Best Practices for Executive Compensation Disclosure

Helpful Tips as You Finalize Your CD&A

The heart of proxy season is upon us with the majority of Annual General Meetings (AGMs) scheduled to take place over the next couple of months. These meetings will highlight shareholder votes on important issues such as the election of directors for the upcoming year and approval of the company’s auditors. In many cases, shareholders will also be voting on whether they approve or disapprove of the compensation provided to a company’s top executives (otherwise known as a “Say on Pay” vote) or re-approving a company’s equity compensation plans for employees. It is on these last two issues (Say on Pay and equity compensation plan approval) where a company’s disclosure on executive compensation can play a critical role in influencing the outcome of votes at the AGM.

In an earlier blog post, I discussed the importance of understanding what your options are from a disclosure perspective, in this article I am covering some best practices you can use to answer the three key questions that should be resolved through your disclosure on Top 5 Named Executive Officer (“NEO”) compensation:

  1. What was paid to executives?
  2. How was compensation paid to executives? and
  3. Why was compensation paid to executives?

There are many examples of best practices from a disclosure perspective that can be identified on an annual basis. Quite often, these best practices are summarized into annual reports by various organizations. One such publication is provided through DFin Solutions (formerly known as RR Donnelley & Co.) which publishes an annual Guide to Effective Proxies in the United States and Canada. This document provides readers with detailed examples of specific disclosure companies can use to better tell not only their compensation story, but other corporate governance and shareholder engagement efforts they have embarked on in the past year. In Canada, the Canadian Coalition for Good Governance (“CCGG”) also publishes an annual Best Practices for Proxy Circular Disclosure. Similar to DFin Solutions, the CCGG highlights specific examples of Canadian companies that provide the best disclosure in areas such as executive & director compensation, corporate governance and shareholder engagement, to name a few. These types of publications should be thought of as great resources for you to see how different companies approach disclosure and determine if these identified best practices can be adopted at your company.

It would take too long to identify all potential best practices from an executive compensation disclosure perspective, but I want to highlight a few specific examples of best practices that can be beneficial to companies as they finalize their 2019 proxy circular disclosures. These include:

  • Outlining what your company does and does not do from a compensation perspective
  • Summarizing how shareholder engagement has influenced executive compensation
  • Summarizing performance metrics used and how they impact compensation
  • Reported Pay vs. Realizable Pay
  • Summarizing key elements of your equity compensation plan


Outlining What Your Company Does and Does Not Do From a Compensation Perspective

A great way to summarize the key aspects of your compensation program to shareholders is to highlight the positive practices that you have put in place. This can include items such as: placing caps on annual bonus payouts, tying bonus payouts to specific performance objectives, annual review of the compensation peer group, the adoption of share ownership guidelines, the adoption of clawbacks on incentive compensation in the case of material misstatement or misconduct and/or having the ability to engage an independent third party to advise the Board on executive compensation. On the flip side, you can also use this section of your proxy disclosure to highlight the things you do not do from a compensation perspective. This could include items such as: not approving guaranteed and multi-year bonuses, repricing of underwater stock options, the use of Single Trigger Change of Control provisions and/or allowing executives to hedge the value of their long-term incentives. While I have highlighted a few areas you can choose to disclose, any positive attribute you feel shareholders should be aware of should be summarized in this section.

Summarizing How Shareholder Engagement Has Influenced Executive Compensation

In today’s environment, it is imperative that companies engage with their shareholders and listen to their views. One of the biggest areas for concern among shareholders surrounds executive compensation. With U.S. companies mandated to hold Say on Pay votes and the significant increase in Canadian firms voluntarily adopting Say on Pay, companies want to ensure that they receive strong support from shareholders on these votes. The embarrassment of receiving low support or even failing a Say on Pay vote is avoidable and one way to avoid this is by actively disclosing what you heard from shareholders around compensation and how you considered this feedback and made any changes. This can demonstrate your company’s commitment to engaging with shareholders and taking their concerns into account.

Summarizing Performance Metrics Used and How They Impact Compensation

Shareholders are demanding more information to better understand why executives received the compensation they did in the past year. A good way to demonstrate this alignment is by summarizing the key performance metrics (both Corporate and Individual) that went into determining executive bonus payouts and Performance Share Units (PSUs) under the long-term incentive program. The disclosure of a balanced scorecard that outlines the performance metrics used, the weighting for each metric, the expected performance levels and expected payouts under “Threshold”, “Target” and “Superior” performance is the best way to do this. Companies can add to this by then disclosing the Actual level of performance achieved in the past year and the associated payout multiplier for each metric with a calculation of what the final bonus payout is for each executive. A similar approach can be used for PSUs outlining the expected performance levels over a 3-year performance period and Actual performance at the end of each 3-year period. This will show the impact of performance on the vested value of PSU payouts. This is all in the spirit of providing increased transparency to shareholders regarding your compensation program.

Reported vs. Realizable Pay

With the goal of demonstrating the alignment between executive pay and performance over longer time periods, companies are increasingly providing supplemental disclosure that compares the value of compensation reported in the Summary Compensation Table with the “realizable” pay the CEO is entitled to at the end of each fiscal year. Often times, the reported pay figure in the Summary Compensation Table is quite different than the “realizable” pay figure. This is often the case in cyclical industries such as Oil & Gas or Mining where a certain grant value of Stock Options, RSUs and/or PSUs is provided to the CEO that appears quite high, but with downward pressures on share prices the actual “realizable” value is much lower as stock options are often out-of-the-money, PSUs may not be on track to vest and RSUs are worth much less than they were granted at due to a lower share price. By calculating and reporting on the “realizable” pay figure at the end of each fiscal year, either through a table or graphic and comparing it to the trend in your company’s share price, you can demonstrate the alignment between your company’s performance and executive pay levels more clearly.

Summarizing Key Elements of Your Equity Compensation Plan

Receiving approval from shareholders on an updated equity compensation plan is becoming more difficult in today’s environment with ISS and Glass Lewis espousing specific voting guidelines that, if not met, could result in a recommending “NO” vote on your equity compensation plan. While disclosure of the full plan document text is recommended and viewed positively, these plan texts can be quite lengthy and complicated to review and understand. Increasingly, companies are summarizing the key elements of their equity compensation plan such as: Plan maximums, limits on non-employee director grant levels, vesting treatment under different termination scenarios and other key provisions in a short summary table or section within their circular with reference to the full plan text in an appendix. This highlight section found within the body of the circular provides shareholders with the most important elements of the plan they need to be aware of when making the decision of supporting the plan or not.

Closing Thoughts

As you can tell, there are many ways in which to identify compensation disclosure best practices across North America with organizations providing specific examples of best practices you can reference and make your own. While there are many best practices to choose from, a few of the key practices to consider for 2019 include:

  • Outlining what your company does and does not do from a compensation perspective
  • Summarizing how shareholder engagement has influenced executive compensation
  • Summarizing performance metrics used and how they impact compensation
  • Disclosing Reported Pay vs. Realizable Pay
  • Summarizing key elements of your equity compensation plan

Executive compensation is becoming more complicated as the demand for more rigor and structure in determining compensation levels grows. This makes the need to simplify disclosure by summarizing the key features of your compensation program, the performance metrics used and how your pay aligns with company performance over time even more important. The use of summary tables and graphics to better tell your compensation story is also something to consider, as opposed to inundating shareholders with pages and pages of text. The scrutiny on executive compensation is higher than ever, so following disclosure best practices can only aid in ensuring the continued support of your shareholders and the avoidance of an unwanted result in approving your equity compensation plan or Say on Pay vote at your upcoming AGM.

Establishing Compensation Programs for Growth in the Cannabis Industry

Don’t let this opportunity go up in smoke!

It has been two eventful years since the Canadian federal government announced its plans to pass legislation to legalize the recreational use of marijuana. In the U.S., over 80% of the states including California, Colorado, Oregon and Washington have legalized recreational and/or medicinal use of marijuana at the state level.  The California industry alone is projected to hit over $7 billion in a few years. This has led to a growing list of emerging companies in the cannabis space seeking financing through the public markets as they see the opportunity in building up their operations to cater to a significant spike in marijuana use now that it is legalized in Canada and more and more U.S. states are legalizing it in some form or fashion. While listing on exchanges in the United States can still be problematic due to the current U.S. federal ban, Canadian stock exchanges have provided a reputable market for cannabis shares with companies listing on the TSX Venture Exchange and Canadian Securities Exchange (CSE). Certain Canadian listed companies have also been able to dual-list their shares on the NYSE such as Canopy Growth, Aurora Cannabis and Aphria with others such as CannTrust currently in the process of listing in New York. This is providing greater exposure of these stocks to institutional investors and index funds.

This shifting dynamic creates a great opportunity for companies throughout the value chain of the cannabis industry such as research and developers, producers, processors, distributors, wholesalers and retailers to realize significant growth through first mover advantages. However, it also requires that the Boards of Directors of these companies put in place the proper executive compensation structures to attract, retain and motivate its executives to execute on the overall business strategy. Companies must also be aware of the various rules and regulations that come with being a publicly-traded company. For those companies graduating up to major exchanges such as the TSX, greater scrutiny from institutional investors and proxy advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis on compensation levels and designs can also be expected. With this in mind, here are the top areas boards of publicly-listed and privately-held companies across the spectrum of the cannabis industry must consider when dealing with executive compensation matters as they continue to navigate this exciting time of expansion in 2019.

Top Area of Focus for Executive Compensation

  1. Compensation Philosophy & Peer Group
  2. Executive Compensation Levels
  3. Short-Term Incentive Design
  4. Equity Compensation & Related Documentation
  5. Employment Agreements
  6. Shareholder Engagement 

Compensation Philosophy & Peer Group

A company’s executive compensation philosophy establishes the foundation for its compensation program as it outlines the objectives of the program and the types of compensation to be offered. It also outlines the peer group that will be used to benchmark compensation levels and practices as well as a company’s desired positioning when compared to that peer group. For companies in a rapid growth phase, peers that might have been comparable a year ago from a size and strategic perspective may have become obsolete due to their size or through acquisitions. The peer group for a $100 million market cap company will look a lot different than a $1 billion company! A good rule of thumb is to look for a peer group of companies within 0.5x to 2x the current size of your organization. Then consider other characteristics such as business model, location of operations, product offerings as well as who you would look to recruit from, or who you might lose talent to, within the marketplace. This could include not only cannabis industry peers, but also other pharmaceutical or fast-moving consumer goods companies in regulated industries such as alcohol and tobacco. Companies in high growth mode will also be looking to attract key talent to drive this growth, which may require a philosophy that targets compensation levels closer to the 75th percentile as opposed to the typical peer group median.

Executive Compensation Levels

In the early stages of a business, there tends to be less concern over compensation levels as the majority of compensation is tied to equity compensation that is intended to provide a windfall if and when future share price growth is achieved. As a company matures, the need to attract and retain key talent becomes paramount and requires a better understanding of the compensation provided to similar professionals in a competitive market. In stages of rapid growth and the resulting change of peers (as described above), a competitive Base Salary provided to the CEO in one year might be well below market when compared to a different peer group of larger companies. As a company grows, the need to compete with smaller peers becomes less relevant and the need to compete for talent against larger peers becomes more pronounced. This may require adjustments to executive compensation levels. With this in mind, it is important for companies to take into account the level of growth of their company. In a rapidly changing business environment, the need to review compensation levels on an annual basis is more important to ensure the continued competitiveness of Base Salary and Incentive opportunities against an ever-evolving peer group of companies.

Short-Term Incentive Design

With cash typically at a premium in the early days of a firm, bonuses are traditionally made on a discretionary basis, if paid at all. They might also be provided in one-off situations to secure key talent from a larger competitor or different industry. In either case, there is generally a lack of structure surrounding how bonuses are to be paid on an annual basis. As a company matures, the mix between Salary, Cash Bonus and Long-Term Incentives tends to change with more weight placed on Cash Bonuses, thereby making it more important to place more structure around how bonus payouts are determined. Companies might feel that a Profit Sharing Plan is a good way to structure bonus payouts as many companies use Earnings as one of the key performance metrics to determine cash bonuses. In the cannabis industry, however, accounting rules under International Financial Reporting Standards (IFRS) require companies to value certain inventory on a mark-to-market basis which can greatly impact earnings results, either positively or negatively. This may make earnings less suitable for determining executive performance in a given year. As a result, following the incentive design of a majority of General Industry companies may not be the best way to measure performance. Given many cannabis companies are in a high growth stage, better types of performance metrics might include Revenue Growth, Cash Flow from Operations or specific milestones tied to acquisitions, production levels or Research & Development (R&D). Measuring performance across a variety of metrics (ideally 4 to 5) using a “Balanced Scorecard” design can bring more structure to determining cash bonuses while focusing executives on multiple drivers of future growth for the company. If a company is private and looking to enter the public markets, tying part of their scorecard to achieving their public listing on schedule and at a targeted valuation level can also be considered as well.

Equity Compensation & Related Documentation

The traditional thought process is that any small cap company should conserve as much cash as possible by granting stock options to its executives in order to incent these executives to significantly grow the share price of the company, which will produce wealth for both shareholders and the executives. While this approach makes sense in the early stages of a company, as a company experiences significant growth and investor interest, greater scrutiny is placed on a company’s equity compensation plans. Institutional investors and groups such as ISS and Glass Lewis pay close attention to the level of share dilution allowed under your equity compensation plans. The TSX, for example, limits companies to up to a 10% dilution, while exchanges such as the Nasdaq and TSX Venture Exchange allow up to 20% dilution in certain cases. Those companies graduating to new exchanges should be aware of any changes in the rules governing equity compensation plans as they will greatly impact the allowable room to make future equity grants. No longer can a company run itself with the notion that stock options are “free” as there is a cost associated to them and therefore more structure around how they are granted and who is eligible must be put in place. With the run up in cannabis-related stocks there is also talk of whether a “bubble” is building that is inflating the price of current shares. If the “bubble” were to burst, those executives holding stock options could see the value of their equity fall. Given this possibility, consideration of full value awards such as Restricted Share Units (RSUs) or Performance Share Units (PSUs), that can retain value even in times where share prices may drop, can provide greater retention value for executives in place of stock options. RSUs and PSUs can be less dilutive to equity compensation pools, providing more flexibility to the Board when granting equity to key talent.

Employment Agreements

With the movement from a private to publicly-traded company, or in cases of significant growth and investor interest, greater scrutiny is placed on the employment agreements of your top executives. Shareholders, along with ISS and Glass Lewis, have specific views on severance payments to be made upon a Change of Control of the company (i.e. acquisition of the company) or other termination scenarios. Severance payouts of 3x or 4x eligible compensation (typically Salary Only or Salary + Bonus) were commonly accepted in the past as the cost of doing business. The new acceptable norm is a maximum of 2x for the CEO with multiples of 1x to 1.5x for executives below the CEO, thereby lowering the cost of exiting executives upon a termination scenario. “Single Trigger” Change of Control payments based solely on control of the company changing hands, but not the termination of an executive, have been widely criticized and are being replaced by “Double Trigger” Change of Control provisions – payout is only made to the executive if control of the company changes and they are subsequently terminated from their position within a 12 to 24 month period. Boards of cannabis companies should review the severance provisions being provided to executives under existing employment agreements to ensure they are in-line with new market norms and avoid potential pushback from shareholders.

Shareholder Engagement

Annual General Meetings (AGMs) were considered a “rubber stamp” process for approval of general corporate matters such as the re-election of directors, or executive compensation. In the era of shareholder activism and the rise of proxy advisory firms such as ISS and Glass Lewis, AGMs have become forums to voice disdain, directly challenge executive decision-making, and assert the power of all shareholders to hold a board accountable for its actions. If shareholders’ concerns are not met, they will be heard through the AGM vote. With Majority Voting guidelines becoming more the norm in North America, requiring directors to step off the Board if they fail to receive more than 50% of shareholder votes at the AGM, it is becoming increasingly important for Boards to engage with their top institutional and retail shareholders to gauge their views on issues they deem important. Failure to be proactive increases the embarrassing risk of having one of their directors voted off the board. Boards that fail to embrace the latest in technology solutions dedicated to corporate governance, such as SaaS-based shareholder engagement platforms, deny themselves solutions that can greatly assist the board, executive and Investor Relations team with engagement efforts in an increasingly complex environment. These solutions should be examined as they make the process of engaging with an entire shareholder base much more effective and efficient than the traditional way of doing things.

Proper Due Diligence Maximizes Growth

The past couple of years have provided quite an opportunity for companies across the entire value chain in the cannabis industry due to the relaxation of marijuana laws across North America. While this has led to significant growth for many companies in terms of market cap, the higher amount of investor interest puts more pressure on boards to come up with market competitive compensation packages for its executives that are deemed reasonable by shareholders. By focusing on the key executive compensation issues discussed above, companies across the spectrum of the cannabis industry will be able to confidently defend the process they have followed and the decisions they have made to both shareholders and their executives through their engagement efforts. Opportunity knocks, but without the proper board due diligence the opportunity for growth presented in the current environment can quickly go up in smoke.


Options for Executive Compensation Disclosure

Understand Your Options

The clock struck midnight on December 31st, ringing in the start of a new year. While most companies work to finalize their audited financial statements in the next month or two, they also need to be aware of other important tasks required in the months ahead. This includes the calculation, review and approval of Annual Incentive payouts for 2018 as well as the review and approval of any adjustments to Base Salary, Target Annual Incentive and Long-Term Incentive opportunities for 2019. Once these approvals are made, companies must figure out how they are going to communicate the executive compensation decisions made for 2018 and potentially what shareholders can expect for compensation in 2019, to shareholders. This information is provided through a company’s Form DEF 14A in the United States or its Canadian equivalent, the Management Information Circular, also referred to as the proxy circular. Specifically, the Compensation Discussion & Analysis (“CD&A”) section is where the majority of information can be found.

Three Key Questions

When providing disclosure to shareholders, companies need to keep in mind three key questions that should be answered through its disclosure on Top 5 Named Executive Officer (“NEO”) compensation:

  • What was paid to executives?
  • How was compensation paid to executives? and
  • Why was compensation paid to executives?

This includes describing each form of compensation that is provided to executives (i.e. Base Salary, Annual Incentive, Long-Term Incentive, Benefits, Pension and Perquisites). It should also provide shareholders with information on the exact level of compensation given to each NEO for each compensation element. Lastly, disclosure should also explain why each of the compensation elements was provided to executives. This can include the purpose of each compensation element and how they link to a company’s strategy and shareholder value. Information on the performance achieved during the year that justifies the level of Bonus or Long-Term Incentive granted to the executive should be included as part of this and also, where possible, disclosure of the specific performance metrics used to determine performance and the level of performance achieved against these metrics.

How Information is Presented in the Proxy Circular

While certain forms of disclosure, such as the Summary Compensation Table outlining the value of compensation granted to a company’s Top 5 NEOs or the Outstanding Share-Based and Option-Based Awards table for NEOs, are mandated by regulators to be disclosed, companies have a variety of alternatives to choose from in terms of how much they want to present within the proxy circular. Companies typically will fall into one of three buckets in how they choose to present information:

  • Minimum Compliance
  • Minimum Compliance Plus
  • Award Seekers

Minimum Compliance

This bucket is where many Small and Micro Cap companies fall into as they have limited resources available to them in order to complete the annual proxy circular. The task is typically performed by the company’s Chief Financial Officer, Corporate Secretary (if they have one) or outsourced to outside legal counsel with the mandate to provide only what is required by the regulators in order to stay in compliance. This keeps preparation costs and the time required to complete the exercise at a low level. Minimum Compliance disclosures often do not provide information on a company’s practices in a clear and easy-to-read manner, ending up with a lot of text and little to no graphs and tables to help present information in a more readable format for shareholders. A company’s compensation practices are often not as robust as larger companies, with executives typically receiving only a Base Salary and Stock Option grants with Annual Incentives paid on more of a one-off and discretionary basis with little structure in how they are determined. This means that the company often has little to no formal process to disclose to shareholders and therefore keeps the level of disclosure at a minimum. These companies also tend to have more of a Retail shareholder base and in many cases, although not always, will face less scrutiny on their compensation practices from shareholder advisory groups, such as ISS and Glass Lewis, to improve upon their compensation disclosure practices. They can get away with providing limited information until they grow and more of an Institutional shareholder base begins to enter the stock and requires clearer information from the company.

Minimum Compliance Plus

This bucket is where the majority of companies find themselves in the market (often at Mid Cap and growing Small Cap companies) as they seek to meet the minimum required standards, but also want to improve upon that disclosure by adding in more graphs and tables to tell a better compensation story to shareholders. These companies tend to have slightly more internal resources available to them in order to complete this task and will often have a Human Resources representative work with the Corporate Secretary as well as a company’s independent compensation advisor to draft and review the annual disclosure and improve upon past practices. While they don’t necessarily want to be on the leading-edge of compensation disclosure, they better understand the value that improved compensation disclosure can bring when communicating with shareholders. Often at this stage, in a company’s life cycle, they begin to implement a more structured strategy to determine how they make annual Base Salary adjustments, determine Annual Incentive payouts and grant Long-Term Incentives to executives. Because of this added structure, a company now has a more formalized process to share with shareholders and is in a better position to disclose how it goes about determining compensation on an annual basis. Given the company’s size, they tend to have more Institutional shareholders in the stock and therefore the opinions of ISS, Glass Lewis and their Top Institutional shareholders start to have a larger impact on voting results at their Annual General Meeting. These groups demand better disclosure from companies and will ensure that their voices are heard if they do not receive the expected disclosure.

Award Seekers

This bucket is where many Large Cap companies find themselves as they seek to go well beyond the required disclosure to provide a clear, but comprehensive story to shareholders on the process followed to determine executive compensation on an annual basis. These companies have a much higher level of internal resources available to them and will put together a team made up of their Human Resources, Legal and Finance divisions to work on the annual disclosure. They will also work with their independent compensation advisor and other outside parties to produce a document that not only provides great information, but also is much more visually appealing to the reader than the typical proxy circular. These companies fully understand the value that plain language and easy-to-read material can bring when communicating with shareholders. They have had a formal compensation design in place for many years, when determining executive compensation, so the objective of disclosure is not just to provide readers with information on the structure of pay, but to provide shareholders with a better sense of a company’s annual process and any compensation improvements they have made in the past year, based on the feedback they have heard from shareholders. Given the company’s size, they have a majority of Institutional shareholders in the stock and therefore the opinions of ISS, Glass Lewis and their Top Institutional shareholders have a direct impact on the voting results at their Annual General Meeting. As an example, a negative vote recommendation from ISS, Glass Lewis or group of top shareholders has the potential to lead to a failed Say on Pay vote, which is embarrassing for the company and its Compensation Committee. Once a solid disclosure format is put in place, “award seekers” are always looking to improve upon the proxy circular, making annual disclosure an ever-evolving process as they are never satisfied.

Closing Thoughts

As you can tell, a company has a variety of ways in which it can choose to provide annual disclosure on executive compensation, which is often predicated on the exact circumstances facing the company. Does the company have a high Retail or Institutional shareholder base? Has the company received negative feedback from ISS, Glass Lewis or a Top shareholder in the past? What stage of life cycle is the company in and what kind of structure is currently in place to determine executive compensation? What resources does the company have available to it to prepare disclosure? These questions should all be asked when determining the type of disclosure, the company can provide to shareholders. However, no matter which level of disclosure a company chooses to provide, it should always remember to answer the three main questions that all shareholders want to know as it relates to compensation:

  • What was paid to executives?
  • How was compensation paid to executives? and
  • Why was compensation paid to executives?

Without answers to these three questions, a company will face scrutiny on its executive compensation disclosure practices.

Glass Lewis Releases 2019 Clarifying Amendments

Summary of Policy Updates

While Glass Lewis has not changed its current approach in the following areas, it has codified certain policies in the United States:

  1. Auditor Ratification Proposals at Business Development Companies (“BDCS”)
  2. Director Recommendations on the Basis of Company Performance
  3. NOL Protective Amendments
  4. OTC-Listed Companies
  5. Quorum Requirements

Auditor Ratification Proposals at Business Development Companies (“BDCS”)

Glass Lewis clarified why they do not recommend voting against members of the audit committees of business development companies for failing to include auditor ratification on the ballot alongside a proposal to issue shares below Net Asset Value.

Director Recommendations on the Basis of Company Performance

With regards to Glass Lewis’ voting recommendations based on company performance, they have clarified that in addition to a company’s share price performance, they will consider the overall corporate governance, pay-for-performance alignment and responsiveness to shareholders. This means that their recommendation is not based solely on share price performance falling in the bottom quartile of the company’s industry sector.

NOL Protective Amendments

Previously, when companies proposed the adoption of a NOL Poison Pill, in addition to a separate proposal seeking approval of “protective amendments” to restrict certain share transfers, Glass Lewis would generally support adoption of the NOL Pill while opposing the protective amendment, on the grounds that the pill itself would be sufficiently restrictive to protect the company’s deferred tax assets. Given that it is common practice in the United States to seek approval of both proposals simultaneously in order to appropriately protect such assets, Glass Lewis has clarified that in cases where companies propose adoption of both a NOL Poison Pill and an additional bylaw amendment restricting certain share transfers, they may support both proposals as long as they find the terms to be reasonable.

OTC-Listed Companies

Glass Lewis has added a section clarifying their approach to analyzing OTC-listed companies and their recommendations relating to a lack of enough disclosure. They have clarified that in cases where shareholders are not provided with information regarding the composition of the board, its key committees or other basic governance practices, Glass Lewis will generally hold the chair of the board’s governance committee responsible, or the chair of the board in cases where no governance committee is disclosed.

Quorum Requirements

Glass Lewis has also added a section clarifying their approach to analyzing quorum requirements for shareholder meetings. Glass Lewis generally believes that a company’s quorum requirement should be set at a level high enough to ensure that a broad range of shareholders is represented in person or by proxy, but low enough that the company can deal with necessary business during the meeting. They generally believe that having a majority of the company’s outstanding shares entitled to vote is an appropriate quorum for the transaction of business at shareholder meetings. However, should a company seek shareholder approval of a lower quorum requirement, Glass Lewis will generally support a reduced quorum of at least one-third of the shares entitled to vote, either in person or by proxy. When evaluating such proposals, Glass Lewis will also consider the specific facts and circumstances of the company such as their size and shareholder base.

Global Governance Advisors (“GGA”) continues to monitor the evolving proxy voting guidelines on a regular basis and will be reporting any changes coming out of ISS in the coming weeks as they emerge. 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 2019 proxy season.

For an overview of the Glass Lewis’ 2019 proxy voting guidelines for the United States and Canada, please click here.

Glass Lewis Releases 2019 Proxy Voting Guidelines

Updates for Canada and the United States

Glass Lewis has recently published its 2019 proxy voting guidelines for the United States and Canada. While there are some differences observed between the two jurisdictions, Glass Lewis has provided clarity on changes in the following areas:

  • Corporate Governance Issues:
    • Board Gender Diversity (U.S. and Canada)
    • Board Skills (Canada)
    • Environmental and Social Risk Oversight (U.S. and Canada)
    • Ratification of Auditors (U.S. and Canada)
    • Virtual-Only Shareholder Meetings (U.S. and Canada)
    • Director and Officer Indemnification (U.S. and Canada)
    • Conflicting and Excluded Proposals (U.S.)
  • Executive Compensation Issues:
    • Contractual Payments and Obligations (U.S. and Canada)
    • Grants of Front-Loaded Awards (U.S. and Canada)
    • Recoupment Provisions “Clawbacks” (U.S. and Canada)
    • Other Executive Compensation Clarifications (U.S. and Canada)
    • Added Excise Tax Gross-Ups (U.S.)
    • Executive Compensation Disclosure for Smaller Reporting Companies (U.S.)
  • Housekeeping Changes

Corporate Governance Issues

Board Gender Diversity (U.S. and Canada)

Their policy regarding board gender diversity, announced in November 2017, will take effect for meetings held after January 1, 2019. Under the updated policy, Glass Lewis will generally recommend voting against the nominating committee chair of a board that has no female members. In addition, they may recommend voting against the nominating committee chair if the board has not adopted a formal written diversity policy. Depending on other factors, including the size of the company, the industry in which the company operates and the governance profile of the company, they may extend this recommendation to vote against other nominating committee members. When making these voting recommendations, Glass Lewis will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending shareholders vote against directors of companies outside the Russell 3000 Index (U.S.) or S&P/TSX Composite Index (Canada), or when boards have provided a sufficient rationale for not having any female board members.

Glass Lewis has updated its guidelines to reflect their view with regards to an emerging best practice for boards to disclose their skills and competencies. They have shared their belief that companies should disclose enough information to allow a meaningful assessment of a board’s skills and competencies. From 2019 onwards, their analyses of director elections at companies in the S&P/TSX 60 Index will include board skills matrices in order to assist Glass Lewis and others in assessing a board’s competencies and identifying any potential skills gaps at those companies.

Environmental and Social Risk Oversight (U.S. and Canada)

For large cap companies, and instances where they identify material oversight issues, Glass Lewis will review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of environmental and/or social issues. Glass Lewis will also note situations when such oversight has not been clearly defined by companies in their governance documents. If a company has not properly managed or mitigated environmental or social risks appropriately, they may consider recommending that shareholders vote against members of the board who are responsible for oversight of environmental and social risks. If explicit board oversight of environmental and social issues is unclear, Glass Lewis may recommend that shareholders vote against members of the audit committee. Glass Lewis will carefully review the situation, its effect on shareholder value, as well as any response made by the company in order to take corrective action before making any final voting recommendations.

 Ratification of Auditors (U.S. and Canada)

Glass Lewis will now include factors such as the auditor’s tenure, a pattern of inaccurate audits, and any ongoing litigation or significant controversies that call into question an auditor’s effectiveness in their review. In limited cases, these factors may lead Glass Lewis to recommend against auditor ratification.

Virtual-Only Shareholder Meetings (U.S. and Canada)

Glass Lewis’ policy regarding virtual-only shareholder meetings, announced in November 2017, will take effect for meetings held after January 1, 2019. Under this new policy, for companies that opt to hold their annual shareholder meeting exclusively by virtual means, without providing the option of attending the meeting in person, Glass Lewis will examine the company’s disclosure of its virtual meeting procedures and may recommend voting against members of the governance committee. An against vote will occur if the company does not provide disclosure assuring that shareholders will be afforded the same rights and opportunities to participate as they would at an in-person meeting.

Examples of effective disclosure to support a virtual-only meeting are:

  • addressing technical and logistical issues related to accessing the virtual meeting platform; and
  • procedures, if any, for posting appropriate questions received during the meeting, and the company’s answers, on the investor page of their website as soon as is practical after the meeting;
  • addressing the ability of shareholders to ask questions during the meeting, including time guidelines for shareholder questions, rules around what types of questions are allowed, and rules for how questions and comments will be recognized and disclosed to meeting participants;
  • procedures for accessing technical support to assist in the event of any difficulties accessing the virtual meeting.

Director and Officer Indemnification (U.S. and Canada)

While Glass Lewis has not changed its current policy, they have added clarity on their approach to analyzing indemnification provisions for directors and officers. Glass Lewis strongly believes that directors and officers should be held to the highest standard when carrying out their duties to shareholders, and they feel that some protection from liability is reasonable to protect directors and officers against certain suits so that these individuals feel comfortable taking measured risks that may benefit shareholders. As such, they find it appropriate for a company to provide indemnification and/or enroll in liability insurance to cover its directors and officers so long as the terms of such agreements are reasonable.

Conflicting and Excluded Proposals (U.S.)

Glass Lewis has now codified its policy regarding conflicting special meeting shareholder resolutions:

  • In situations where companies have excluded a special meeting shareholder proposal in favor of a management proposal ratifying an existing special meeting right, Glass Lewis will typically recommend against the ratification proposal as well as members of the nominating and governance committee.
  • In situations where there are conflicting management and shareholder special meeting proposals and the company does not currently maintain a special meeting right, Glass Lewis may consider recommending that shareholders vote in favor of the shareholder proposal and that shareholders abstain from voting on management’s proposal.
  • In situations where companies have both a management and shareholder proposal on the ballot requesting different thresholds for the right to call a special meeting, Glass Lewis will generally recommend voting for the lower threshold (in most instances, the shareholder proposal) and recommend voting against the higher threshold.
  • Glass Lewis will also note situations where the SEC has allowed companies to exclude shareholder proposals, which may result in recommendations against members of the governance committee. In recent years, the dynamic nature of the considerations given by the SEC, when determining whether companies may exclude certain shareholder proposals, has been witnessed by Glass Lewis. They understand that not all shareholder proposals serve the long-term interests of shareholders and value and respect the limitations placed on shareholder proponents when submitting proposals to a vote of shareholders, as certain shareholder proposals can unduly burden companies. However, in the event that Glass Lewis believes that the exclusion of a shareholder proposal was detrimental to shareholders, they may recommend against the members of the governance committee.

Executive Compensation Issues

Contractual Payments and Arrangements (U.S. and Canada)

Glass Lewis has extended its policy regarding contractual payments and arrangements as part of their analysis of executive compensation and clarified terms that drive a negative Glass Lewis recommendation. When evaluating severance and sign-on arrangements, they will consider general market practice (according to each jurisdiction), the size and design of entitlements.

Grants of Front-Loaded Awards (U.S. and Canada)

Glass Lewis has added a discussion of grants of front-loaded awards to their policy, which are often referred to as “mega grants”. They believe that there are certain risks associated with the use of this type of granting structure for long-term incentives. When evaluating such awards, Glass Lewis will consider the quantum, design and the company’s rationale for granting awards using a front-loaded structure.

Recoupment Provisions “Clawbacks” (U.S. and Canada)

Glass Lewis has clarified its policy regarding clawbacks as they are increasingly focusing attention on the specific terms used as part of these policies by companies. They have stated that their view on the adequacy of clawback policies will not directly affect their voting recommendations with respect to Say on Pay votes, but the terms of a policy will inform their overall view of a company’s compensation program.

Other Executive Compensation Clarifications (U.S. and Canada)

Glass Lewis has formalized several aspects of their executive compensation policies, which includes re-framing how peer groups contribute to their voting recommendations, a revised description of their pay-for-performance model and consideration of discretion in incentive plans. They have also added an explanation of the structure and disclosure ratings used in their Proxy Papers and addressed certain recent developments in their discussion of director compensation and bonus plans.

Added Excise Tax Gross-Ups (U.S.)

When analyzing the performance of the board’s compensation committee, Glass Lewis will now include new excise tax gross-up provisions, as an additional factor that may contribute to a negative voting recommendation from them. When new excise tax gross-ups are provided for in executive employment agreements, Glass Lewis will consider recommending against members of the compensation committee, particularly in situations where a company previously committed not to provide any such entitlements in the future.

Executive Compensation Disclosure for Smaller Reporting Companies (U.S.)

When analyzing the performance of a board’s compensation committee, Glass Lewis will now consider the impact of a material reduction in the amount of CD&A disclosure provided by a company when formulating their recommendations and may consider recommending against members of the committee where a reduction in disclosure substantially impacts shareholders’ ability to make an informed assessment of the company’s executive pay practices. This update takes into account the SEC amendments, made in June 2018, that raised the thresholds in the definition of a “smaller reporting company” (or “SRC”), thereby significantly expanding the number of companies eligible to comply with reduced disclosure requirements. Under the updated lower disclosure standard from the SEC, a company defined as an SRC is only required to disclose two years of summary compensation table information rather than the standard three years. It also only has to report on compensation for only the top three named executive officers rather than the standard five. SRCs are also not required to provide a compensation discussion and analysis or tables detailing grants of plan-based awards to executives.

Housekeeping Changes

Glass Lewis has also made several minor edits to its U.S. and Canadian policies, including the removal of several outdated references, in order to enhance clarity and readability for readers.

Global Governance Advisors (“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 emerge. 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 2019 proxy season.

For access to the Glass Lewis’ 2019 U.S. Clarifying Amendments please click here: Glass Lewis Release 2019 U.S. Clarifying Amendments  

For access to the full Glass Lewis’ 2019 Proxy Voting Guidelines for the United States and Canada, please click on the following link: