Institutional Shareholder Services ("ISS") and Glass, Lewis & Co., LLC ("Glass Lewis"), two leading proxy advisory firms, recently released updated guidelines for the 2016 Canadian proxy season. Many of the revisions focus on director responsibility and accountability. Given the influence that ISS and Glass Lewis have on voting, issuers should be cognizant of these guidelines and their potential implications. For the ISS guidelines update, see here. For the Glass Lewis guidelines update, see here.
The ISS "Canada Proxy Voting Guidelines Updates" modifies ISS' approach to overboarded directors, board accountability at externally-managed issuers ("EMIs"), and equity compensation plans.
ISS redefined "overboarded," such that it will consider a director overboarded if he or she is a CEO and sits on more than one public company board (reduced from the current threshold of two) or if he or she is not a CEO and sits on four or more public company boards (reduced from the current threshold of five). These changes will be effective in February 2017, at which point ISS will generally recommend withholding votes for a director nominee who exceeds the new "overboarded" thresholds and who has attended less than 75% of his or her respective board and committee meetings in the past year without a valid reason for such absences.
Board Accountability at EMIs
ISS will implement a new framework for reviewing board accountability at EMIs where disclosure of any management services agreements and management compensation is limited or insufficient. ISS will recommend voting on a case-by-case basis on say-on-pay and director election resolutions where an EMI has provided inadequate disclosure of its management services agreements or senior management compensation. In making its voting recommendation, ISS will consider various factors, including compensation compared to issuer peers, executive responsibilities and overall performance.
Equity Compensation Plans
ISS introduced a scorecard model, the Equity Plan Scorecard, similar to the model it introduced in the United States in 2015, by which ISS will evaluate equity plans for issuers listed on the Toronto Stock Exchange ("TSX"). The scorecard will be based on plan cost, plan features, and grant practices. ISS will generally recommend voting against equity plans that have overall scores that indicate that they are not in shareholders' best interests. In addition, regardless of score, ISS will generally recommend voting against equity plans if certain issues are identified, including, discretionary or insufficiently limited non-employee director participation, an amendment provision that does not adequately limit the issuer's ability to amend the plan without shareholder approval, a company that has repriced stock options without shareholder approval within the past three years, a plan that is a vehicle for problematic pay practices or significant pay-for-performance inconsistencies, or any other plan features that may detrimentally affect shareholder interests.
The Glass Lewis "Proxy Paper Guidelines 2016 Proxy Season" updates its previous guidelines regarding the following issues.
Glass Lewis has also amended its definition of "overboarded." Commencing in 2017, it will generally recommend withholding votes from directors who are executives of public companies while sitting on more than two boards (reduced from the current threshold of three) and from non-executive directors who sit on more than five boards (reduced from the current threshold of six). Glass Lewis will not revise its general recommendation in 2016, but will review director board commitments and note directors exceeding the new thresholds as a going concern.
Environmental and Social Risk Oversight
Glass Lewis codified its policy regarding the responsibility of directors for environmental and social issues. If Glass Lewis perceives that a board or management has failed to sufficiently identify and manage a material environmental or social risk that could reduce shareholder value, it will recommend that shareholders withhold votes from directors who were responsible for risk oversight.
Nominating Committee Performance
Glass Lewis revised its guidelines to provide that it may recommend withholding votes from the chair of a nominating committee if the board's failure to ensure that the directors have relevant experience has contributed to the company's poor performance.
Glass Lewis augmented its discussion of quorum requirements to include a requirement for quorums at director meetings as well as at shareholder meetings. Glass Lewis will generally accept that a majority of directors of a board constitutes an acceptable quorum for a meeting of directors.
Audit Committee Over-Commitment
Glass Lewis has generally recommended withholding votes from audit committee members who sit on an "excessive number" of public company audit committees. Going forward, Glass Lewis will consider a director of a TSX Venture Exchange-listed company to sit on an "excessive number" of audit committees if the director either has financial experience and sits on more than five audit committees or does not have such experience and sits on over four committees, and will generally recommend voting against these individuals. The threshold for a director of a TSX-listed company will remain the same as Glass Lewis will consider a director of a TSX-listed company to sit on an "excessive number" of audit committees if the director either has "demonstrable" financial experience and sits on more than four audit committees or does not have such experience and sits on over three committees.
Glass Lewis clarified that it generally supports proxy access, which permits certain shareholders to nominate directors and to have such nominees included on the ballot. However, Glass Lewis will consider many factors when determining whether to recommend voting for a bylaw amendment to adopt proxy access, including the minimum ownership and holding requirements necessary for a shareholder to be entitled to nominate a director.
Exclusive Forum Provisions
Glass Lewis has noted that charter or bylaw provisions that limit shareholders' choice of legal venue are generally not in the best interests of shareholders. It will generally recommend that shareholders vote against a bylaw or charter amendment seeking to adopt an exclusive forum provision unless the company provides a compelling argument explaining why the provision would directly benefit shareholders, proves abuse of legal process in other jurisdictions, narrowly adapts the provision to the risks involved, and maintains good corporate governance practices.
Glass Lewis clarified that when deciding which of its country-specific policies is to apply to dual-listed companies, it will determine what governance standards are most applicable to the issuer by considering various factors, including primary exchange listing, corporate governance structure and company features.