Proxy advisory firm Glass Lewis recently released its Proxy Paper Guidelines for the 2014 proxy season in Canada. These guidelines, which contain a number of updates to Glass Lewis’ proxy voting policies on director and executive compensation, shareholder rights and defences, and other similar governance matters, are applicable to all shareholder meetings to be held in the 2014 proxy season. The key updates to the proxy voting guidelines are summarized below.
Director and Executive Compensation
Glass Lewis’ previous pay-for-performance analysis was based on comparing a company’s pay and performance to a peer group of similarly-sized companies in the same sector. For the 2014 proxy season, Glass Lewis has developed a proprietary quantitative pay-for-performance model, which is intended to evaluate the link between the pay of the top five executives at Canadian companies against company performance. This model will benchmark these executives’ pay and company performance against peers across five performance metrics. Companies will then be given a letter grade of “A” to “F”, which will be used to evaluate compensation committee effectiveness. Glass Lewis may recommend voting against the compensation committee of companies with a pattern of receiving a failing grade of “F” under this pay-for-performance analysis. This analysis will also inform Glass Lewis’ decisions on say-on-pay proposals; if a company receives a failing grade on the pay-for-performance model, Glass Lewis will likely recommend that shareholders vote against the say-on-pay proposal. In this respect, Glass Lewis also continues its support for an annual say-one-pay vote as an effective mechanism for enhancing transparency in setting executive pay, improving accountability to shareholders and providing for a more effective link between pay and performance.
Related to its focus on pay-for-performance, Glass Lewis now acknowledges that emerging best practice is to promote “clawback” or “malus” provisions which allow for some or all of an executive’s incentive compensation to be recouped or forfeited in certain circumstances, usually relating to a material misstatement of financial results and related conduct.
With respect to director compensation, Glass Lewis has also further bolstered its position that non-employee director option grants should not be tied to performance, explaining that it prefers instead a compensation structure that provides directors with the option of receiving some or all of their fees in deferred share units or common shares that are restricted until the director leaves the board.
Advance Notice Policies
Glass Lewis’ previous acceptable time frame for advance notice provisions was between 30 and 65 days. Glass Lewis will now generally recommend that shareholders vote for advance notice provisions that require a shareholder to provide notice of between 30 and 70 days prior to the date of the annual meeting. In cases where the notice period deviates from this time frame, Glass Lewis will consider recommending that shareholders vote against such resolutions.
Majority Voting for Controlled Companies
Glass Lewis previously recommended that shareholders withhold votes from all members of a company’s governance committee for companies in the S&P/TSX composite index that elected to “explain” rather than adopt a majority voting policy. Glass Lewis has now changed its requirements to exempt controlled companies from adopting a majority voting policy (i.e. companies where a single individual or entity owns more than 50% of the voting shares). For companies that have adopted a majority voting policy, Glass Lewis will also now recommend that votes be withheld from the nominating committee chair when a director who did not receive support from a majority of voting shares in the previous election was allowed to remain on the board.
Term and Age Limits
Glass Lewis has also added a very robust discussion on the propriety of director age and term limits, explaining why it supports periodic director rotation to ensure a fresh perspective on the board as opposed to arbitrary term or age limits. However, if a term or age limit has been adopted, Glass Lewis will consider recommending shareholders withhold votes from the nominating and/or governance committees if the limit is waived, unless the rule was waived with a reasonable explanation, such as the consummation of a major corporate transaction.
Other Proxy Related Matters
On more technical issues, Glass Lewis also recommends that shareholders not give their proxy to management to vote on other business items that may properly come before the meeting as, in its view, granting such unfettered discretion is unwise and that it will recommend withholding votes against the governance committee chair when the board has failed to disclose detailed voting results from the previous annual meeting.
Integrity in Financial Reporting
Glass Lewis will now typically recommend supporting proposals to require auditor rotation when the proposal uses a reasonable period of time (usually not less than 5-7 years), particularly at companies with a history of accounting problems. Glass Lewis believes that auditor rotation within this timeframe ensures both the independence of the auditor and the integrity of the audit.