Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) have both released updates to their Canadian proxy voting recommendation guidelines for the 2014 proxy season. Glass Lewis released its updates on December 13, 2013 and ISS released its updates on November 21, 2013. The items updated include those pertaining to corporate governance standards, shareholder rights and executive compensation.
The following summary outlines the significant changes made by both ISS and Glass Lewis to their respective Canadian proxy advisory guidelines. These changes will apply to shareholder meetings held on or after February 1, 2014.
Director Over-boarding – TSX Companies
ISS will generally consider a director to be “over-boarded” when he or she is a CEO of a public company who sits on more than two additional outside public company boards, or where a director who is not a CEO of a public company sits on more than six public company boards. Based on feedback obtained, ISS has implemented a double-trigger overboarding policy pursuant to which it will generally recommend a withhold vote from an individual director nominee where the director is overboarded and has attended less than 75% of his or her respective board and committee meetings held within the past year without a valid reason.
Persistent Problematic Audit-Related Practices – TSX Companies
ISS will make case-by-case recommendations on members of an audit committee and, in some cases, the entire board if adverse accounting practices are identified and are determined to reach a “level of serious concern.” Some examples provided by ISS of such adverse accounting practices are: accounting fraud, misapplication of applicable accounting standards, or material weaknesses identified in the internal control process. ISS further notes that the analysis of the accounting practices should include a review of the severity, breadth, chronological sequence and duration, as well as efforts by the company to remediate the issue.
Director Independence – TSX and TSXV Companies
ISS clarifies circumstances under which a director will be considered an “Inside Director” or “Affiliated Outside Director.” The revised criteria now provide that any current interim executive will be designated as an Inside Director and that the calculation of whether a beneficial owner of shares has more than 50% of the outstanding voting rights may now include voting power distributed among more than one member of a group. A former CEO of an affiliate of the company will now be designated as an Affiliated Outside Director. A former interim CEO of the company will be considered an Affiliated Outside Director where they served for a period of 12 to 18 months and their compensation was high relative to other directors, whereas other former interim executives will be considered Affiliated Outside Directors if they served for a period greater than 18 months or if they served for a period between 12 and 18 months and received compensation comparable to the top five NEOs or compensation which was high relative to other directors. Further, ISS’s definition of Affiliated Outside Director has been expanded to capture directors who are, or whose relative is, a partner, controlling shareholder or an employee of an organization providing professional services to the company, its affiliates, or to an individual officer of the company or its affiliates.
Egregious Actions – TSX and TSXV Companies
ISS will, in extraordinary circumstances, recommend a withhold vote from individual directors, one or more committee members, or an entire board due to: material failures of governance, stewardship, risk oversight or fiduciary responsibilities; failure to replace management as appropriate; or egregious actions related to a director’s service on other boards that raise substantial doubt about that director’s ability to effectively oversee management and serve the best interests of shareholders. A key part of this update is that ISS has taken the position that any hedging of company stock by directors and executives is considered a material failure of risk oversight as it results in a misalignment between the director/executive and the company’s shareholders.
Board Responsiveness – TSX and TSXV Companies
ISS will make a case-by-case recommendation on continuing individual directors, committee members, or continuing members of an entire board if: (i) where the company has a majority voting policy, any director received more than 50% withhold votes at the previous election and the nominating committee has not required the director leave the board after 90 days or has otherwise failed to provide another form of acceptable response to the vote; (ii) where the company does not have a majority voting policy, any director received more than 50% withhold votes at the previous election and the company has not addressed the issues underlying the results of that majority withhold vote; or (iii) the board fails to act on a shareholder proposal that received the support of the majority of votes cast by shareholders.
Pay for Performance
The revisions to Glass Lewis’s pay for performance model were the key update in its 2014 policy guide. Glass Lewis will now utilize a proprietary pay for performance model to assess the quantitative link between pay and performance of the top five executives. Glass Lewis will benchmark the executive’s pay and company performance against four peer groups across seven metrics and grade the companies on a letter based system based on the link between quantitative pay and performance. The methodology for constructing the peer group builds a weighted social network of peers based on four peer groups, including: company disclosed peers, incoming peers, peers or peers and incoming peers of peers. Glass Lewis will generally vote against “say on pay” proposals and/or withhold from compensation committee members of companies that show a pattern of failing the quantitative pay for performance analysis.
ISS has revised its methodology for calculation of the “Relative Degree of Alignment” (RDA) pay-for-performance screen and will now calculate the difference between a company’s total shareholder return (TSR) rank and its CEO’s total pay rank within a peer group measured over a three year period. Under the previous methodology, the most recent year was given the most weight in the RDA calculation, whereas the new model will weigh each year of TSR equally. ISS expects the single measure will provide a better view on long-term pay and performance alignment and avoid the impact of periods of volatility.
Equity Compensation Plans – TSX Companies
ISS has revised its policy related to management equity compensation plans to implement revised limits and to address investor concerns related to discretionary or unreasonable participation of non-employee directors in such plans. ISS will generally vote against an executive compensation plan where: (i) the non-employee director aggregate share reserve exceeds 1% of the outstanding common shares; or (ii) the plan does not contain an annual individual non-employee director grant limit with a maximum value of $100,000 worth of stock options in the case of a stock option or omnibus plan or $150,000 worth of shares where the equity plan does not grant stock options. ISS will also generally vote against individual equity grants to non-employee directors where the vote is in conjunction with an equity compensation plan that is being voted against and where such grant would exceed the individual director limit noted above.
Repricing Proposals – TSX and TSXV Companies
ISS will now generally vote against proposals to reprice outstanding options. The policy states that the following actions and any other adjustments that can reasonably considered to be repricing will generally not be supported: reduction in exercise price or purchase price, extension of term for outstanding options, cancellation and reissuance of options, substitution of options with other awards.
Quorum at Shareholder Meetings – TSX and TSXV Companies
Glass Lewis has increased its generally acceptable quorum for shareholder meetings from 25% to 33%; however, it will continue to support a continuance proposal where the quorum is set at 25% as long as this threshold represents an increase or maintenance of prior quorum levels.
Advance Notice Requirements – TSX and TSXV Companies
ISS will generally vote against an advance notice policy or by-law where the board has the discretion only to waive a portion of the advance notice provisions or where proposed director nominees are required to deliver written acknowledgement and agreement to comply with all policies and guidelines of the company applicable to directors.
Enhanced Shareholder Meeting Quorum for Contested Director Election – TSX and TSXV Companies
ISS will generally vote against new by-laws or amendments to by-laws that provide for two different quorum levels at shareholder meetings, the higher of which is required for shareholder meetings where common share investors seek to replace the majority of current directors. ISS takes the position that requiring a higher threshold for contested director elections is inconsistent with the principal that shareholder votes on all matters are of equal importance.