New CBCA Regulations & Diversity Disclosure

by | Dec 30, 2019 | Board Dynamics, Diversity, Regulations

A Summary of Changes and Impact to Shareholders

Earlier this year, the regulations relating to amendments to the Canada Business Corporations Act (“CBCA”) for diversity disclosure at publicly-listed corporations were released, which should have a large impact at TSX Venture Exchange (“TSXV”) and Canadian Securities Exchange (“CSE”) listed companies. These regulations will require all publicly-listed CBCA corporations to provide specific information on board and executive officer diversity policies and statistics beginning in 2020. While many Toronto Stock Exchange (“TSX”) listed companies have already adopted some form of board and executive diversity policy disclosure within their annual proxy circulars, the new regulations go one step further and now apply to TSXV and CSE companies as well.

The new regulations, which have taken over a year to be developed, will come into force on January 1, 2020 and will apply to all 2020 shareholder meetings of publicly-listed CBCA corporations. The information should be provided within the annual shareholder meeting notice or proxy circular and will need to go beyond reporting just on gender diversity. The specifics of the new regulations include:

  • Reporting on Diversity at the Board and Senior Management Level
  • Reporting Not Just on Gender Diversity
  • Application to TSXV and CSE Listed Companies
  • Comply or Explain Still in Effect
  • A Review of the Provisions in 5 Years

Reporting on Diversity at the Board and Senior Management Level

CBCA corporations will be required to annually disclose their term limits, diversity policies and diversity targets (along with any related statistics) for the representation by “designated groups” at the Executive and Board level. Reporting will apply in respect of the Board as a whole, the Chair as well as any Vice Chair of the Board. At the Executive level, disclosure will be required for the President, Chief Executive Officer, Chief Financial Officer, each Vice President of a principal business unit, division or other function (including Sales, Finance and Production) and any other individual who acts in a policy-making capacity.

Reporting Not Just on Gender Diversity

The new disclosure requirements do not pertain only to women, but have been expanded to include other members of “designated groups”. The term “designated groups” is meant to align with the federal Employment Equity Act, which defines “designated groups” as: women, Aboriginal peoples, persons with disabilities and members of visible minorities. Current regulations require disclosure only on gender diversity.

Application to TSXV and CSE Listed Companies

While current disclosure regulations are applicable to TSX-listed issuers only that is not the case under the new regulations. Under the new disclosure requirements, TSXV and CSE listed companies will have to disclose the same types of disclosure information as TSX listed companies, which is a significant change for these companies.

Comply or Explain Still in Effect

The good news for CBCA corporations is that the new regulations do not impose any quotas or specific diversity requirements on companies. Similar to current Canadian securities law, a “comply or explain” regime will be put in place. This means that CBCA corporations will be under no obligation to increase the level of diversity at the Executive or Boardroom level. However, they must disclose the number and percentage of directors and executives who are members of designated groups. In addition, while they are not obligated to adopt a specific policy or quota for diversity, they will be required to disclose whether they have adopted a formal policy or not and if they have not done so explain why that is the case.

A Review of the Provisions in 5 Years

The federal government will review the new diversity disclosure regulations five years after they are enacted, in 2025. At that point in time, if the new regulations do not result in increased diversity at the Executive and Boardroom level, the government will consider whether further amendments to diversity disclosure requirements are required.

The expected impact at TSX-listed companies is lower due to the fact that many TSX-listed companies have already been disclosing the existence of a formal executive and board gender diversity policy at their companies the past couple of years and in the absence of a formal policy, the reason why such a policy has not been adopted. However, the expanded definition of diversity to include all “designated groups” as defined in the federal Employment Equity Act will mean additional reporting on the number and percentage of Aboriginals, persons with disabilities and visible minorities, which will require additional time and effort of staff to ensure adequate disclosure in these areas. That said, this change is more incremental in nature.

At TSXV and CSE-listed companies the impact should be much larger due to the fact that formal diversity disclosure regulations are currently not in effect for companies listed on these exchanges. This will require Boards at these companies to spend some time discussing the issue of diversity and whether the need for a formal policy is warranted at their company. If a formal diversity policy is not put in place, boards will then have to discuss the reasons why a formal policy is not required for their company and be able to explain this to shareholders through the annual proxy circular. Staff time (already stretched as it is at many TSXV and CSE-listed companies) devoted to this issue will also be increased to ensure that adequate diversity disclosure is provided to align with the new regulations. This will increase the soft compliance costs associated with annual disclosure.

Diversity has been an ever-growing issue at public companies in recent years. While some progress has been made, it is clear that the federal government feels this progress is not enough and is hoping that new diversity disclosure regulations will lead to further change. It will be interesting to see which companies embrace this new regulation to spark change in the make-up of their boards and executive ranks and ultimately which companies choose to do the bare minimum.

To review copies of the new regulations please click on the following links:

Regulations Amending the Canada Business Corporations Regulations, 2001

Canada Business Corporations Act

ISS Releases 2020 Policy Guidelines for Canada

by | Nov 25, 2019 | Governance, ISS, Proxy Guidelines

A Review of Guideline Upates

On November 12, 2019 Institutional Shareholder Services (“ISS”) published their Americas Proxy Voting Guidelines Updates for 2020 for the Americas region, which includes Canada and the United States. While GGA has summarized updates directly affecting U.S.-listed companies in a separate blog post, we are summarizing the key updates affecting Canadian-listed companies as it relates to compensation and governance below. These updates will impact any shareholder meetings held on or after February 1, 2020.

The updates are generally split into four separate categories:

  1. Ratification of Auditors
  2. Election of Directors (several updates)
  3. Equity-Based Compensation Plans for Venture companies
  4. Pay-for-Performance Analysis (use of Economic Value Added or “EVA”)

GGA’s summary of each change is provided below.

Ratification of Auditors (TSX and Venture)

ISS has historically excluded significant one-time capital restructuring events from “Other” fees when calculating whether “Other” fees are greater than Audit and Audit-related fees. Prior to the policy update, only three events fell under this exemption: 1) IPOs, 2) Emergence from bankruptcy, and 3) Spinoffs. ISS has now updated this policy so that these three restructuring events are part of a brief list of examples that fall under the policy. Other similar events not listed here that could fall under this exemption are M&A transactions and re-domiciling of a company. In all cases, ISS will scrutinize the disclosure around “Other” fees when determining whether the carve-out policy should apply.

Election of Directors

Excessive Non-Audit Fees (TSX and Venture)

Aligning with the new “Ratification of Auditors” policy update above, ISS has made it clear that in the event that the “Ratification of Auditors” resolution receives an “Against” recommendation, ISS will also recommend that shareholders vote Withhold for the members of the Audit Committee. This aligns both policies so that significant one-time capital restructuring events can be treated in the same way when making vote recommendations.

Policy Considerations for Majority Owned Companies (TSX and Venture)

ISS clarified that their majority-owned companies policy only applies to non-management directors. This clarifies ISS’ stance that regardless of whether a company is majority owned or not, executive directors should not be serving on the Audit and Compensation Committees.

The policy was designed to recognize that while director nominees that are controlling shareholders or represent controlling shareholders and not considered independent, their interests may still be aligned with other shareholders given the significant equity stake that they represent as controlling shareholder. By clarifying this policy, ISS has the right to support those directors serving on the Audit and/or Compensation Committee despite other policies that would suggest a Withhold recommendation for those directors based on ISS’ director independence requirements.

Director Attendance (TSX Only)

ISS’ director attendance policy relies upon the director attendance record provided by the issuer in order to evaluate whether directors have been fulfilling their commitments on the board. This is taken from a company’s most recent proxy circular with only TSX-listed issuers required to disclose director attendance. ISS clarified within its policy that it will exempt new publicly-listed issuers, recent graduates from a venture exchange to the TSX and director nominees who have not served an entire fiscal year on the board as a complete attendance record will not have been taken. ISS will continue to evaluate whether directors have attended at least 75% of the aggregate of board and key committee meetings such as Audit, Compensation and Nominating Committees held during the year in reviewing the commitment of directors.

Former CEO/CFO on Audit/Compensation Committee (TSX Only)

ISS has now aligned its voting policy for former CEOs and CFOs who sit on the Audit or Compensation Committee with its definition of independence. ISS policy recommends that shareholders vote Withhold for current CEOs or CFOs who sit on the Audit or Compensation Committee. They also deem former CEOs within the past 5 years and former CFOs within the past 3 years as being non-independent. For those former CEOs or CFOs that are deemed non-independent, ISS will now recommend that shareholders vote Withhold if they serve on the Audit or Compensation Committee within the 3 or 5-year non-independence period.

Overboarded Directors (TSX Only)

ISS clarified their policy to state that they will generally not count a board for determining if a director is overboarded, when it is publicly disclosed that the director will be stepping off that board at its next annual meeting. This information must be included within the company’s proxy circular in order to be taken into consideration by ISS. On the flip side, ISS will include any new boards a director is planning on joining even if the shareholder meeting confirming their election to the new board has not yet taken place.

Equity-Based Compensation Plans – Venture Companies

ISS considers companies on either the TSX Venture Exchange (TSXV) or Canadian Securities Exchange (CSE) as Venture companies. While the TSXV requires regular confirmation by shareholders of rolling limit equity plans (e.g. 10% of common shares outstanding) on an annual basis, there is no such requirement for CSE-listed companies. In many cases, this means that rolling limit equity plans for CSE-listed issuers may not appear on an AGM ballot for shareholder re-approval unless there are material amendments to the plan. ISS refers to rolling limit equity plans as “evergreen” plans.

Moving forward, ISS will now recommend a Withhold vote for Compensation Committee members who continue to serve on the committee, if the company maintains an evergreen plan and has not sought shareholder approval in the past two years, and is not seek shareholder approval at the upcoming AGM.

This change provides consistency between ISS’ treatment of TSXV and CSE-listed companies when seeking shareholder re-approval of evergreen plans. The exact voting policy will be enacted starting in 2021, providing CSE-listed companies with a transition period to react accordingly to this policy change and seek shareholder re-approval at the appropriate AGM.

Updates to Pay-for-Performance Analysis

Use of EVA as New Executive Compensation Metric to Replace GAAP-Based Metrics – TSX Companies

Starting in 2020, ISS plans on incorporating a new performance metric (EVA) into the financial performance assessment, replacing the GAAP-based metrics used in 2019. Accordingly, EVA performance will now affect the quantitative pay-for-performance analysis and Say on Pay recommendations for the 2020 proxy season. GAAP-based metrics will continue to displayed within ISS reports for information purposes.

As a reminder, EVA will be calculated as follows by ISS:

EVA = Net Operating Profit after Taxes – (Cost of Capital * Capital)

ISS will look at EVA in four different ways as part of its analysis:

1) EVA Margin – EVA as a Percentage of Sales
2) EVA Spread – EVA as a Percentage of Capital
3) EVA Momentum (Sales) – Annual change in EVA Margin
4) EVA Momentum (Capital) – Annual change in EVA Spread

These four measures will then be weighted and compared to the same overall performance of the selected peer group for an issuer.

Further clarification of these calculations are expected from ISS in the months ahead leading up to the adoption of these changes for issuers with meetings falling on or after February 1, 2020.

Addition of 3-Year Multiple of Median View of CEO Pay for Information Purposes

ISS has also indicated that their research reports will now feature a 3-year Multiple of Median (MoM) view of CEO pay as a measure of long-term pay on a relative basis against an issuer’s ISS peer group. The 3-year Multiple of Median analysis will not be a part of the ISS quantitative screen methodology, but will be displayed in ISS reports for informational purposes only.

GGA continues to monitor the evolving proxy voting guidelines on a regular basis and will be reporting on any further developments as they are confirmed. Companies should be reviewing their compensation and governance practices against these updated guidelines to ensure that their current designs align to the updated guidelines as we move into the 2020 proxy season.

For more details on the ISS 2020 Proxy Voting Guideline Updates for Canada, please click on the following link:  https://www.issgovernance.com/file/policy/latest/updates/Americas-Policy-Updates.pdf

Further information on preliminary changes to ISS’ Canadian compensation policies for 2020 can also be found here: https://www.issgovernance.com/file/policy/latest/americas/Canada-Preliminary-Compensation-FAQ.pdf

ISS 2020 Policy Guidelines for the U.S.

by | Nov 25, 2019 | Executive Compensation, Governance, Regulations

Summary of 2020 Guidelines

On November 12, 2019 Institutional Shareholder Services (“ISS”) published their Americas Proxy Voting Guidelines Updates for 2020 for the Americas region, which includes the United States and Canada. While GGA has summarized updates directly affecting Canadian-listed companies in a separate blog post, we are summarizing the key updates affecting U.S.-listed companies as it relates to compensation and governance below. These updates will impact any shareholder meetings held on or after February 1, 2020. 

The updates are generally split into six separate categories:

  1. Voting on Director Nominees in Uncontested Elections (several updates)
  2. Independent Board Chair Proposals
  3. Share Repurchase Programs
  4. Equity-Based Compensation Plans – Evergreen Provision
  5. Diversity – Gender Pay Gap
  6. Pay-for-Performance Analysis

GGA’s summary of each change is provided below.

Voting on Director Nominees in Uncontested Elections

Exemptions for New Nominees

ISS clarified that they will now consider new director nominees on a case-by-case basis with a “new nominee” being a director who is being presented for election by shareholders for the first time. Vote recommendations for “new nominees” will generally depend on the timing of their appointment to the board and the problematic governance issue in question. This will include whether a director has been on the board long enough to be held responsible for a problematic governance issue at the company. On a related note, this “new nominee” exemption is being moved to the beginning of the Director Election section from Accountability, as it may be applied to other policies in the other ISS evaluation pillars of Independence, Responsiveness, and Composition.

Board Composition – Attendance

ISS also clarified its policy for director nominees who served only for part of the fiscal year. This includes nominees who may have been appointed to the board a few months prior to the first annual meeting that they are to be elected by shareholders at. In these cases, it is to be expected that a nominee would not have attended all meetings throughout the fiscal year and therefore ISS’ 75% attendance threshold should not apply.

Board Composition – Diversity (Russell 3000 or S&P 1500 Companies)

ISS has stated that they will generally vote “Against” or “Withhold” for the Nominating Committee Chair (or other directors on a case-by-case basis) at companies where there are no women on the company’s board. Mitigating factors that could lead to a For vote recommendation include:

  • Until Feb. 1, 2021, a firm commitment within the proxy statement to appoint at least one woman to the board within a year;
  • The presence of a woman on the board at the preceding annual meeting and a firm commitment to appoint at least one woman to the board within a year; or
  • Other relevant factors, as applicable.

The one-year transition period to appoint a female director provided by ISS has now passed, so even making a commitment to appoint at least one woman to the board within the next year will only act as a mitigating factor for 2020 for those companies who have had no women on their board previously.

In addition, for those companies that had at least one woman on their board in previous year, but not the current year, the company will clearly have to acknowledge the current lack of diversity on their board and provide a clear commitment to re-achieve a level of board gender diversity within the next year.

A “firm commitment” is defined by ISS as a plan, with measurable goals, outlining the way in which the board will achieve gender diversity.

Board Accountability – Problematic Governance Structure at Newly Public Companies

ISS has clarified its policy in two areas for newly public companies. One update states that ISS will generally vote “Against” or “Withhold” from directors individually, committee members or the entire board (except for new nominees who should be considered on a case-by-case basis), if prior to or in connection with a company’s public offering, the company or its board adopted the following by-law or charter provisions considered materially adverse to shareholder rights: 

  • Supermajority vote requirements to amend the by-laws or charter;
  • A classified board structure; or
  • Other egregious provisions.

ISS has noted that a reasonable sunset provision (7 or less years at the most) will be considered a mitigating factor when making their vote recommendation. In subsequent years, unless the adverse provision is reversed or removed, ISS will vote case-by-case on director nominees.

ISS’ second update states that for newly public companies, they will generally vote “Against” or “Withhold” for the entire board (except new nominees, who will be considered on a case-by-case basis) if, prior to or in connection with the company’s public offering, the company or its board:

  • Implemented a multi-class capital structure in which the classes have unequal voting rights without subjecting the multi-class capital structure to a reasonable time-based sunset.

They clarify that in assessing the reasonableness of a time-based sunset provision, consideration will be given to the company’s lifespan, its post-IPO ownership structure and the board’s disclosed rationale for the sunset period selected. A sunset period of more than seven years from the date of the IPO will not be considered reasonable.

In subsequent years, unless the problematic capital structure is reversed or removed, ISS will continue to recommend a vote “Against” or “Withhold” their vote from incumbent directors.

Board Accountability – Restrictions on Shareholders’ Rights 

ISS clarified its policy around restricting binding shareholder proposals to state that they will generally vote “Against” or “Withhold” its vote for Governance Committee members if the company’s governing documents impose undue restrictions on shareholders’ ability to amend by-laws. Undue restrictions include, but are not limited to:

  • Outright prohibition on the submission of binding shareholder proposals or share ownership requirements, subject matter restrictions or time holding requirements in excess of SEC Rule 14a-8.

If this restriction is not amended or removed, ISS will recommend an “Against” or “Withhold” vote on an ongoing basis.

ISS has also clarified that submission of management proposals to approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders’ rights. Therefore, ISS will continue to recommend a vote of  “Against” or “Withhold” for Governance Committee members on an ongoing basis until shareholders are provided with an unfettered ability to amend the by-laws or a proposal providing for such unfettered right is submitted for shareholder approval.

Independent Board Chair 

ISS has stated that they will generally vote For on shareholder proposals requiring that the Board Chair position be filled by an independent director when the scope and appropriate rationale for the proposal is provided, in addition to other considerations. They have also clarified that the following factors will increase the likelihood of a For recommendation on the proposal:

  • A majority non-independent board and/or the presence of non-independent directors on key board committees;
  • A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role;
  • The presence of an executive or non-independent chair in addition to the CEO;
  • A recent recombination of the role of CEO and chair; and/or departure from a structure with an independent chair;
  • Evidence that the board has failed to oversee and address material risks facing the company;
  • A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or
  • Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’ interests.

This view continues the evolution in North America thinking towards separating the Board Chair and CEO roles, which GGA has observed in recent years.

Share Repurchase Programs 

ISS has added new language relating to share repurchase programs stating that for U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, ISS will recommend shareholders vote “For” on management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in the absence of company-specific concerns regarding: 

  • Greenmail;
  • The use of buybacks to inappropriately manipulate incentive compensation metrics;
  • Threats to the company’s long-term viability; or
  • Other company-specific factors as warranted.

ISS will also vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale of the company against the possibility for the repurchasing authority to be misused, such as to repurchase shares from insiders at a premium to market price.

Equity-Based Compensation Plans – Evergreen Provision

ISS has updated its list of overriding factors that will apply under the Equity Plan Scorecard analysis to include plans that contain an evergreen (automatic share replenishment) feature. This means that for those U.S.-listed companies that have historically had an automatic share replenishment feature in their formal plan documents, if that feature is not removed then ISS will recommend a vote “Against” the equity plan proposal.

GGA notes that this could lead to a lot more “Against” vote recommendations from ISS than in the past as we have noted many U.S. companies that include these automatic share replenishment features within their plans, so is something for U.S. companies to be mindful of when putting their equity compensation plans up for a shareholder vote at the annual meeting.

Diversity – Gender Pay Gap 

ISS has stated that it will generally vote on a case-by-case basis on requests for reports on a company’s pay data by gender, race or ethnicity, or a report on a company’s policies and goals to reduce any gender, race or ethnicity pay gap. While gender was included in this policy before, race and ethnicity have been added for 2020 within the policy.

ISS has also included whether the company has been the subject of recent controversy, litigation, or regulatory actions related to race or ethnicity pay gap issues; and whether the company’s reporting regarding race or ethnicity pay gap policies or initiatives is lagging its peers. This is in addition to ISS’ historical inclusion of gender pay gap issues in its considerations as well.

Pay-for-Performance Analysis 

Use of EVA as New Executive Compensation Metric to Replace GAAP-Based Metrics

Starting in 2020, ISS plans on incorporating a new performance metric (EVA) into the financial performance assessment, replacing the GAAP-based metrics used in 2019. Accordingly, EVA performance will now affect the quantitative pay-for-performance analysis and Say on Pay recommendations for the 2020 proxy season. GAAP-based metrics will continue to displayed within ISS reports for information purposes.

As a reminder, EVA will be calculated as follows by ISS:

EVA = Net Operating Profit after Taxes – (Cost of Capital * Capital)

ISS will look at EVA in four different ways as part of its analysis:

1) EVA Margin – EVA as a Percentage of Sales
2) EVA Spread – EVA as a Percentage of Capital
3) EVA Momentum (Sales) – Annual change in EVA Margin
4) EVA Momentum (Capital) – Annual change in EVA Spread

These four measures will then be weighted and compared to the same overall performance of the selected peer group for an issuer.

Further clarification of these calculations are expected from ISS in the months ahead leading up to the adoption of these changes for issuers with meetings falling on or after February 1, 2020.

Changes to Quantitative Pay-for-Performance Thresholds 

ISS has also updated its pay-for-performance thresholds relating to their Relative Degree of Alignment (RDA) and Pay-TSR Alignment test as follows:

 

2019 vs. 2020 Quantitative Pay-for-Performance Thresholds: All U.S. Companies
Measure Policy Year Eligible for
FPA Adjustment		 Medium Concern High Concern
RDA 2019 -28 -40 -50
2020 -38 -50 -60
Pay-TSR Alignment 2019 -13% -20% -35%
2020 -22% -30% -45%

The Multiple of Median (MoM) thresholds will not change in 2020.

Addition of 3-Year Multiple of Median View of CEO Pay for Information Purposes

ISS has also indicated that their research reports will now feature a 3-year MoM view of CEO pay as a measure of long-term pay on a relative basis against an issuer’s ISS peer group. The 3-year MoM analysis will not be a part of the ISS quantitative screen methodology, but will be displayed in ISS reports for informational purposes only.

GGA continues to monitor the evolving proxy voting guidelines on a regular basis and will be reporting on any further developments as they are confirmed. Companies should be reviewing their compensation and governance practices against these updated guidelines to ensure that their current designs align to the updated guidelines as we move into the 2020 proxy season.

For more details on the ISS 2020 Proxy Voting Guideline Updates for the United States, please click on the following link:  https://www.issgovernance.com/file/policy/latest/updates/Americas-Policy-Updates.pdf

Further information on preliminary changes to ISS’ U.S. compensation policies for 2020 can also be found here: https://www.issgovernance.com/file/policy/latest/americas/US-Preliminary-Compensation-FAQ.pdf

Glass Lewis Releases 2020 Proxy Guidelines for the United States

by | Nov 18, 2019 | Glass Lewis, Proxy Guidelines, United States

Summary of Guideline Updates

On November 1, Glass Lewis released its 2020 Policy Guideline updates for the U.S. market. These changes are expected to be effective for shareholder meetings taking place on or after January 1, 2020. They have identified several updates in the areas of compensation and governance with several covering Say on Pay votes. 

Updates in Compensation and Governance

Post fiscal year-end changes

Glass Lewis clarified that in their review of Say on Pay proposals, they would include post fiscal year-end changes to executive compensation and one-time awards, “particularly where the changes touch upon issues that are material to Glass Lewis recommendations.” 

Company responsiveness to Low shareholder support

Glass Lewis added “insufficient response to low shareholder support” to their non-exhaustive list of issues that may cause them to recommend voting against a company’s Say on Pay proposal. In addition, Glass Lewis clarified what they consider to be an appropriate response to low shareholder support of a Say on Pay proposal (i.e. those proposals not receiving at least 80% support). Glass Lewis noted that the level of responsiveness should corresponding with the level of shareholder opposition both in a single year and over time. Lower levels if support should lead to a higher level of responsiveness by a company. Glass Lewis also indicated that engaging with a company’s large shareholders to identify concerns and implement changes (where reasonable) to address those concerns would be considered an appropriate response. From  a disclosure perspective, GGA would recommend outlining in a table a summary of what a company learned from its shareholder engagement in the prior year, what the board and management discussed and reviewed to address shareholder concerns, and finally what the board has ultimately decided that may address or not address the shareholder concern and a rationale for why they have done so as a best practice to address this concern. 

Short-term incentives

Glass Lewis noted that in cases where a company lowered goals mid-year or increased calculated short-term incentive payouts from the original formula result, they expect a robust discussion of why the Board made that decision within the Form DEF 14A. GGA advises any of its clients who have applied discretion to adjust formulaic results to provide an adequate level of explanation of why this discretion was applied and why it is in the best interests of the company.

Change in control

Glass Lewis reiterated its belief that “double trigger” change in control arrangements that require a change in control and subsequent termination of employment of an executive in order to be triggered as a best practice. They also addressed broad definitions of change in control scenarios as being problematic as they could lead to situations where executives are paid additional compensation, but have not witnessed a material change in their position or duties. 

Contractual arrangements and amended employment agreements

Glass Lewis provided an updated list of problematic practices that could lead to a negative Say on Pay vote recommendation. This includes: 

    • Excessively broad change in control triggers;
    • Inappropriate severance entitlements;
    • Inadequately explained or excessive sign-on arrangements;
    • Guaranteed bonuses (especially as a multiyear occurrence); and
    • Failure to address any concerning practices in amended employment agreements.
    • Glass Lewis made it clear that they view failures to address problematic pay practices within an amended employment agreement as a missed opportunity and that companies should seek to align to current best practices when amending employment contracts.

Additional key updates for the 2020 proxy season

Shareholder Proposals

Glass Lewis stated that they believe “companies should only omit shareholder proposals in instances where the SEC has explicitly concurred with a company’s argument that a proposal should be excluded.” Therefore, Glass Lewis will now consider recommending a vote against all members of the Governance Committee where SEC Division staff:

  • Decline to state a view on a shareholder proposal and the company does not include the shareholder proposal in its proxy statement; and
  • Orally concurs with a company’s no-action request but the Division staff does not provide any written record and/or the company does not provide any disclosure relating to the result of its no-action request. 

Standards for Assessing the Audit Committee

Glass Lewis will now consider recommending a vote against the Audit Committee Chair when fees paid to the company’s external auditor are not disclosed. If the company has a staggered board and the Audit Committee Chair is not up for re-election, then Glass Lewis will not recommend a vote against other Audit Committee members, but will note its concern regarding the Audit Committee Chair.

Compensation Committee Performance

Glass Lewis will now consider recommending a vote against all members of the Compensation Committee if the board adopts a frequency for Say on Pay votes that differs from the frequency that received the most votes from shareholders.

Nominating and Governance Committee Performance

Glass Lewis will now consider recommending a vote against the Governance Committee Chair when board and committee attendance is not disclosed in the Form DEF 14A or similar document. Glass Lewis will also consider recommending a vote against the Governance Committee Chair when a director’s attendance is less than 75% of the board and applicable committee meetings, but the disclosure is too vague to determine which director’s attendance was lacking.

Forum Selection Clauses

Glass Lewis will continue to consider recommending a vote against the Governance Committee Chair if the board adopted a forum selection clause without shareholder approval during the past year. They did clarify that they would “evaluate the circumstances surrounding the adoption,” and if the forum selection clause “is narrowly crafted to suit the particular circumstances facing the company and/or a reasonable sunset provision is included,” then it may make an exception to its voting policy.

Shareholder Proposals – Supermajority Vote Requirements

While Glass Lewis generally supports shareholder proposals seeking to eliminate supermajority voting provisions, they clarified that they may recommend that shareholders vote against proposals that seek to eliminate supermajority voting provisions at controlled companies, because these provisions may protect minority shareholders.

Shareholder Proposals – Gender Pay Equity

Glass Lewis will review on a case-by-case basis shareholder proposals requesting disclosure of a company’s median gender pay ratio. However, if a company has disclosed “sufficient information” about its diversity initiatives, including how it is “ensuring that women and men are paid equally for equal work,” then Glass Lewis will generally recommend a vote against these proposals.

GGA continues to monitor the evolving proxy voting guidelines on a regular basis and will be reporting on any finalized changes coming out of ISS in the coming weeks as they are confirmed. Companies should be reviewing their compensation and governance practices against these updated guidelines to ensure that their current designs align to the updated guidelines as we move into the 2020 proxy season. 

For access to the full Glass Lewis’ 2020 Proxy Voting Guidelines for the United States, please click on the following link: https://www.glasslewis.com/wp-content/uploads/2016/11/Guidelines_US.pdf

Glass Lewis Releases 2020 Policy Guidelines for Canada

by | Nov 18, 2019 | Canada, Glass Lewis, Governance, Proxy Guidelines

A Summary of Guideline Updates

On November 1, Glass Lewis released its 2020 Policy Guideline updates for the Canadian market. These changes are expected to be effective for shareholder meetings taking place on or after January 1, 2020. They have identified several updates in the areas of compensation and governance.

Updates in Compensation and Governance 

Meeting Attendance

For TSX companies, Glass Lewis will recommend that shareholders withhold votes from the Governance Committee Chair when board and committee meeting attendance is not disclosed in the annual proxy circular or similar document. Beginning in 2021, Glass Lewis will also hold the Governance Committee Chair responsible if the number of Audit Committee meetings has not been disclosed. The Audit Committee Chair will also be held responsible if the Audit Committee did not meet a minimum of four times during the year and will receive a withhold vote recommendation as well.We at GGA have noted increasingly more companies doing a better job of disclosing the attendance of board members at both board and committee meetings within their proxy circular and have successfully worked with our clients to incorporate this level of disclosure on an annual basis. We expect this to be a relatively easy improvement for companies to make for 2020. 

Board Skills

Since the 2019 proxy season, Glass Lewis has included board skills information as part of its report on S&P/TSX 60 Index companies. In this regard, Glass Lewis expects proxy circulars for TSX 60 companies to include meaningful disclosure regarding the skills possessed by the board as a whole and also on an individual board member level. It is indicated that if a board has failed to address material gaps regarding its mix of board skills and experience, Glass Lewis will view this negatively.

We at GGA have noted that many of Canada’s largest companies, by Market Cap, have started disclosing a formal board skills matrix within their annual proxy circulars. It is a governance best practice to identify areas for individual and broader board skills development and can be extremely useful in identifying the skill sets required of any new board members to be added as part of the regular board renewal process. If a company has not already done so, disclosing a board skills matrix should be an identified area for improvement in the 2020 proxy circular.  For a board member sitting on multiple boards that disclose board skills, the director should maintain a repository of skills they posses, so there is consistency at each company they are a director at.

Board Responsiveness

Glass Lewis has codified its approach to board responsiveness to significant shareholder opposition (deemed as 20% or greater) relating to Say on Pay votes. They have identified appropriate responses to opposition which include: 

    1. Engaging with large shareholders to identify concerns; and
    2. Enacting changes in the compensation program to address any concerns raised.


      Issuers who faced significant shareholder opposition must be able to provide evidence in the proxy circular that the board is actively responding to shareholder concerns. This is usually in the form of expanded shareholder engagement disclosure within the circular, which we at GGA have noted much more companies are adopting in recent years. Failing to clearly disclose shareholder engagement activities after facing significant opposition in a Say on Pay vote may result in Glass Lewis recommending withhold votes for the Compensation Committee Members responsible at the next AGM.       

      GGA notes the importance of ongoing engagement with shareholders whether there has been significant opposition to a company’s pay programs or other governance concerns identified. It aids shareholders in better understanding the company’s strategy and rationale for why it has structured its pay plans and governance framework the way that it has. Proactive engagement should be preferred instead of reactive engagement to avoid situations such as those identified by Glass Lewis as companies should be striving for a 90%+ approval rate for Say on Pay and other governance matters.

      Companies that face Say on Pay scrutiny should also consider disclosing a table that summarizes what they learned from shareholder engagement in the prior year, what the board and management discussed and reviewed to address shareholder concerns, and finally what the board has ultimately decided that may address or not address the shareholder concern and a rationale for why they have done so.

    Contractual Agreements

    Glass Lewis has codified several provisions that it deems as problematic within executive employment agreements. These include:

    1. Excessively broad definitions of change of control;
    2. inappropriate severance entitlements;
    3. excessive sign-on arrangements without accompanying rationale; and
    4. guaranteed bonuses.


      Glass Lewis also expects double-triggered change of control provisions in all employment agreements, where the cash severance multiple is three times or less. The inclusion of long-term incentives in the severance multiple has also been identified as being problematic by ISS.

      GGA notes that the three times multiple sighted by Glass Lewis is higher than the limit used by Institutional Shareholder Services (“ISS”) which has historically been set at a two times multiple. In our consulting experience, we observe that most companies have trended towards the use of no higher than a two times multiple when setting new employment contracts, so we do not believe there will be a huge push towards moving the standard back to three, since the low watermark standard by most institutional shareholder vote guidelines remains capped at 2 times.

      When amending existing employment agreements or adopting new ones, we at GGA encourage companies to be aware of the problematic practices identified by both Glass Lewis and ISS and avoid including terms that could lead to negative sentiment from these groups, unless there is a business case to do so.

    Problematic Pay Practices

    Glass Lewis has also codified several new provisions that it deems as problematic and could lead to a negative Say on Pay vote recommendation or recommended withhold votes for Compensation Committee members where there is no Say on Pay vote. These include:

    1. Targeting overall compensation above median without adequate justification;
    2. Paying discretionary bonuses when short & long-term incentive targets are not met; and
    3. Applying upward discretion either by lowering short-term performance goals at mid-year or increasing calculated payouts from the original formula.


      In GGA’s experience, most companies targeted the median of the market for compensation, but in some cases, there may be a business case to justify why a company need to target above median. If a company is in this situation, while the threat of a withhold vote is heightened, they will need to do a great job in their proxy circular of explaining their company’s rationale which will help in justifying to shareholders why the approach makes sense, even if it still results in an Against recommendation from Glass Lewis or ISS. This explanation needs to go beyond just indicating that a specific executive or group of executives is performing above target. They will need to demonstrate this with clear evidence in the circular.       

      Having participated in thousands of board meetings that included discussion on finalizing annual bonuses, we are not convinced that Glass Lewis got this one right. Discretion is something that we at GGA believe boards should have as there may be specific accomplishments made by an executive or group of executives that fall outside of the original scorecard formula and deserve to be recognized. On the flip side, the scorecard results may lead to higher results, but not necessarily take into account recent events at a company that are affecting its operations or underlying share price such as new trade wars, environmental incidents, safety incidents, labour disputes, etc. The board should retain the discretion to adjust calculated payouts downwards as well, so discretion has to work both ways. What is most important, given the new guidance from Glass Lewis, is that if a company chooses to use discretion to adjust payouts upwards, it must do an excellent job of explaining its rationale for doing so and why it is in the best interests of the company. 

    Excessive Non-Audit Fees

    Glass Lewis has clarified that in the second consecutive year where Non-Audit Fees have exceeded Audit or Audit Related Fees, they will hold the full Audit Committee responsible (not just the Audit Committee Chair), which may lead to recommended withhold votes. 

    Company Board Size

    Glass Lewis has identified that a TSX-listed company should be made up of no less than 5 board members and that TSX Venture-listed company should be made up of no less than 4 board members. They have also established a maximum board size of 20. For larger financial institutions such as Canada’s Big banks, they have indicated that they may make an exception on a case-by-case basis, but will require appropriate rationale for why a larger board makes sense. One exception to the minimum size rule is controlled companies, where Glass Lewis has indicated that it will waive the size threshold, but maintain the maximum limit of 20 board members.In GGA’s experience, most boards are made-up of no less than 5 members with the median ending up around 9, so we do not believe this new requirement will affect too many companies.

    Quantitative Pay for Performance Analysis

    While Glass Lewis’ 2020 guidelines did not discuss any material changes to their quantitative pay for performance model, it will be interesting to see how Glass Lewis responds to the recent move by ISS to include more Economic Value Added (“EVA”) metrics within their quantitative pay-for-performance model. While nothing has been formally announced, the new partnership between Glass Lewis and CGLytics should lead to some additional pay-for-performance analysis offerings to demonstrate the strength of this new formal arrangement. We at GGA will continue to monitor these trends and keep our clients informed on any new developments.

    GGA continues to monitor the evolving proxy voting guidelines on a regular basis and will be reporting on any changes coming out of ISS in the coming weeks as they are confirmed. Companies should be reviewing their compensation and governance practices against these updated guidelines to ensure that their current designs align to the updated guidelines as we move into the 2020 proxy season.

     

    For access to the full Glass Lewis’ 2020 Proxy Voting Guidelines for Canada, please click on the following link: https://www.glasslewis.com/wp-content/uploads/2016/11/Guidelines_Canada.pdf