely of independent directors).