In preparation 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), respectively. This bulletin addresses certain topics covered by the ISS benchmark policy recommendations and Glass Lewis’s proxy guidelines and shareholder initiatives guidelines, respectively, in each case for the 2021 proxy season in respect of issuers listed on the Toronto Stock Exchange (TSX).

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, such as the appointment of auditors, to proxy contests and 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 adherence to the practices and standards contained in the proxy advisory firm’s voting guidelines for that proxy season.

POLICY CHANGES

Board Gender Diversity

For the 2021 proxy season, as was the case for the 2020 proxy season, ISS will generally recommend that shareholders “withhold” their votes from 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) at issuers in the S&P/TSX Composite Index and other widely held issuers designated by ISS (based on the number of ISS clients holding securities of the issuer) if: (i) the issuer has not disclosed a formal written gender diversity policy that includes measurable goals and/or targets denoting a firm commitment to increasing board gender diversity within a reasonable period of time; and (ii) there are zero women on the issuer’s board.

For the 2021 proxy season, however, ISS has deleted commentary from its voting guidelines that previously provided that, in formulating its voting recommendation, ISS would also consider the board's disclosed approach to considering gender diversity in executive officer positions and stated goals or targets or programs and processes for advancing women in executive officer roles, and how the success of such programs and processes is monitored. Further, for the 2021 proxy season, issuers in the S&P/TSX Composite Index no longer qualify for exceptions from ISS’s gender diversity policy for: (i) issuers publicly listed within the current or prior fiscal year; (ii) issuers that have transitioned from the TSX Venture Exchange (TSXV) within the current or prior fiscal year; and (iii) issuers with four or fewer directors. The exceptions will continue to be available for other widely held issuers designated by ISS.

In addition, commencing February 2022 for issuers in the S&P/TSX Composite Index, ISS has already amended its voting guidelines to provide that it will generally recommend that shareholders “withhold” their votes from 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) where (i) women comprise less than 30 per cent of the board of directors; and (ii)(A) the issuer has not disclosed a formal written gender diversity policy; or (B) the issuer's formal written gender diversity policy does not include a commitment to achieve at least 30 per cent women on the board over a reasonable timeframe. In its updated voting guidelines, ISS noted the vital role that S&P/TSX Composite Index constituents play as “market leaders” in the process of increasing the representation of women on boards and at the executive level. As a summary of the foregoing, ISS will generally recommend that shareholders “withhold” their votes from 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) if:

Issuer

2020

2021

2022

S&P/TSX Composite Index Constituent

  1. Issuer has not disclosed a formal written gender diversity policy that includes measurable goals and/or targets denoting a firm commitment to increasing board gender diversity within a reasonable period of time; and

  2. Zero women on the issuer’s board

Exceptions:

  • Newly publicly listed issuers within the current or prior fiscal year;

  • Issuers that have transitioned from the TSXV within the current or prior fiscal year; or

  • Issuers with four or fewer directors

Further Considerations:

  • Board's disclosed approach to considering gender diversity in executive officer positions and stated goals or targets or programs and processes for advancing women in executive officer roles, and how the success of such programs and processes is monitored

Same as 2020, although the Exceptions are no longer available and the Further Considerations have been deleted

  1. (A) Issuer has not disclosed a formal written gender diversity policy; or (B) Issuer’s formal written gender diversity policy does not include a commitment to achieve at least 30 per cent women on the board over a reasonable timeframe

Widely Held Issuers (i.e., other issuers designated by ISS based on the number of ISS clients holding securities of the issuer)

Same as 2020, although the Further Considerations have been deleted

Same as 2021

For the 2021 proxy season, as was the case for the 2020 proxy season, Glass Lewis will generally recommend that shareholders “withhold” their votes from the chair of the committee responsible for nominating candidates for election to the board at issuers that have no female directors and have not provided a sufficient explanation or disclosed a plan to address the lack of diversity on the issuer’s board. However, unlike in 2020, Glass Lewis’s voting guidelines no longer provide for such a consequence where an issuer’s board has not adopted a formal diversity policy and concerns have been identified regarding the gender diversity of the board. Instead, Glass Lewis will now consider, as mitigating factors when formulating voting recommendations, the existence of a diversity policy with non-boilerplate language and clear targets or disclosure around the board’s timeline for increasing its female membership.

Also beginning in 2021, Glass Lewis will note as a concern boards consisting of fewer than two female directors but, commencing January 1, 2022, Glass Lewis will generally recommend that shareholders “withhold” their votes from the chair of the committee responsible for nominating candidates for election to the board if the issuer’s board has more than six members, but fewer than two female directors. For boards with six or fewer total directors, as was the case for the 2020 proxy season, Glass Lewis will generally require a minimum of one female director. As a summary of the foregoing, Glass Lewis will generally recommend that shareholders “withhold” their votes from the chair of the committee responsible for nominating candidates for election to the board if:

Issuer

2020

2021

2022

All

  1. Board has no female directors and issuer has not provided a sufficient explanation or disclosed a plan to address the lack of diversity on the board; or

  2. Board has not adopted a formal diversity policy and Glass Lewis has identified concerns regarding the gender diversity of the board

Board has no female directors and issuer has not provided a sufficient explanation or disclosed a plan to address the lack of diversity on the board. Further Considerations:

  • Mitigating factors may include the existence of a diversity policy with non-boilerplate language and clear targets or disclosure around the board’s timeline for increasing its female membership

  • Glass Lewis voting report will note as a concern boards consisting of fewer than two female directors

  • For boards with six or fewer total directors, 2021 policy requiring a minimum of one female director will remain in place

Exclusive Forum Proposals

ISS has updated its 2021 guidelines to codify its existing approach to voting recommendations concerning proposed bylaw provisions that would exclusively specify the choice of forum where shareholder disputes (e.g., derivative action lawsuits) will be heard. In balancing the conceptual benefits of such provisions against the potential for negative impacts on shareholder rights, ISS states that it will make voting recommendations, on a case-by-case basis, concerning proposals for an issuer to adopt an exclusive forum bylaw or to amend bylaws to add an exclusive forum provision, taking into consideration:

  1. The jurisdiction of incorporation of the issuer

  2. The board’s disclosed rationale for adopting the provision

  3. The legal actions that will be subject to the provision

  4. Any evidence of past harm as a result of shareholder legal action against the issuer originating outside of the jurisdiction of incorporation

  5. The issuer’s corporate governance provisions and shareholder rights

  6. Any other problematic provisions that ISS views as raising concerns regarding shareholder rights

For 2021, Glass Lewis has not revised its proxy voting guidelines concerning exclusive forum proposals. Glass Lewis continues to believe that provisions limiting a shareholder’s choice of legal venue are not in the best interests of shareholders and therefore, shareholder approval should be sought for the adoption of any such provision. Where issuers have not sought shareholder approval, Glass Lewis will generally recommend shareholders support proposals requesting that an issuer repeal an exclusive forum provision, unless the issuer makes a cogent case for the provision, including benefits to shareholders and evidence of abuse of legal process in other, non-favoured jurisdictions.

Environment and Social Matters

Noting that insufficient oversight of material environmental and social issues can present direct legal, financial, regulatory and reputational risks that could serve to harm shareholder interests, Glass Lewis has updated its 2021 proxy voting guidelines to provide that:

  • For issuers in the S&P/TSX 60 index that do not provide clear disclosure concerning the oversight afforded to environmental and/or social issues by the board, Glass Lewis will now note a corresponding concern in their 2021 voting reports and, beginning with shareholder meetings held after January 1, 2022, Glass Lewis will recommend that shareholders “withhold” their votes from the election of the governance committee chair of such issuers

  • In situations where an issuer has not properly managed or mitigated environmental or social risks to the detriment of shareholder value, or when such mismanagement has threatened shareholder value, Glass Lewis may now recommend that shareholders “withhold” their votes from the election of the members of the board who are responsible for the oversight of environmental and social risks (or in the absence of explicit board oversight of such issues, the members of the audit committee)

While Glass Lewis believes that it is important that environmental and social issues are overseen at the board level, it also recognizes that this oversight can be effectively conducted by specific directors, the entire board, a separate committee, or combined with the responsibilities of a key committee.

Glass Lewis has also updated its proxy voting guidelines on shareholder initiatives with respect to various environmental and social matters.

While ISS has not revised proxy voting guidelines concerning social and environmental issues for the 2021 proxy season, ISS will now, under extraordinary circumstances, recommend that shareholders “withhold” their votes from the election of directors who showed demonstrably poor risk oversight of environmental and social issues, including climate change.

Board Committee Matters

Glass Lewis has updated its 2021 proxy voting guidelines to provide for increased scrutiny of the level of professional expertise on audit committees, which should have at least one member with experience as a certified public accountant, chief financial officer or corporate controller of similar experience, or demonstrably meaningful experience overseeing such functions as senior executive officers. This standard is intended by Glass Lewis to be slightly stricter than the Canadian Securities Administrators’ “financial literacy” requirement in National Instrument 52-110 Audit Committees, and closer to that of the U.S. Securities and Exchange Commission for “audit committee financial experts”. Glass Lewis will now flag any such shortfalls in audit committee member professional experience as a concern in its reports, but, for 2021, will generally refrain from making recommendations solely on this basis, except where other concerns are raised about the performance of the issuer’s audit committee.

As first foreshadowed in their 2020 proxy voting guidelines, Glass Lewis will now generally recommend that shareholders “withhold” their votes from the election of the audit committee chair if the audit committee did not meet at least four times during the year. Further, Glass Lewis will also now generally recommend that shareholders “withhold” their votes from the election of the governance committee chair when the number of audit committee meetings that took place during the most recent year is not disclosed.

For 2021, Glass Lewis has also revised its proxy voting guidelines to provide that it will generally recommend that shareholders “withhold” their votes from the election of the nominating committee chair if, alongside other governance or board performance concerns, the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the issuer’s board in the past five years.

Glass Lewis’s 2021 proxy voting guidelines now also provide that the merits of compensation committee member re-election at shareholder meetings will receive particularly close scrutiny at the boards of issuers that do not provide shareholders with an advisory vote on executive compensation (i.e., a say-on-pay vote).

Compensation and COVID-19

Generally, ISS and Glass Lewis have not revised their 2021 proxy voting guidelines to reflect different considerations concerning compensation matters (e.g., changes in metrics or shifts in goals or targets, option re-pricing (or cancellation and regranting), COVID-related retention or other one-time awards) in light of the impacts of COVID-19. However, Glass Lewis has made some revisions more generally to its compensation-related voting guidelines which could relate to issuer actions resulting from COVID-19, including updates concerning short-term incentives (e.g., any significant changes to the program structure should be well-explained), long-term incentives (e.g., outside of exceptional circumstances, decisions to significantly rollback or eliminate performance-based awards will generally be viewed negatively, and the basis for any adjustments to metrics or results should be clearly explained, as should any use of upward discretion and any significant changes to a performance program structure), option re-pricing (e.g., it may be acceptable if macro economic or industry trends, rather than specific issuer concerns, cause a stock’s value to decline dramatically and the repricing is necessary to motivate and retain employees, provided that officers and board members cannot participate in the re-pricing, a cogent case for the re-pricing is disclosed, and the vesting requirements on exchanged or repriced options are extended beyond one year).

For information regarding proxy advisor expectations with respect to Canadian issuers’ approaches to COVID-19-related compensation matters, the ISS 2021 – Canada Executive Compensation FAQs refers to the U.S. Compensation Policies and the COVID-19 Pandemic FAQ, while Glass Lewis has provided its own guidance on a variety of matters impacted by COVID-19, including remuneration in particular. Ahead of the 2021 proxy season, consideration should be given to these documents, as well as any further or subsequent guidance published by the proxy advisors.

Other 2021 Policy Changes

  • Advance Notice Requirements for Director Nominations. ISS has amended its proxy voting guidelines to remove from its list of problematic features in advance notice requirements, provisions concerning disclosure requests that go “beyond what is necessary to determine director nominee qualifications, relevant experience, shareholding or voting interest in the company, or independence in the same manner as would be required for management nominees”. However, ISS continues to consider disclosure request provisions to be problematic if they exceed what is required in a dissident proxy circular or go beyond what is required under law or regulation, and ISS continues to oppose the inclusion of stipulations that the issuer will not be obligated to include any information provided by dissident director nominees or nominating shareholders in any shareholder communications, including the proxy statement.

  • Independent Directors in the Context of a Controlling Shareholder. Glass Lewis has clarified its proxy voting guidelines to provide that it will consider board members of an issuer to be “Affiliated Directors” if they are currently, or have in the past three years been, employees of significant shareholders or explicit designees of such shareholders.

  • Board Skills. Glass Lewis may now recommend that shareholders “withhold” their votes from the election of the chair of the nominating committee if a board has not addressed major issues of board composition, including the composition, mix of skills, and experience of the non-executive element of the board.

  • Poor Disclosure. Noting that issuer disclosure is critical when assessing governance standards and the performance of board members, Glass Lewis will now follow a stricter voting policy at issuers where disclosure standards are poor, unclear, outdated or contradictory, and hold the chair of the governance committee responsible for poor disclosure standards. Included under this assessment will be the quality and clarity of federally incorporated (CBCA) companies disclosing the rate of representation of the “Designated Groups” of diversity on the board and in senior management.

  • Amendments to Constating Documents. Glass Lewis may now recommend a vote against proposals to amend an issuer’s constating documents if a clear summary of amendments or a copy of past/proposed constating documents are not available and the disclosure is sufficiently vague that it is not possible to determine the full extent of what is being changed.

  • Change of Continuance. Where a shareholder vote is being held on a proposed change of incorporating jurisdiction of an issuer, Glass Lewis now expects shareholders to be presented with a comparison of the substantive changes between the two jurisdictions, thereby allowing shareholders to make an informed decision regarding the advantages, disadvantages and overall effect on the governance of the issuer and shareholder rights.