In November 2019, Institutional Shareholder Services (ISS) and Glass Lewis announced their 2020 updates to their voting guidelines. In this article, we outline the major changes to be aware of for the upcoming proxy season.

ISS’ Voting Guideline Updates for 2020

ISS’ updates to its Canadian voting policies were mostly to clarify existing guidelines, and do not differ significantly from 2019. In summary:

Clarification on voting recommendations for ratifying external auditors and withholding audit committee members, expanding the definition of “other” fees paid to external auditors to include fees related to M&A transactions;
Clarification of its support for director nominees who are or represent a controlling shareholder of a majority owned company, specifying that its support only extends to such nominees if they are not members of management;
Clarification of its policy to vote “withhold” on director nominees due to lack of attendance, specifying that the policy excludes nominees who only served for part of the year and companies that recently listed on the TSX;
Clarification of its policy to vote “withhold” on director nominees who have served as former CEO or CFO of the company and are members of the audit or compensation committee, noting that it will also vote to withhold any former CEOs / CFOs of affiliates of the company, or former CEOs / CFOs of recently-acquired companies;
Clarification of its policy to vote “withhold” on overboarded director nominees, noting that when ISS determines the number of boards the nominee sits on, it will exclude any boards that the nominee is stepping off from; and
Inclusion of “evergreen” plans as a possible rationale for voting against a venture company’s equity compensation plan proposal, in order to address the lack of restriction on evergreen plans imposed by the Canadian Securities Exchange compared to the TSX and TSX-V.

Glass Lewis Voting Guideline Updates for 2020

Glass Lewis’ updates to its Canadian voting policies were more substantial, and we have provided additional commentary on the most significant changes:

1. Director Attendance / Committee Meeting Disclosure

“…Specifically, Glass Lewis will generally recommend voting against the governance committee chair when: (i) records for board and committee meeting attendance are not disclosed, and; beginning 2021: (ii) the number of audit committee meetings that took place during the most recent year is not disclosed.

We believe that attendance at board and committee meetings is one of the most basic ways for directors to fulfill their responsibilities to shareholders and that disclosure of attendance records is a critical element in evaluating the performance of directors and the board more generally.

Beginning 2021, we will recommend against the audit committee chair if the audit committee did not meet at least four times during the year.”

**CGP Comments: In favour**

A company that does not disclose the number of Board / committee meetings may be cause for concern, due to excessive meetings (which may be a sign of inefficiency or an underlying corporate governance issue) or very few meetings (which may indicate a lack of scrutiny by the Board).
Based on our examination of proxy circulars from 118 publicly-listed mid-cap TSX companies, only 2 companies did not disclose the number of audit committee meetings held in 2018, and only one company did not disclose the number of Board meetings. We do not see any significant reason that would preclude a publicly-listed company from such a simple disclosure.
Additionally, our examination revealed that: **(i) the average number of audit committee meetings was 4.8;** **(ii) most companies held 4 audit committee meetings;** **and (iii) only one company met fewer than 4 times**. We believe that a quarterly audit committee meeting is a reasonable requirement and reflects the greater time commitment required for an audit committee to effectively carry out its regulatory obligations for financial oversight and accurate disclosure.

2. Board Diversity

“While we will not be altering our vote recommendation policies on the basis of the CBCA amendments coming into effect in 2020…we will review any new company diversity disclosure resulting from these amendments and, where relevant, reflect such expanded disclosure in our analysis for the election of directors at TSX issuers.”

Previously, only TSX-listed companies were required to provide diversity disclosure, and only in relation to gender. The new CBCA amendments, which came into effect on January 1, 2020, now also applies to issuers listed on the TSX Venture Exchange and the Canadian Securities Exchange, and imposes new disclosure obligations regarding organization diversity on companies incorporated under the CBCA, expanding the definition of “diversity” to include other designated minority groups. For the full list of amendments, click here.

**CGP Comments: In favour**

As pointed out by Glass Lewis, “the increased disclosure requirements should not represent an overt burden to existing TSX issuers who already must disclose aspects of their organization’s diversity policies and practices”, and as we noted in our last article on boardroom diversity, diversity can involve a variety of social aspects beyond gender.
We believe that having a more diverse board and/or executive team can encourage more collaborative discussions and bring different perspectives to the table, and Glass Lewis’ decision to actively review and consider these policies as part of their analysis of board nominations is a step in the right direction.

3. Board Skills

“Following on from our 2019 Guidelines update, by which we codified our assessment of board skills as an integral part of the analysis of proposals to elect directors, we clarify our expectation that companies provide meaningful disclosure in line with developing best practice standards.”

Glass Lewis has stated that it expects companies in major indices to disclose sufficient information to make a meaningful assessment of a board’s skills and competencies, and it will consider recommending a vote against the nominating committee chair if material concerns regarding the mix of skills and competencies are not properly addressed by the board. Glass Lewis has provided a description of the board skill matrices and criteria that it will use as part of its assessment.

In summary, Glass Lewis’ assessment criteria sets the expectation that boards should have significant core industry experience, proven skillsets in relation to finance / audit & risk and legal / public policy, and current or prior employment as an executive of a publicly-listed or large private multinational company.

CGP Comments: In favour

We believe that Glass Lewis’ assessment criteria are both fair and relevant, and an evaluation of a candidate’s relevant skills, qualifications and experience beyond previous directorships should already form a major component of the nominating committee’s selection and screening process (especially for a large publicly-listed company).

The nominating committee is ultimately responsible for ensuring that the board is composed of members that have the necessary background to provide effective oversight and strategic direction, and committee members should be held accountable for any perceived lack of due diligence.

4. Contractual Payments and Arrangements

“We have clarified our approach to analyzing both ongoing and new contractual payments and executive entitlements. In general, we disfavor contractual agreements that are excessively restrictive in favor of the executive, including excessive severance payments, new or renewed single-trigger change-in-control arrangements and multi-year guaranteed awards. Further, we believe that the extension of such entitlements through renewed or revised employment agreements represent a missed opportunity to remedy shareholder un-friendly provisions.”

Glass Lewis has noted that most companies maintain severance entitlements based on a multiple of total cash compensation (base salary + bonus), typically three times or less. Additionally, Glass Lewis views the inclusion of long-term incentives (“LTI”) in the calculation of cash severance as inappropriate, especially since accelerated vesting of LTI is relatively common in certain termination scenarios.

CGP Comments: In favour

Excessive severance, single-trigger change-in-control, and multi-year guaranteed awards can result in extreme payouts without a corresponding performance requirement or change in duties, and as such are contrary to corporate governance best practices.

While we have historically observed large signing bonuses and “make-whole” LTI grants to attract high-performing executives, we generally recommend against overly generous contractual payments, particularly if they are not conditional on the executive’s actual performance in their new role.

5. Company Responsiveness

“We have expanded our discussion of what we consider to be an appropriate response following low shareholder support for the say-on-pay proposal at the previous annual meeting, including differing levels of responsiveness depending on the severity and persistence of shareholder opposition. We expect a robust disclosure of engagement activities and specific changes made in response to shareholder feedback. Absent such disclosure, we may consider recommending against the upcoming say-on-pay proposal.”

Glass Lewis has stated that their “expectations regarding the minimum appropriate levels of responsiveness will correspond with the level of shareholder opposition, as expressed both through the magnitude of opposition in a single year, and through the persistence of shareholder discontent over time.”

Appropriate responses to significant shareholder opposition (i.e. a say-on-pay response of 80% or less) would include direct engagement with large shareholders to identify their concerns and, where reasonable, implementing changes that address those concerns. Glass Lewis may recommend “holding compensation committee members accountable for failing to adequately respond to shareholder opposition”.

**CGP Comments: In favour**

One of the chief responsibilities of the board is to evaluate and monitor their organization’s executive compensation, and one of the most valuable tools to assess the appropriateness of their executives’ compensation (in addition to proactively assessing and monitoring current market and corporate governance best practices) is the result of a say-on-pay proposal.
If the compensation committee does not acknowledge the results of its say-on-pay proposal and subsequently fails to address significant shareholder opposition to the executive compensation program, it is effectively failing its fiduciary duty to the company’s shareholders and should be held accountable for doing so.

Overall, CGP agrees with Glass Lewis’ major policy updates for 2020, as these updates signal Glass Lewis’ heightened expectations with respect to disclosure standards and general corporate governance. While most publicly-listed organizations should not be significantly affected, the 2020 policy updates will provide greater guidance in bringing trailing companies in-line with corporate governance best practices.

ISS and Glass Lewis Updates for 2020 Canadian Proxy Voting Guidelines