On November 21, 2013, Institutional Shareholder Services Inc. (ISS) issued its 2014 Corporate Governance Policy Updates applicable to issuers holding their shareholder meetings on or after February 1, 2014. Updates for the Americas, EMEA and Asia-Pacific were released. For the first time, ISS has opened a consultation period (which expires on February 14, 2014) related to long-term policy changes beyond the 2014 proxy season for a number of specific topics. ISS is shifting its focus from specific seasonal guidance to a continual focus on policy development over the year.
A summary of the key issues addressed in the 2014 Canadian Policy Updates are summarized below. For a more exhaustive summary, please see our client update on the 2014 ISS Corporate Governance Policy Updates found here.
New Formalized ISS Policies
- Persistent Problematic Audit Related Practices (TSX issuers) – Under this new policy, ISS will WITHHOLD votes on a case by case basis for members of the Audit Committee and potentially the full board of an issuer if adverse accounting practices are identified that rise to a level of serious concern. Examples of such practices include: accounting fraud, misapplication of applicable accounting standards, or material weaknesses in internal control processes.
- Board Responsiveness (TSX and TSXV) – ISS states that a lack of board response to shareholder majority votes, majority withhold votes or a shareholder proposal is unacceptable. It will generally WITHHOLD from directors if the company has failed to address the issues that caused a majority withhold vote, or has failed to act on majority shareholder supported proposals.
- Enhanced Quorum By-laws for Shareholder Meetings for Contested Director Elections (TSX and TSXV issuers) – ISS will now generally vote AGAINST new or amended by-laws that establish two different quorum levels thereby implementing a higher quorum solely for those shareholder meetings where a majority of the board is sought to be replaced.
Select Updates to Existing ISS Policies
- Director Attendance and Over-boarding (TSX issuers) – ISS has stated that a double trigger over-boarding policy including attendance at meetings is more appropriate than the current practice. Under the 2014 update, an individual director is over-boarded if: (i) the director is also CEO and sits on more than 2 outside public company boards other than the company for which he/she is CEO or (ii) for non-CEO directors, sits on more than 6 public company boards in total and has attended less than 75% of his/her respective board/committee meetings held within the past year without a valid reason (irrespective of whether the company has a majority voting policy). ISS will generally recommend a WITHHOLD vote for such director nominees.
- Director Independence (TSX and TSXV issuers) – ISS has refined and clarified its criteria for identifying “inside directors”, “affiliated outside directors” and “independent directors.”
- Voting on Directors for Egregious Actions (TSX and TSXV issuers) – ISS will recommend a WITHHOLD vote under extraordinary circumstances for directors, committee members or the entire board for: material failures of governance, stewardship, fiduciary responsibilities or risk oversight (which includes bribery, large fines or sanctions, significant adverse legal judgments or hedging of company stock). The clarification with respect to hedging activities is new, and ISS states that the board chair is responsible for the overall process in identifying principal risks.
- Advance Notice Requirement for Director Nominations (TSX and TSXV issuers) – ISS will recommend AGAINST advance notice by-laws or policies: (i) if the board does not have the ability to waive the entire advance notice provision or (ii) in instances where the company requires proposed nominees to deliver a written agreement acknowledging that he/she will comply with all company policies and guidelines applicable to directors.
- Board Communication and Responsiveness Related to Executive Pay (TSX issuers)– ISS will specifically consider the failure of an issuer to respond to its say-on-pay proposal that received support of less than 70% of votes cast when evaluating issues related to executive pay. ISS will look to enhanced disclosure of engagement efforts regarding the issues that contributed to low levels of support and specific actions taken by the company to address such issues in making its recommendations.
- Non-Employee Director Participation in Equity Compensation Plans (TSX issuers) – ISS has updated non-employee director participation limits in equity plans to increase the permitted value limit on forms of equity granted to non-employee directors other than stock options. There are now different ISS policy limits for option-based and share-based (non-option) equity compensation awards to non-executive directors.
There were also updates to ISS policies regarding stock option repricing proposals and changes to quantitative screen metrics for relative degree of alignment (RDA) as part of ISS’ Pay for Performance evaluation. Please see our bulletin for details.
Copies of the 2014 Update and related documents can be accessed below:
- Institutional Shareholder Services Inc. Canadian Corporate Governance Policy – 2014 Updates (pdf 765kb) – November 21, 2013
- Institutional Shareholder Services Inc. 2014 Canadian Corporate Governance Policy Updates and Process – Executive Summary (pdf 419kb) – November 21, 2013.