Institutional Shareholders Services (ISS) recently announced the results of its 2017-2018 Governance Principles Survey. This high-level survey of the institutional investors, corporate executives, board members and other interested parties examined a small number of high-profile corporate governance issues and constitutes the initial part of ISS’s annual two-part global policy survey. The more comprehensive policy application survey closed in early October 2017.

The Survey

A key part of ISS’s annual policy formulation process, the Survey is designed to collect feedback from various market participants about emerging corporate governance issues and trends. Final benchmark voting policy updates will be released in mid-November 2017 (effective for meetings on or after February 1, 2018) following an open comment period on draft policy updates which is scheduled to be released by ISS in late October. While survey topics may reflect issues that ISS is tracking over the short or medium term, they can also result in future ISS policy or QualityScore amendments.

Survey Topics and Key Takeaways

While Canadian respondents represented only 9% of the total Survey respondents, with 90% of respondents being from the U.S., the following Survey results will be of interest to Canadian market participants:

  • Board Gender Diversity. ISS reports that responses in this area reflect the growing global focus on increasing the number of female directors on public company boards. A majority of both investor and non-investor respondents (69% and 54% respectively) felt that an absence or lack of female directors on public company boards was considered problematic. A disclosure policy describing the considerations taken by a company’s board to increase gender diversity would mitigate the concern for 26% of such investor respondents and more than half of the non-investor respondents. This feedback is consistent with the approach taken in Canada, where NI 58-101 Disclosure of Corporate Governance Practices requires issuers to disclose whether a written policy on the representation of women on the board and in executive positions has been adopted and if not, the reasons for not doing so. Disclosure about, among other things, considerations for increasing the level of representation of women on the board in the nominating process is also required. The CSA recently noted in Multilateral Staff Notice 58-309, the CSA’s third annual review of disclosure regarding gender representation on boards and in executive officer positions in response to the NI 58-101 requirements, that, among other things, regardless of issuer size, issuers that had adopted written policies regarding representation of women on boards had a higher percentage of women on their boards compared to issuers without such a policy. Stikeman Elliott’s own internal survey of the companies in the TSX/S&P 60 shows that in 2017, 80% of those issuers now have written gender diversity policies and that 35% of issuers on the TSX/S&P 60 have boards comprised of 30% or more women. Click here for recent blog posts in our Board Diversity Series.
  • Virtual Meetings. While virtual shareholder meetings have not yet been widely adopted in Canada, with the first Canadian virtual shareholders meeting having taken place in early 2017, the implications of a transition away from physical meetings has raised concern among some shareholders. When asked about their views on the use of online mechanisms to facilitate shareholder participation at shareholder meetings, more than 36% of investor respondents considered the practice acceptable if it were a “hybrid” meeting but not a “virtual-only” meeting, with 8% not supporting either type. Another 32% were comfortable with both “hybrid” meetings and “virtual-only” meetings if the latter provided the same shareholder rights as a physical meeting. Finally, 19% of investors considered both types of meetings to be acceptable without reservation.
  • Multi-Class Capital Structures With Unequal Voting Rights. In the Survey, ISS solicited responses on multi-class share structures, which it presented as a practice increasingly under scrutiny in light of the recent Snap Inc. IPO (in which the public was only offered non-voting shares). Investors and non-investors are split on the appropriateness of these structures, with 43% of investor respondents indicating they are always problematic (even in the context of an IPO), and 50% of non-investors of the view that companies should have the right to choose their capital structure. Another 43% of investor respondents thought that these structures are only problematic if not subject to automatic sunset provisions or periodic re-approval by shareholders. This finding is consistent with the findings of ISS’ 2016-2017 annual survey in which 57% of investor respondents were in favour of ISS’s adverse vote recommendations in cases where sunset provisions were lacking. Currently, the ISS 2017 Proxy Voting Guidelines for TSX-Listed Companies recommend a vote against proposal to create a new class of common stock that will create a class of common shareholders with diminished voting rights unless certain criteria are met, including, among other things, a sunset provision.
  • CEO Pay Ratio Disclosure. Currently, Canadian public companies are not required to disclose the ratio of CEO pay to the pay of the median company employee or any other executive pay ratios. However, the 2018 introduction of pay ratio disclosure in the U.S. and a similar new disclosure requirement to be implemented in the UK, generated a survey question on how respondents intend to analyze data on pay ratios. Of the investor community, 63% of respondents indicated that they would compare a company’s pay ratio across companies or industries, and would assess year-on-year changes in the ratio for a particular company, or do both. Among non-investor respondents, 44% did not regard pay ratios as useful data while 21% of non-investors intended to use the data in both ways.

Survey Participation

Responses from both the global institutional investor and corporate communities were significantly higher than last year’s annual survey. Of the 602 global responses to the Survey, 51 were from groups based in Canada, which represented a combined investor (3%) and non-investor (6%) total of 9% of the respondents as compared to a total of 90% from the U.S.