While the Canadian Securities Administrators formulate a policy based approach to address concerns raised about services provided by proxy advisory firms (see our September 2013 Blakes Bulletin: Canadian Securities Administrators to Address Proxy Advisory Firm Concerns), in preparing for the 2014 proxy season, it remains important to be familiar with the latest Canadian voting guidelines as prepared by two of North America's largest proxy advisory firms: Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. (Glass Lewis).
With respect to TSX-listed issuers, this bulletin briefly addresses a few of the key corporate governance matters covered by the ISS corporate governance policies and Glass Lewis proxy guidelines for the 2014 proxy season. We have also included references to further Blakes bulletins that provide additional information on several of the items discussed.
ROLE OF PROXY ADVISORY FIRMS
Proxy advisory firms offer a variety of services to their clients, who are typically institutional investors. Primarily, proxy advisors review and analyze matters put forward for consideration at shareholder meetings and make voting recommendations concerning such matters. The items considered range from routine matters to highly complex merger and acquisition transactions that involve a voting decision and cover both management initiatives and shareholder proposals. A voting recommendation is generally based on the issuer’s compliance with the governance practices and standards contained in the proxy adviser’s general voting guidelines (or further customized guidelines) for that proxy season.
DIRECTOR ELECTIONS AND SHAREHOLDER QUORUM
Quorum for Shareholder Meetings
Canadian federal and provincial corporate statutes generally provide that unless the by-laws of a company provide otherwise, the holders of a majority of the shares entitled to vote at a meeting of shareholders, whether present in person or represented by proxy, will constitute a quorum.
For the 2014 proxy season, Glass Lewis updated its proxy voting guidelines to provide that it will generally permit a reduced quorum in a company’s by-laws to be set at 33 per cent, after considering the specific facts and circumstances of the company such as size and shareholder base. Previously, Glass Lewis would recommend voting in favour of a reduced quorum set as low as 25 per cent, which level it will still support when companies are adopting new articles in connection with a change of jurisdiction of incorporation, provided that the new quorum represents an increase, or remains unchanged from prior levels.
ISS will generally give a positive voting recommendation in respect of by-laws if a reduced quorum is set at 25 per cent or greater, which may be reduced to no less than 10 per cent in the case of a small company that can demonstrate, based on publicly disclosed voting results, that it is unable to achieve a higher quorum and where there is no controlling shareholder.
Enhanced Quorum for Contested Director Elections
An enhanced quorum by-law raises the quorum threshold (generally to 50 per cent) for any shareholder meeting where shareholders seek to replace the majority of an issuer’s current board members (Enhanced Quorum). In such situations, if the higher Enhanced Quorum level is not satisfied, the shareholder meeting is adjourned for up to 65 days to facilitate maximum participation by shareholders and any shareholders present in person or by proxy at the reconvened meeting will constitute the necessary quorum.
For its 2014 Canadian proxy voting guidelines, ISS added a policy whereby it will generally recommend voting against any new by-law or by-law amendment establishing Enhanced Quorum. Previously, ISS considered such matters on a case by case basis.
Glass Lewis does not specifically address enhanced quorum by-laws in its publicly available abridged proxy guidelines.
Advance Notice Provisions
During the 2012 proxy season, the adoption of advance notice provisions gained a foothold in Canada (see our March 2013 Blakes Bulletin: Blakes Proxy Contest Study – Preparing for the 2013 Season) and the number of issuers adopting such provisions increased during the 2013 proxy season. Advance notice provisions are composed of amendments to corporate by-laws or articles, or policies adopted by boards of directors, which require notice of director nominations and detailed information about nominees and dissident shareholders to be provided to management in advance of an annual or special meeting, generally between 30 and 65 days prior to the meeting date. For more information on the adoption of advance notice provisions, see our October 2012 Blakes Bulletin: Proxy Contests: Lessons from 2012 Proxy Season.
For the 2014 proxy season, ISS updated its proxy voting guidelines to clarify that, while it is generally supportive of reasonably drafted advance notice provisions, it will usually recommend voting against a proposal to adopt such a provision if the company requires any proposed nominee to agree in writing that he or she will comply with all of the company’s policies and guidelines applicable to directors (the concern being that such agreements may impede the nominee’s ability to affect positive board and corporate governance change); or the board, in its sole discretion, is only permitted to waive a portion – rather than all – of the advance notice provisions.
Glass Lewis has also updated its Canadian proxy voting guidelines in respect of advance notice provisions. It will now generally support reasonably drafted policies that require a nominating shareholder to provide notice of any director nominations no less than 30 and no more than 70 days prior to the date of the annual meeting. This policy update extends Glass Lewis’ previous permissible notice range (i.e., no less than 30 and no more than 65 days) by an additional five days.
Various governance commentators are concerned about director “overboarding” and in this regard, ISS notes that “[d]irectors must be able to devote sufficient time and energy to a board in order to be effective representatives of shareholders' interests.” ISS deems a director who is not a CEO of a public company to be overboarded if he or she sits on more than six public company boards, while a director who is a CEO of a public company is considered to be overboarded if he or she sits on more than two outside public company boards in addition to the company of which he or she is CEO.
As a new provision in its 2014 Canadian proxy voting guidelines, ISS will now generally issue a withhold recommendation for an individual director where that director was overboarded and he or she attended less than 75 per cent of his or her board and committee meetings held within the past year without a valid reason. Previously in situations where directors were viewed as being overboarded, ISS would only include cautionary language in its voting recommendation reports, which practice will be continued in the 2014 proxy season, even where an overboarded director’s attendance is not viewed as problematic by ISS.
In its 2014 Canadian proxy voting guidelines, Glass Lewis adopted a definition for “overboarding” that is generally the same as the definition used by ISS and provides that an overboarded director will typically receive withhold recommendations regardless of attendance. Previously, Glass Lewis would usually recommend that shareholders withhold votes from directors if a director served on an “excessive” number of boards, which was not quantitated.
Say on Pay
The implementation of shareholder say-on-pay votes on the compensation practices of public companies in Canada started in 2009 when the major Canadian banks announced that they would give shareholders an advisory say-on-pay vote. Currently, it is estimated that approximately 41 per cent of the issuers in the S&P/TSX Composite Index have adopted say on pay.
In its 2014 Canadian proxy voting guidelines, ISS announced that when evaluating issues related to executive pay, it will consider a company’s response to a previous say on pay proposal that received less than 70 per cent support, taking the company’s ownership structure into account, rather than its prior standard of 50 per cent. Noting that Canadian say on pay vote support levels have typically been above 80 per cent, ISS now requires that vote support below 70 per cent receive an appropriate board response, which may include shareholder engagement, changes in executive compensation structure or practices, or improved disclosure and rationale to support compensation decisions.
Glass Lewis adopts a 75 per cent threshold across voting matters in its 2014 Canadian proxy voting guidelines, noting that in its view, any time 25 per cent or more of shareholders vote against the recommendation of management, the board should demonstrate some level of engagement and responsiveness to address the shareholder concerns.
Pay for Performance Evaluation
In its updated Canadian voting guidelines, ISS has revised its methodology for determining long term pay for performance alignment. ISS will now consider the difference between the company's total shareholder returns rank and the CEO's total pay rank within a peer group on an annualized basis measured over a three-year period. Previously, ISS employed a 40/60 weighted average of such measures over one-year and three-year periods. The new methodology is intended to, among other things, provide a better view on long-term pay and performance alignment and, in particular, avoid being overwhelmed by periods of volatility and mean reversion.
For the 2014 proxy season, Glass Lewis notes that it will employ a proprietary model to evaluate the link between pay and performance of the top five executives at Canadian companies. The model benchmarks executive pay and company performance against four peer groups and across seven performance metrics, and assigns the company a corresponding letter grade ranging from “A” to “F”.
As a prelude to its 2015 Canadian proxy voting guidelines, ISS has already completed a consultation period in connection with evaluating a number of potential approaches concerning director tenure requirements (see our January 2014 Blakes Bulletin: OSC Proposes Disclosure Requirements for Gender Diversity and Director Term Limits). ISS noted that viewpoints vary on outside director tenure, with certain governance observers insisting that long tenure demonstrates commitment and builds valuable expertise, while others maintain that long serving directors may lack independence and objectivity, and that term limits can refresh directors’ skill sets and boost board diversity. ISS has proposed three possible approaches: (1) consider the mix of director tenures as a key factor for evaluating nominating committee member voting recommendations; (2) automatically deem long-serving directors as “non independent” for the purposes of existing voting policies; or (3) retain the status quo (ISS does not currently consider director tenure).
By contrast, Glass Lewis states in its 2014 Canadian proxy voting guidelines that while it supports periodic director rotations to ensure fresh perspective and novel idea generation, it believes director term limits typically are not in shareholders’ best interests and that director experience can be a valuable asset. However, if a company voluntarily adopts term limits, then Glass Lewis will insist that the applicable limits are adhered to.