The two largest proxy advisory firms in North America, Glass Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services Inc. (“ISS”) have recently released Canadian guidelines for the 2013 proxy season. The guidelines come into effect for shareholder meetings held on or after February 1, 2013.
The guidelines follow recently announced amendments to the TSX Company Manual, which become effective on December 31, 2012. These amendments will require issuers listed on the TSX to elect directors individually, essentially doing away with the practice of nominating directors by way of slate ballot. The TSX also introduced a “comply or explain” majority voting requirement for the election of directors. For further information on these TSX amendments, please see our bulletin dated December 5, 2012.
Directors Nominated by Slate Ballot
For companies not listed on the TSX, the Glass Lewis guidelines continue to recommend voting for directors nominated by slate ballot on a case-by-case basis. However, if significant issues exist concerning a nominee on a slate ballot, Glass Lewis will recommend withholding votes from the entire slate.
For TSX and TSX Venture issuers the ISS guidelines recommend, where there is an uncontested director’s election, that shareholders should generally withhold votes from all directors nominated by slate ballot.
Majority Voting for Election of Directors
As result of the changes to the TSX Company Manual described above, Glass Lewis will generally recommend voting in favour of proposals that call for majority voting and when an issuer listed on the S&P/TSX Composite Index has decided to explain rather than comply, Glass Lewis will recommend withholding votes for members of the governance committee.
Board Independence & Majority Owned Companies
Both Glass Lewis and ISS address the need for independent directors. In particular, Glass Lewis expects boards of companies listed on the S&P/TSX Composite Index to be at least two-thirds independent (rather than a simple majority) and that TSX Venture issuers have at least two independent directors, representing no less than one-third of the board (current TSX Venture rules do require that listed companies have at least two independent directors, but there is no requirement that they comprise any given percentage of the board). Furthermore, as Glass Lewis believes that only independent directors should serve on the company’s audit, compensation and governance committees, Glass Lewis will typically recommend that shareholders withhold votes for an inside director who seeks appointment to any of these committees.
The main change in the ISS 2013 guidelines is that ISS may now support the election of non-independent directors who are controlling shareholders when certain independence and governance criteria are met including, among other things, the election of independent directors and the number of related directors not exceeding the proportion of common shares held by the controlling shareholder.
Glass Lewis believes that auditors should be free from conflicts of interest and shareholders should be able to annually review the auditor’s performance and ratify the board’s selection of the auditor. Glass Lewis will generally support the board’s auditor appointment recommendation and support the board’s right to determine the audit fee. However there are circumstances where Glass Lewis will not recommend voting in favour of the auditor, for instance when audit fees and audit related fees total less than 50% of overall fees paid to the auditors or when Glass Lewis believes that the company has aggressive accounting policies.
Say-on-Pay Proposals & Equity Based Incentive Plans
Both the Glass Lewis and ISS guidelines address advisory votes on executive compensation (say-on-pay proposals) and equity based compensation for executives. Both firms are of the view that executive compensation should be directly linked with the company’s financial performance. Glass Lewis will review say-on-pay proposals on a case-by-case basis, focusing on four main areas:
- the overall design and structure of the company’s executive compensation program;
- the quality and content of the company’s disclosure;
- the quantum paid to executives; and
- the link between compensation and performance as indicated by the company’s pay-for-performance practices.
Glass Lewis makes recommendations for stock option and equity-based compensation plans on a case-by-case basis. In relation to stock option plans, it will compare the subject plan to a representative peer group and “reasonable” absolute limits that it believes are key to equity value creation in order to determine whether to vote for or against the plan. When a full-value award plan (generally where the participant receives the value of the stock as opposed to options where the value is contingent on the stock price and exercise price) provides for such things as participation of non-executive directors on the same basis as company executives or the administration of the plan by non-independent members of the board, Glass Lewis may recommend voting against the award plan.
For S&P/TSX Composite Index companies, ISS evaluates executive pay and practices on a case-by-case basis. ISS will recommend voting against management say-on-pay and equity based incentive plans if, in their view, there is a significant long-term misalignment between executive pay and company performance. Determining whether there is such a misalignment involves both a quantitative and qualitative assessment. In terms of the quantitative assessment, ISS will look at:
- the relative degree of alignment, which is difference between the company’s total shareholders’ return rank and the executive’s total pay rank within a peer group measured over one year and three years;
- the multiple of the median, which looks at the total compensation in the last reported fiscal year in relation to the median compensation of the peer group; and
- the CEO pay to total shareholders’ return alignment, which looks at the alignment between the trend of executive pay and the trend of the company’s performance over the past five fiscal years.
If after this stage ISS believes that there may be pay to performance misalignment, a qualitative assessment will be undertaken which will consider a range of factors, including:
- the ratio of performance to time based equity grants and the overall mix of performance-based compensation relative to total compensation (considering whether the ratio is more than 50 percent);
- the quality of disclosure and appropriateness of the performance measures (including the use of non-GAAP financial metrics) and goals utilized, so that shareholders can assess the rigor of the performance program;
- the trend in other financial metrics, such as growth in revenue, earnings and return measures such as return on equity, return on assets and return on invested capital; and
- the trend considering prior years' pay for performance.
Advance Notice Requirements
Under the previous ISS guidelines, there was no policy in place for advance notice requirements. Advance notice policies require shareholders to notify the company in advance of a meeting at which the shareholder intends to nominate a new director to the board. The new ISS guidelines call for voting on a case-by-case basis for proposals to adopt or amend the articles or bylaws in relation to advance notice requirements. In particular, ISS recommends supporting proposals that allow shareholders to submit director nominations as close to the meeting date as reasonably possible and within the broadest window possible. They say that the company’s deadline for notice of such nominations should not be more than 65 days and should not be less than 30 days prior to the meeting date. The Glass Lewis recommendations contain similar guidelines.