Institutional Shareholder Services (ISS) and Glass Lewis have updated their respective proxy voting guidelines for the upcoming 2017 shareholder meeting season. While Glass Lewis has published its fully updated 2017 Proxy Paper Guidelines, ISS has published a summary of its key updates and intends to release a complete set of updated policies in December 2016.
The following are significant highlights of the changes to ISS’ and Glass Lewis’ policies relevant to Canadian companies:
- Shareholder Rights Plans - To conform with recent amendments to the Canadian take-over bid regime, ISS and Glass Lewis will recommend voting against shareholder rights plans where the minimum period for a permitted bid is greater than 105 days.
- Problematic Compensation Practices - ISS may issue a recommendation to vote against director elections if a company’s director compensation practices pose what ISS views to be independence risks or are otherwise problematic (e.g. providing for excessive grants to new directors and the granting of performance equity to directors).
- Non-Audit Fees - ISS will recommend voting against the election of audit committee members if non-audit fees paid to the auditor exceed the sum of audit fees, audit-related fees, and tax compliance and preparation fees.
- Director Overboarding - Glass Lewis will generally recommend voting against a director who (i) serves as an executive officer of any public company while serving on more than two public company boards, or (ii) serves on more than five public company boards. - ISS will redefine “overboarded” to mean a director who (i) serves as the CEO and sits on more than one public company board other than the board of the company at which they are CEO, or (ii) sits on more than four public company boards. ISS will recommend a withhold vote for any director who is overboarded and who has attended less than 75% of his/her respective board and key committee meetings within the past year without a valid reason for the absences.
- Board Responsiveness to Say-On-Pay - Glass Lewis may recommend voting against compensation committee members where the committee fails to address shareholder concerns following a say-on-pay vote receiving less than majority support.
- Equity Compensation Plans - Glass Lewis clarified that a rolling share limit above 5% in a full-value award plan (e.g. performance and restricted share units) could contribute to an against recommendation.
Shareholder Rights Plans
The Current Approach
Currently, ISS will vote against a shareholder rights plan (or poison pill) where the permitted bid minimum period is greater than 60 days. Glass Lewis will not support a poison pill if, among other things, the offer is not required to remain open for more than 90 days. Recent amendments to the Canadian take-over bid regime have mandated a longer minimum deposit period of 105 days (as compared to the previous 35-day minimum deposit period), subject to certain prescribed exceptions.
ISS will amend its Canadian voting guidelines to align with the Canadian take-over bid regime’s new minimum deposit period of 105 days. Effective for shareholder meetings on or after February 1, 2017, ISS will vote against shareholder rights plans where the permitted bid minimum period is greater than 105 days. Similarly, Glass Lewis has updated its position and will generally support a poison pill if, among other things, a take-over bid offer is not required to remain open for more than 105 days. No other changes to ISS’ or Glass Lewis’ guidelines for shareholder rights plans have been made.
Problematic Compensation Practices
The Current Approach
ISS does not currently have an explicit voting policy with respect to problematic non-employee director compensation practices; however, ISS does treat unrestricted non-employee director participation in equity-based compensation plans as an overriding negative factor in the assessment of such plans. ISS will generally recommend a vote against equity plan participation and/or equity-based awards to non-employee directors unless they are subject to ISS’ prescribed limits. Glass Lewis currently notes that equity-based grants to non-employee directors should not be tied to performance conditions, as a focus on specific aspects of financial performance could hinder a director’s independence. Glass Lewis prefers 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.
In response to the increase in non-employee director compensation schemes, ISS is introducing a case-by-case policy for TSX listed companies aimed at identifying significant problematic non-employee director compensation practices that would result in a negative vote recommendation at the board level in addition to, or in the absence of, the ability to register a negative vote for the problematic award or payment or the plan under which it is made. In accordance with its new policy, ISS may, on a case-by-case basis, generally vote withhold for members of the compensation committee (or other committee responsible for director compensation), or, in the absence of such a committee, the board chair or the full board, where ISS has identified director compensation practices that, in its view, pose a risk of compromising a non-employee director’s independence or otherwise appear to be problematic from a shareholder perspective. Examples of such problematic practices provided by ISS include excessive inducement grants issued to new directors upon their appointment or election and performance-based equity grants to non-employee directors. ISS’ amendments purportedly seek to reflect best practices in the Canadian market as described by the Canadian Coalition for Good Governance in its 2011 Director Compensation Principles.
As noted above, Glass Lewis already recommends against performance linked non-employee director compensation and has not adopted any amendments related to problematic compensation practices for the 2017 proxy season.
The Current Approach
ISS will currently recommend a vote against proposals to ratify auditors where non-audit related fees exceed audit-related fees and will recommend voting withhold for individual directors who are members of the audit committee where non-audit fees paid to the external auditor exceed audit and audit-related fees. Glass Lewis does not have a similar policy but will recommend withholding votes from all members of the audit committee where recent non-audit fees have included charges for services that are likely to impair the independence of the auditor and where non-audit fees include charges for tax services for senior executives of the company or include services related to tax avoidance or tax shelter schemes.
The new ISS guidelines will recommend that shareholders vote against proposals to ratify auditors and to withhold for individual directors who are members of the audit committee where non-audit fees are greater than the aggregate of the issuer’s audit fees, audit-related fees and tax compliance/preparation fees. ISS has noted that while tax compliance and preparation include the preparation of original and amended tax returns, refund claims and tax payment planning, other services in the tax category, including tax advice, planning and consulting, should fall within non-audit fees for the purpose of determining whether excessive non-audit related fees have been paid to the external auditor.
Glass Lewis has not adopted any amendments related to non-audit fees.
The Current Approach
Currently, Glass Lewis will recommend that shareholders withhold votes from a director who is on an excessive number of boards. This would include a director who serves as an executive officer of any public company while serving on a total of more than three public company boards (i.e., their own company’s board and two others), and any other director who serves on a total of more than six public company boards. ISS will generally withhold its vote for an individual director if such a director is overboarded and has attended less than 75% of his/her respective board and committee meetings held within the past year without a valid reason for these absences. Until February 2017, ISS will define “overboard” as a CEO of a public company who sits on more than two outside public company boards in addition to the company of which he/she is CEO or a director who is not a CEO of a public company and who sits on more than six public company boards in total.
Effective for the 2017 proxy season, Glass Lewis will generally recommend voting against a director who serves as an executive officer of any public company while serving on more than two public company boards and against any other director who serves on a more than five public company boards in total. Glass Lewis may consider other relevant factors in determining whether a director can devote sufficient time to his/her duties, including, among other things, the director’s attendance record and the director’s duties on the other boards.
While the Glass Lewis update is similar to the amended definition of “overboarded” announced by ISS last year and scheduled to take effect beginning in February 2017, Glass Lewis has not mandated the double-triggered approach used by ISS whereby the director must be overboarded and have a poor attendance record and therefore it is possible that Glass Lewis could recommend voting against an overboarded director where ISS will recommend a vote in favour. Effective February 1, 2017, ISS’ new definition of “overboarded” will reduce the thresholds from more than two outside public company boards to more than one in the case of CEOs and from more than six total public company boards to more than four in the case of non-CEO directors.
Board Responsiveness to Say-On-Pay
The Current Approach
Glass Lewis currently believes that an issuer’s compensation committee should provide some level of response to a significant level of shareholder opposition (25% or more) to a say-on-pay proposal and, in the absence of evidence that the board has actively engaged shareholders on such issues, Glass Lewis may recommend holding compensation committee members accountable for failing to respond to shareholder opposition. ISS will consider on a case-by-case basis the board’s responsiveness to investor input and engagement on compensation issues, including the board’s failure to respond to the company’s previous say-on-pay proposal that received support of less than 70% of the votes cast. ISS will recommend a withhold vote for continuing individual directors, members of the nominating committee or the continuing members of the entire board of directors if, among other things, the board failed to act on a shareholder proposal that received the support of a majority of the votes cast at the previous shareholder meeting.
Glass Lewis has updated its guidelines to clarify that Glass Lewis may recommend voting against members of the compensation committee if the committee fails to address shareholder concerns following a company’s failure to secure majority approval of a say-on-pay proposal. Glass Lewis will also consider recommending voting against the compensation committee chair or all members of the compensation committee where a say-on-pay proposal was approved but there was a significant shareholder vote against in the prior year.
ISS has not made any amendments to its policy with regard to board responsiveness.
Full-Value Award Plans
The Current Approach
In the case of full-value award plans (e.g., RSU and performance share plans), Glass Lewis will consider a plan limit set at a rolling maximum of 10% of a company’s share capital to be a provision that could contribute to an against recommendation. Glass Lewis notes that a 10% limit is typical of stock option plans. ISS will generally recommend a vote against equity plan participation and/or equity-based awards (including full value awards) to non-employee directors unless they are subject to ISS’ prescribed limits.
Glass Lewis has amended its policy to provide that a full-value award plan limit set at a rolling maximum of more than 5% of a company’s share capital could contribute to an against recommendation from Glass Lewis. Other considerations, while unamended, that could contribute to an against recommendation include, among others, the absence of any performance conditions or vesting provisions, the participation of non-executive directors on the same basis as company executives and the inclusion of a single-trigger change of control provision. ISS has not amended its policies with regard to share-based compensation plans, including full-value award plans, other than with respect to the NED amendments referred to above.
In addition to the amendments noted above, ISS is adding a footnote to its definition of independence to clarify that the terms “currently”, “is” or “has” in the context of Transactional, Professional, Financial, and Charitable Relationships will be defined as having been provided at any time within the most recently completed fiscal year and/or having been identified at any time up to and including the annual shareholders’ meeting.
All ISS updates will take effect for shareholder meetings held on or after February 1, 2017. Other than the addition of the new non-employee director compensation policy which will only apply to TSX listed issuers, all updates will apply to both TSX and TSX-V listed issuers. For further information, please see ISS’ U.S., Canada, and Latin America Proxy Voting Guidelines Updates 2017 Benchmark Policy Recommendations (November 21, 2016) and Executive Summary Proxy Voting Guideline Updates and Process (November 21, 2016).
The Glass Lewis amendments will be effective for the 2017 proxy season. For further information, please see Glass Lewis’ 2017 Proxy Paper™ Guidelines: An overview of the Glass Lewis approach to proxy advice Canada.