Institutional Shareholder Services (ISS) and Glass Lewis, & Co. (Glass Lewis) have both recently released updates to their proxy voting recommendation guidelines for the 2013 proxy season. Glass Lewis released its updates on November 15, 2012 and ISS released its updates on November 16, 2012. The items updated include those pertaining to corporate governance standards, executive compensation and shareholder rights. The main highlight in the ISS update is the new pay-for-performance methodology which now has two tiers of analysis: first is a quantitative evaluation of three factors designed to provide a relative and absolute analysis on pay for performance; second, is a qualitative evaluation where the quantitative analysis indicates that there is a potential pay-for-performance misalignment.

The following report outlines the significant changes made by both ISS and Glass Lewis to their respective Canadian proxy advisory guidelines. These changes will apply to shareholder meetings held on or after February 1, 2013.

Corporate Governance

Election of Directors by Slate Ballot

ISS will no longer support any slate ballots for directors for TSX or TSXV issuers, in line with recent policy changes from the TSX (see our Bulletin). This update removes the double trigger that previously applied to TSX listed issuers which required that there be additional corporate governance concerns before ISS would not support a slate ballot for directors. This policy will not apply to contested director elections.

Directors of Majority Owned Companies

On a case-by-case basis, director nominees who are or who represent a controlling shareholder of a majority owned company, who will be designated as controlling insiders, may generally be supported under ISS’s board and committee independence policies, if the company meets certain stated independence and governance criteria. This exemption will not be considered at dual class companies.

Majority Voting Policy

Glass Lewis will recommend that shareholders withhold votes from all members of S&P/TSX Composite index companies’ governance committees where a company has not adopted a majority voting policy.

Board Responsiveness to Significant Shareholder Vote

Where 25% or more of a company’s shareholders vote against a management recommendation, Glass Lewis will consider this a factor in voting against a future management proposal where Glass Lewis determines that the board did not respond appropriately to this significant shareholder vote.

Executive Compensation

ISS’s revised executive compensation methodology aims to have a longer-term emphasis and to address concerns with the previous methodology regarding the impact of CEO turnover. It applies to all S&P/TSX Composite index companies and for all management say-on-pay resolutions. ISS will generally vote against management say-on-pay proposals, compensation committee members, and equity-based incentive plan proposals if there is significant long-term misalignment between CEO pay and company performance.

The first stage of the analysis of this alignment involves an examination of three quantitative measures, as follows:

  1. Relative Degree of Alignment: the difference between the company’s total shareholder return (TSR) rank and the CEO’s total pay rank within a peer group, measured over a one-year and three-year period. The peer group is generally comprised of 11-24 companies that meet certain criteria including revenue/assets and market cap between 0.25 times and 4 times the company’s size and those that are in the closest Global Industry Classification Standard industry group.
  2. Multiple of Median: the total compensation in the last reported fiscal year relative to the median compensation of the peer group.
  3. CEO Pay to TSR Alignment: the alignment between the trend of CEO pay and the trend of company performance over the prior five fiscal years.

If the above quantitative analysis indicates that there is a potential pay-for-performance misalignment ISS will conduct a qualitative assessment that will consider a range of case-by-case factors that may include: the ratio of performance to time based equity grants and the overall mix of performance based compensation relative to the total compensation; the quality of disclosure and appropriateness of performance measures and goals utilized so shareholders may assess the rigor of the performance program; trends in other financial metrics such as growth in revenue, earnings and return measures; and any other factors deemed relevant.

Shareholder Rights

Advance Notice Requirement

Both Glass Lewis and ISS will support proposals to adopt an advance notice policy or to adopt or amend bylaws containing or adding an advance notice requirement where the company’s deadline for notice of shareholders’ director nominations is no more than 65 days and no less than 30 days prior to the meeting date.