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 and shareholder initiatives guidelines, in each case regarding issuers listed on the Toronto Stock Exchange (TSX) for the 2018 and 2019 proxy seasons.
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 to proxy contests and highly 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 alignment with the practices and standards contained in the proxy advisory firm’s voting guidelines for that proxy season.
Policy changes for 2018
In its 2018 Canadian proxy voting guidelines, ISS has articulated a new gender diversity guideline for the 2018 proxy season. The guideline will be applicable to S&P/TSX Composite Index issuers in 2018 and to both S&P/TSX Composite Index and non-Composite Index issuers in 2019, subject to certain exceptions. Under the new guideline, ISS will generally issue a “withhold” voting recommendation concerning the chair of the committee responsible for nominating candidates for election to the board, or board chair if no applicable committee or committee chair has been identified, of issuers that have not disclosed a formal written gender diversity policy and do not have any women directors on their boards.
ISS has noted that gender diversity policies of such issuers should include a clear commitment to increase board gender diversity within a reasonable period, with measurable goals and/or targets, and that use of boilerplate or contradictory language may result in “withhold” voting recommendations for directors. In applying the new guideline, ISS will also consider such issuers’ disclosed approach to considering gender diversity in executive officer positions when formulating a voting recommendation. This guideline will not apply in respect of issuers with four or fewer directors, newly publicly-listed issuers within the current or prior fiscal year, and issuers that have transitioned to the TSX from the TSX Venture Exchange within the current or prior fiscal year.
In its 2018 Canadian proxy voting guidelines, ISS has revised its criteria for qualification by majority-owned issuers for a variation on the standard board and committee independence policies (e.g., in certain situations involving controlled issuers, the chief executive officer (CEO) and board chair roles may be combined). In particular, ISS has removed the requirement that such issuers adopt a majority voting policy or publicly commit to doing so if they cease to be a controlled issuer.
For the 2018 proxy season, Glass Lewis has highlighted a heightened concern regarding issuers where voting control is held through a dual-class share structure with disproportionate voting and economic rights, where vote results on a matter (e.g., to recommend against a director nominee, against a say-on-pay proposal, etc.) indicate that a majority of unaffiliated shareholders supported a shareholder proposal or opposed a management proposal. Glass Lewis believes that, in such situations, the board of the dual-class share issuer should demonstrate an appropriate level of responsiveness, and the failure to do so may be a contributing factor to it recommending that shareholders vote against management’s recommendation on such matters in the future.
Advance Notice Requirements
In its 2018 Canadian proxy voting guidelines, ISS has refined its list of problematic features of an issuer’s advance notice requirements concerning the nomination by shareholders of candidates for election to the issuer’s board, to include as being problematic, any requirement that any nominating shareholder provide a representation that the nominating shareholder be present at the meeting in person or by proxy at which his or her nominee is standing for election for the nomination to be accepted, notwithstanding the number of votes obtained by such nominee. In addition, ISS has removed, as being problematic, situations where there is no indication that the issuer will make publicly available to it its shareholders information the issuer requested of a nominee or nominating shareholder.
For the 2018 proxy season, Glass Lewis has expanded and codified its policy on climate change-related shareholder proposals to provide that it will recommend in favour of shareholder resolutions requesting that issuers in certain extractive or energy-intensive industries that have increased exposure to climate change-related risks provide information to shareholders concerning their climate change scenario analyses and other climate change-related considerations. Although Glass Lewis is generally supportive of the disclosure recommendations recently developed by the Task Force on Climate-related Financial Disclosure (TCFD), it will review proposals requesting that issuers report in accordance with these recommendations on a case-by-case basis. When reviewing proposals requesting increased disclosure on either of the aforementioned issues, Glass Lewis notes that it will evaluate: (i) the industry in which the issuer operates; (ii) the issuer’s current level of disclosure; (iii) the oversight afforded to issues related to climate change; (iv) the disclosure and oversight afforded to climate change-related issues at peer issuers; and (v) if companies in the issuer’s market and/or industry have provided any disclosure that is aligned with the TCFD’s recommendations.
Other 2018 Policy Changes
- Director Independence: ISS has revised the nomenclature of its categories of director independence (e.g., “insider director” and “affiliated outside director” have been reformulated and re-categorized as “executive director” and “non-independent non-executive director”) and provided further guidance on transactional, professional, financial and charitable relationships that can impact on a director’s independence.
- Board Responsiveness: Glass Lewis has lowered its applicable threshold, from 25 per cent to 20 per cent, for heightened concern regarding shareholders voting contrary to the recommendation of management on a matter, necessitating the issuer’s board to demonstrate some level of engagement and responsiveness on the matter. As previously noted, in the case of controlled dual-class share issuers, Glass Lewis will carefully examine the level of approval or disapproval attributed to unaffiliated shareholders.
- Excessive Non-Audit Fees: ISS has clarified that in circumstances where "other" fees paid to an issuer’s auditors include fees related to significant one-time capital restructure events (being limited to initial public offerings, emergence from bankruptcy, and spinoffs) and the issuer makes public disclosure of the amount and nature of those fees, which are an exception to the standard "non-audit fee" category, then such fees may be excluded from the quantum of non-audit fees considered by ISS in determining whether non-audit fees are excessive.
- Proxy Access: Outside of the United States, Glass Lewis reviews proxy access proposals on a case-by-case basis, examining the regulatory landscape within the country in question in order to assess if existing proxy access rights are sufficient or preferable to those requested by the proposal. In instances where Glass Lewis believes that existing laws, policies or regulations either provide shareholders with adequate proxy access rights, it will recommend that shareholders vote against such proposals.
- Compensation Matters: Both ISS and Glass Lewis have made minor changes to aspects of their compensation-related voting guidelines.
Policy changes for 2019
In its 2018 Canadian proxy voting guidelines, Glass Lewis has added additional commentary regarding board gender diversity. For the 2019 proxy season, Glass Lewis will generally issue a “withhold” voting recommendation concerning the chair of the committee responsible for nominating candidates for election to the board, or board chair, if the issuer has not adopted a formal written gender diversity policy or does not have any women directors on its board. Glass Lewis has also noted that, depending on other factors, including the size of the issuer, the industry in which the issuer operates and the governance profile of the issuer, in 2019, it may also extend “withhold” voting recommendations to other members of the committee responsible for nominating candidates for election to the board. In applying the new guideline, Glass Lewis has retained discretion to refrain from recommending “withhold” votes to directors of issuers outside the S&P/TSX Composite Index, or when issuers’ boards have provided a sufficient rationale for not having any women board members or have disclosed a plan to address the lack of board diversity.
For the second time in only a few years, ISS is significantly reformulating its director overboarding guideline for directors of Canadian issuers. For the 2019 proxy season, ISS will generally issue a “withhold” voting recommendation in respect of electing a director where that individual is a CEO of a public issuer and sits on more than two outside public issuer boards in addition to the issuer of which he/she is CEO (2018: one) or is not a CEO of a public issuer and sits on more than five total public issuer boards (2018: four). In the case of a CEO of a public issuer, the “withhold” voting recommendation would be made in respect of their outside boards only. Accordingly, the current requirement for a director also needing to have attended less than 75 per cent of his/her board and meetings held within the past year (without a valid reason) in order to be consider overboarded is being removed for 2019. Further, for 2019, ISS has noted that in situations where an issuer’s CEO sits on boards of subsidiaries (greater than 50 per cent ownership) of the issuer, while such subsidiary boards will be counted as separate boards for purposes of its overboarding guideline, ISS will not recommend a “withhold” vote for the CEO at the parent issuer board or at any of the controlled subsidiaries, but may do so in respect of the CEO sitting on the boards of investees that are less than 50 per cent controlled and at boards outside the parent/subsidiary relationship.
Glass Lewis has not announced any significant changes to its current overboarding guideline: it will generally recommend that shareholders withhold their votes in respect of a director who is an executive officer of any public issuer while serving on a total of more than two public issuer boards or any other director who serves on more than five public issuer boards.
Virtual Shareholder Meetings
Beginning in 2019, Glass Lewis will generally recommend “withholding” votes from members of an issuer’s governance committee where the board is planning to hold a virtual-only shareholder meeting and the issuer does not provide robust proxy circular disclosure to assure shareholders that they will be afforded the same rights and opportunities to participate in the meeting electronically as they would at an in-person meeting. While Glass Lewis believes that virtual meeting technology can be a useful complement to a traditional, in-person shareholder meeting by expanding participation of shareholders who are unable to attend a shareholder meeting in person (i.e., a “hybrid meeting”), it shares the concern of other shareholder rights advocates that virtual-only meetings have the potential to curb the ability of shareholders to meaningfully communicate and engage with an issuer’s management, reducing the board’s accountability to shareholders.