Proxy advisory firm Glass Lewis recently released its Proxy Paper Guidelines for the 2013 proxy season for issuers listed in Canada. According to Glass Lewis, its research and advice is intended to encourage governance structures that will "drive performance, create shareholder value and maintain a proper tone at the top." Ultimately, the guidelines set out the key issues Glass Lewis will consider in making recommendations with respect to the election of directors, financial reporting, executive compensation, governance structure and environmental and social risk.
Election of Directors
According to the guidelines, boards that protect and enhance shareholders' best interests are those that (i) are independent; (ii) have directors with diverse backgrounds; (iii) have a record of positive performance; and (iv) have members with a breadth and depth of experience.
On the issue of board composition and director independence, the guidelines state that Glass Lewis will usually recommend that shareholders withhold votes for directors that (i) attend less than 75% of the board and/or key committee meetings; (ii) serve on the board while also serving as the issuer's CFO; (iii) serve on an "excessive" numbers of boards (although the definition of excessive is not provided); (iv) provided material professional services to the company during the past year, or whose immediate family member provided such services; (v) engage in commercial deals, including perk-type grants from the company, or whose immediate family member engaged in such deals; or (vi) have interlocking directorships with one of the company's executives.
Further, according to Glass Lewis, only independent directors should serve on a company's audit, compensation, nominating and governance committees, and the firm will generally recommend a withholding of votes from any insider or affiliated director seeking to be appointed to such a committee. While Glass Lewis does not generally recommend that shareholders withhold votes from chief executives that chair the board, the guidelines state that the roles should be separated. Meanwhile, an exception to independence standards is provided for controlled companies.
Recognizing the important roles played by auditors in the disclosure of financial information, the guidelines outline the circumstances under which Glass Lewis may not recommend voting in favour management's recommendation for an auditor or authorizing the board to set auditor fees. Such factors include where (i) audit fees and audit-related fees total less than 50% of overall fees; (ii) the auditor bears some responsibility for recent restatements or late filings; (iii) the company has aggressive accounting policies; (iv) the company has poor disclosure or a lack of transparency in its financial statements; (v) there are other relationships or issues of concern with the auditor that might suggest a conflict between the interests of the auditor and those of shareholders; and (vi) the company is changing auditors due to a disagreement between the company and auditor on a matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures.
The guidelines also suggest that rotating auditors is an important safeguard against having a relationship between a company and its auditor becoming too close.
According to the guidelines, Glass Lewis employs a "highly nuanced" approach in analyzing executive compensation whereby advisory votes are reviewed on a case-by-case basis to ensure that each company is considered within the context of industry, size, financial condition, historic pay-for-performance practices, and other mitigating factors. Four specific issues are considered when reviewing say-on-pay proposals, namely (i) the overall design and structure of the executive compensation program; (ii) the quality and content of disclosure; (iii) the amount paid to executives; and (iv) the link between compensation and performance.
The guidelines also provides examples of "problematic" pay practices, including excessive or guaranteed bonuses, high executive pay that is not reinforced by outstanding company performance, and inappropriate benchmarking. The guidelines also provide Glass Lewis' position on such issues as equity based incentives, option re-pricing and director compensation.
According the guidelines, poison pills are generally not in the best interests of shareholders as they can reduce management accountability. Glass Lewis will generally support a limited poison pill, however, to accomplish a specific objective such as the closing of an "important merger" or a poison pill containing a reasonable qualifying offer clause. There is no indication in the guidelines, however, as to what threshold a merger would have to meet to be considered "important". Support for poison pills will also be considered if the threshold is not "unreasonably low", (i.e. lower than 20%) and the provisions of the qualifying offer clause include certain attributes.
On the issue of advance notice policies, Glass Lewis states that while it recognizes that an advance notice policy may increase the burden on small shareholders attempting to nominate directors, it believes that costs are minimal "compared with the potential negative impact resulting from an overhaul of a company's incumbent board." As such, the guidelines state that Glass Lewis will generally support advance notice policies that require nominating shareholders to provide notice not less than 30 and not more than 65 days prior to the annual meeting date.
Other governance issues discussed in the guidelines include quorum requirements (Glass Lewis recommends supporting a quorum of at least 25% of shares entitled to vote), voting structure (including support for proposals calling for majority voting in place of plurality voting) and shareholder proposals.
Environmental and Social Risk
According to the guidelines, Glass Lewis will recommend voting in favour of a reasonable and well-targeted shareholder proposal if it believes supporting the proposal "will promote disclosure of and/or mitigate significant risk exposure." In those "egregious" cases where a company fails to adequately address risks related to environmental or social practices, Glass Lewis will recommend a vote against directors.
As we discussed earlier this month, the Canadian Coalition for Good Governance also recently released its 2012 Best Practices for Proxy Circular Disclosure guidelines. For more information guidance and suggested best practices relevant to continuous disclosure, see our Continuous Disclosure Guide.