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 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 

     

     

     

    Best Practices for Executive Compensation Disclosure

    by | May 6, 2019 | Executive Compensation, Governance, Leadership

    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.

    Boards of Directors & The Digital World

    by | Apr 8, 2019 | Board Dynamics, Governance, Leadership, Productivity, Technology

    Embracing Digital Transformation

    Everything will change. If you come away with anything from this blog, it is an understanding that it is critical that Boards of Directors and Executives understand that to succeed in today’s business environment, they must take a giant leap and embrace the digital transformation. Boards and executives are facing a myriad of challenges and can only successfully address them by leveraging artificial intelligence, data analytics, and digital communications. Everything will change – how board members interact with each other; how they make decisions; how they address issues from governance to corporate social responsibility; how they recruit and retain high performance executive teams; and how they will communicate with both shareholders and stakeholders.

    The Digital World Has Already Passed the “Board Portal” (We do not use VHS tapes anymore)

    Seven years ago, a major financial institution faced a dilemma. A board member left a binder of sensitive information in a taxi in New York City. Following this security breach, the board quickly adopted a ‘board portal.’ That solution, seven years later, presents an even greater problem. A portal application resides on a laptop, which if lost – in this hacker dominated society – is the equivalent of leaving sensitive information in thousands of taxis.

    I spoke recently for more than 80 companies. Half of them use no technology at all. Board members expose the companies they serve/lead to unnecessary risks and are out of compliance. They incur unnecessary costs. They are often inefficient and ineffective. They do not leverage artificial intelligence, data analytics, or data communications that can be at their fingertips when analyzing the market, strategy, and/or recruiting and retaining high performance executive teams. Their shareholders are seizing upon social media. Boards of Directors must contend in a digital world and most of these boards remain clueless.

    Our Board Member Will Not Use New Technology

    “A ‘lame excuse’ is an excuse of poor quality or lack of thought or an inappropriate excuse.” If this statement is true about your current board of directors, your board members must become introspective and embrace digital technology or your company needs to find new board members. One does not go into battle with spears and swords against tanks.

    The Solution– Adopt a Workplace Productivity Platform Designed for Board Members and Executives  

    There is only one solution: A workplace productivity platform.

    Implementing a workplace productivity platform means:

    1. All of your documents are housed within the platform. Board member access, annotate, and store board documents in this single repository. At no time does that platform reside on anyone’s PC or Laptop – all of which can be hacked, stolen, lost, or break.
    2. The platform can be accessed from any device, anytime, anywhere.
    3. Board members communicate/message within the platform.
    4. Your board meeting is run through the platform.
    5. All of your committees use the same platform. One single sign-on.
    6. You launch video conferencing through the platform. Any meeting can be attended from anywhere. Your meeting can be recorded. The platform utilizes artificial intelligence, translating voice to text. Voila – your transcripts/notes are ready – and available to your board members or committee members.
    7. Your platform also provides both a prepopulated board evaluation tool and prepopulated D&O questionnaire.
    8. The platform provides data around executive compensation. It is both a repository of almost 10,000 companies and their executive pay by job title and peer group composer. The platform is a data analytics engine that allows your board to identify the right compensation and incentive program for its top executives; score card those plans, and provides payout reporting at any time during the fiscal year.
    9. The workplace productivity platform is also a shareholder/stakeholder communications engine (including survey/proxy tabulator). You build targeted groups of shareholders and stakeholders and utilize the platform’s digital communication capabilities. The geographic reporting features allow your board and executive teams to schedule road shows and meetings with stakeholders more efficiently. The digital educational and communication tools put the board of directors on an equal playing field to address social media and its impact on shareholder activism. The labor and mailing costs more than pay for the platform.
    10. The workplace productivity platform for boards and executives is easy to use and intuitive. If someone can use a smart phone, that person can use this platform

    The digital world has changed everything. Has your board and executive team changed with it?

     

    How to Write a Motion for a Board Meeting

    by | Mar 11, 2019 | Governance, Leadership, Meeting Effectiveness, Productivity

    Considerations for a Well-Written Motion

    It’s the holidays and you’re the chosen victim to host this year’s family dinner. Unfortunately, this dinner doesn’t get your undivided attention because your AGM happens to be right around the corner, and you have the meeting and motions to prepare for. Lucky for you, there’s a universal “recipe” that can ensure success in the kitchen and the boardroom…

    A well-written English Trifle recipe is similar to a well-written board meeting motion. It’s unique, concise, specific and ensures that your family can taste the whipped cream that you infused into each individual raspberry, the same way your board members can see the hard work you put into your motion.

    The Motion

    Stop.

    Before you read any further you must organize your thoughts. A good motion writer can easily itemize the countless innovative ideas bouncing around his or her head.

    Instead of taking the long way to work before the AGM, arrive early enough to practice your motion and to jot down any additional main ideas that you want to convey. Do not forget to include the key ingredients to your motion, such as why the motion is necessary, any legal factors, and if the board is working against a deadline. A good motion writer will be well versed in the details of their motion and has mentally anticipated any potential questions or concerns.

    Does your motion need funding? Be very particular about the wording you choose and the details surrounding where you recommend the funds come from. Any motions that propose funding will require a second motion to approve the allocation of funds.

    While preparing, it is important to read and re-read your motion. Say it out loud. Is it clear? Does it ask your board of directors to take a specific action? Does it need a time-frame? Don’t be afraid to ask for feedback from one or two other board members, prior to the meeting.

    Motion Types

    Parliamentary procedure (Robert’s Rules) provides set guidelines when it comes to making motions. The following are common types of motions:

    • Main Motion – this is the “ask” motion. It requires that a board takes a specific action. It requires a second and can only be introduced if there is no other motion on the floor.
    • Subsidiary Motion – this motion changes the treatment of a main motion. For instance, a motion is introduced by one board member and another member may deem this motion sensitive in nature and introduces a subsidiary motion to go into executive session. An executive session would be used to further discuss the main motion, prior to voting on it.
    • Privileged Motion – this motion takes precedence over other motions and they are not up for debate. It is the motion that provides boards of directors the opportunity to bring up urgent matters that are typically unrelated to the business being discussed at the current meeting. They cannot be combated with a subsidiary motion, unless the board wants to adjust the time to adjourn or take a recess.
    • Incidental Motion – this motion asks for additional information on the procedures related to other motions. Incidental motions table the main motion until clarity is provided.

    Examples of a Motion

    Let’s look at a couple of examples. The board at a top public university has been discussing whether to renovate the kitchens in the four freshmen dorms. They haven’t been renovated in approximately 15 years and the board agrees that they need to be updated. It’s time to make a motion to renovate the kitchens.

    A poorly-written board meeting motion:

    I move to redo the kitchens in the four freshmen dorms.

    A well-written board meeting motion:

    I move to redo the kitchens in the first and second freshmen dorms in May 2019. The second phase of renovations will occur in July 2019, for the third and fourth freshmen dorms. The renovations for both phases will be funded by the board’s budget at a cost of $60,000.

    The more detail the better. If you are vague and unclear you may face more amendments, and risk the modification of your original motion to an unrecognizable point.

    Closing Thoughts

    That completes your overview on how to effectively write a motion for a board meeting. Feel free to browse through the rest of our blog (how about checking out How to Chair a Board Meeting) for more.