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:

Attracting & Motivating a High Performance Executive Team (Mining)

An Interview with Corporate Director, Peter Gillin

Peter Gillin is a Corporate Director who currently serves on the Boards of several public companies, including: Turquoise Hill Resources Ltd., Sherritt International Corporation, Dundee Precious Metals Inc., TD Mutual Funds Corporate Class Ltd. and Wheaton Precious Metals Inc. He was a Director of HudBay Minerals, Inc., and was Vice Chair of N.M. Rothschild & Sons Canada Limited, an investment bank. Peter was President and CEO of Zemex Corporation and Chairman and CEO of Tahera Diamond Corporation.

Peter holds an HBA degree from the Richard Ivey School of Business at Western University and is a Chartered Financial Analyst. He is also a graduate of the Institute of Corporate Directors – Director Education Program at the University of Toronto Rotman School of Management and has earned the designation of ICD.D from the Institute of Corporate Directors.

Follow Peter Gillin on LinkedIn.


GGA: What are the key factors in developing incentive plans?

Peter Gillin: Boards focus on the motivation and attraction of new executives, but a key element is also the retention of existing executives. Boards need to have a clear idea of what they want to pay for – in other words, what is the job and what are the important elements of that job for which the candidate will get compensated. And that, of course, involves the specific goals and objectives for the executives and the time horizons for accomplishing them. In any package of compensation, you must mix and match the incentives, obviously salary, plus short-term bonus (typically in cash) and then various other equity related instruments. In order to motivate people in the proper way you must offer a diverse portfolio. It’s also important to start early. Incentive plans require careful consideration, and so much of the planning is driven by specific goals, objectives, and an element of subjectivity. There needs to be time for the executives to provide input – of what they think they’ve accomplished or not. Bench-marking for senior executives is a very widespread practice, but it’s inherently inflationary and sometimes people lose sight of that fact. All in all, you determine what you want to pay for, how you’re going to pay for it and then you compare that to the rest of the world to see if it’s fair.

GGA: What about the considerations needed when building effective incentive plans, specifically within the mining space?

Gillin: In my experience, the greatest single difficulty in formulating any of these plans, in the mining space, is the movement of commodity prices and whether that creates a financial windfall or financial penalty. Ideally you want to have your compensation system designed to operate exclusive of the performance of the company itself because the companies have absolutely no control over that. You cannot forget to factor in the alignment with the shareholders. They suffer when the commodity prices decline, and they are happy as clams when prices increase. What you want to avoid is generously awarding executives when things are bad – that doesn’t sit well with the shareholders. Usually, senior executives have substantial equity awards, and when you compensate them there is an expectation that they have done a first-class job – met all of their objectives and goals (in terms of production).

GGA: You mentioned equity awards. As of late, equity has become obviously more complicated. How do approach equity awards?

Gillin: Well. Cash is the really the easiest approach. As you know, equity participation incentives for executives are of utmost importance and performance share units around the ascendancy options are on the decline. Interestingly, there’s a difference between Canada and the United States and the utilization of those more so in Canada than the U.S. In fact, the mining industry tends to utilize them a great deal more than other industries, particularly smaller mining companies. But, as I said, when things get complicated cash becomes king.

GGA: What about technology? Do your boards use any when developing incentive plans?

Gillin: Absolutely. There is a new trend of incorporating board management software into the executive compensation planning process. One of my companies, in particular, installed a balanced scorecard system and it’s an outstanding piece of technology. It doesn’t do all of the work – determining what compensation is fair – but it works with the board’s subjective judgement to design incentive plans. The board is responsible for using the technology to generate some numbers and then deciding if those numbers feel right, under that circumstance. Ultimately, when it comes to consideration, it’s very valuable to have the combination of the board and the technology.

GGA: How has the role of directors changed (regarding compensation)?

Gillin: Well certainly from the general board perspective, the overall evolution of governance, the improvement of governance techniques, criteria and behaviors have evolved. It’s just been a massive increase over the last 15 or 20 years, if not longer. I mean, I know the first board I ever went on, years and years ago, somebody suggested using a dartboard when determining how you compensated people. It wasn’t sophisticated. But that’s no longer the case. I mean, everything must be well designed, well-structured, very transparent and fully defensible. And that applies to compensation, but also board behavior – meaning board outreach. Specifically, shareholder outreach by the members of the board. I’ve done that in several companies and the agenda is always one of three topics: governance, compensation and strategy formulation. It’s very often focused on compensation. And ordinarily, if the shareholder calls the company and wants to have a conversation, then you know you’re already in trouble. So, if you do it proactively you get a much better response. That’s a relatively new development, but none of this is going to stop. It’s just the way of the world these days.

GGA: What would be the key takeaway from what we’ve covered today. If readers were to walk away with only one piece of information, what should it be?

Gillin: That’s hard. We’ve covered a lot of important information. Compensation is a very important element in this discussion, the main focus, and how companies work to determine it. It’s often the trigger for activism, and all of the other elements flow from it, together with stock price performance.

Risky Business & Board Oversight

Good board members ask good questions.

Risk exists in every organization and it is a board member’s role to probe until they are convinced that management is not incurring any undue risk or risk that is outside of the boundaries they helped to establish. Board members must be cognizant of the lengthy list of risks that exist. Be it:

  • financial risk,
  • legal risk,
  • human resource risk,
  • governance risk,
  • political risk,
  • cyber risk,
  • social media risk, or
  • headline risk.

Overall, board members need to make sure that they are successfully overseeing risk, asking good questions, and ensuring there are other elements of good governance and risk management are place.

Guiding charters, bylaws, mandates, strategic plans, policies and procedures need to be formulated, implemented and updated regularly because they provide focus and direction to proper oversight and establish a framework and safety net for your board to operate within. Operating without these documents, or failing to update them, will not only put your organization at risk but will also increase your board’s liability. Often, board members don’t realize that guiding documents can help protect board members, if something was ever to go wrong. If something did go wrong, your Board must be able to answer “yes” to the following questions – it will go a long way in protecting board members and the stakeholders they serve.

  • Did the board members act with loyalty, prudence and impartiality?
  • Did the board members act within the guidelines of the existing and relevant policy or procedure?

Given the evolution of cyber threats, protecting confidential or sensitive information is an area that is relatively new to organizations. Over the last decade, many boards have evolved away from printing out and shipping board meeting packages to every member.

  1. With the emergence of email, many boards began to send out board materials electronically.
    • This opened risks to email hacks, the ease of forwarding sensitive material, and fact that material remained accessible on lost or stolen devices.
  2. The provision of document repositories then enabled boards to store and access electronic documents on the internet.
    • Many of these services were not secure which made them vulnerable to hacks.
  3. The emergence of secure digital platforms now enables boards to improve their document security while simultaneously enhancing access to electronic materials and inter-member and stakeholder communication tools.
    • With enhanced security around access, and control, this next evolutionary step is proving to be the logical next step for boards that are concerned about mitigating risk.

Risk is a reality in all organizations and board members need to remain vigilant in its oversight. As seen in guiding frameworks and board materials distribution and communication, things will continue to evolve, and related risks will continue to change. Therefore, board members need to continue to ask good questions, and continue to ensure that their organizations are managing risk in a proactive way and doing what is necessary and required to safeguard themselves, as fiduciary leaders and the organizations they are entrusted to oversee.

An Essential Tool for Improving Board Composition

Creating a Board Skills Matrix

An essential question asked by board members is how can we improve our performance? While there are many possible answers to solve this riddle, making sure your board composition is set-up as intended is key. An increasingly prevalent tool used by boards in evaluating their board’s composition is the Board Skills Matrix. According to a 2017 study by Equilar, 307 U.S. and Canadian public companies disclosed the use of a Skills Matrix within their proxy statement. A Board Skills Matrix strengthens an organization’s overall governance practices by identifying the current skills, knowledge, experience and capabilities of current board members. The matrix is a relatively simple table that lists all board members along the top with a board’s view of the essential skills and experience required by the board to be most effective.

Once the essential skills are determined, the board can then evaluate whether each board member possesses that skill or not with a simple check mark (see example below). This evaluation can be done, by the Board or Nominating Committee Chair, by conducting their own assessment of each board member or by asking each board member to self-assess against the identified skills and experiences through use of a questionnaire. At GGA, we have developed a digital boardroom platform, the emPower platform, which can be used by boards to identify the skills and experiences they require. Then each board member can fill out an online self-assessment questionnaire on how they stack up against the identified skills and experiences. These individual questionnaire results can be consolidated and instantly accessed by the Board or Nominating Committee Chair to identify any gaps amongst the current board.

Illustrative Example: Board Skills Matrix

A completed skills matrix, as demonstrated above, helps the board in two ways:

  1. Board Member Development – the matrix identifies areas for individual skills development, that can be strengthened through additional education and training opportunities. This allows for an individual development plan to be created to improve the board member’s overall skill level.
  2. Board Skills Development – the matrix can identify areas for overall board improvement through education or through the recruitment of a new board member that possesses a specific skill set to improve the board’s composition.

In the example above, Board Members # 3, 4 and 6 could use individual skills development in the area of Investments. Increased skill/experience in Compensation and Human Resource matters is required for the board, as many board members do not have experience in that area.

At a bare minimum, the results of the Board Skills Matrix assessment should be shared internally so that the board can identify any areas for future improvement. However, many public companies are taking a pro-active approach and disclosing the results of the assessment directly in their proxy statements on an annual basis (as evidenced by Equilar’s research above). For mid and large cap companies, shareholders are expecting more transparency from companies which require companies to be honest about the skills and experience the board truly values and how each board member stacks up. They can also use this opportunity to detail to shareholders how the board plans on filling any identified gaps in skills.

How does a board determine which skills and experiences to include within its skills matrix? It starts by asking where the organization is today and where it wants to be in the future? Are the skills required to sit on the board today going to be the skills required 5 years from now? This allows the board to determine the skills required to sit on the board and add value, both now and in the future. There are certain skills that are commonly required for a board such as Financial Literacy, Human Resources and Legal experience, but boards should also ask what industry-specific skills and experience are required in addition to functional experience. Are there diversity aspects that need to be considered by the board in addition to specific skill sets? These questions should all be answered when developing a skills matrix.

Required Board Skills

What skills should you be looking for? Recent research by Korn Ferry indicates that the Top 5 skills required by boards as part of their Board Skills Matrix are as follows:

  1. Finance/Accounting (97% prevalence)
  2. Industry Knowledge (95% prevalence)
  3. Compensation/HR (86% prevalence)
  4. Board/Governance Experience (81% prevalence)
  5. Legal/Regulatory/Compliance/Government/Public Policy (80% prevalence)

Other skills/experience included by companies are:

  • M&A/Corporate Finance/Investment Banking/Capital Markets (74% prevalence)
  • Risk Management (64% prevalence)
  • Executive Leadership (63% prevalence)
  • Strategic Planning (48% prevalence)
  • International Experience (45% prevalence)

While not identified above, a growing number of companies are also including Cyber-Security and Information Technology experience on their boards to deal with the increasingly concerning issue of cyber-hacking.

Diversity & Matrix Development

Historically, companies produce a long “laundry list” of skills and experiences as part of their Board Skills Matrix. However, institutional investors are starting to advocate for a more nuanced approach to developing a skills matrix. Instead of including 10-15 different skills and/or experience, they prefer to see companies disclose the 3-5 most important skills required on the board with an evaluation of how each board member compares against these skills. This makes it more clear which skills and experiences the board feels add the most value and how the current set of board members adequately cover each of those skills/experiences.

In addition to skills and experiences, companies are also looking at ways to increase the diversity on their board and will sometimes include this as one of the board considerations when evaluating board composition. While quota-based systems have been implemented in many European countries, they have historically not made their way across the Atlantic to North America. However, recent trends indicate a growing focus on gender diversity in North America, with California recently approving a quota-based system for public companies incorporated or headquartered in the state. In Canada, the Toronto Stock Exchange (“TSX”) has implemented a comply or explain regime that requires companies to disclose the existence of a gender diversity policy for executives and board members or explain why a policy has not been put in place. ISS and Glass Lewis have also put in place specific voting recommendation guidelines that will recommend “Against” votes for Nominating Committee Chairs in situations where there is no written diversity policy and no female board members. These new laws and policies should cause boards to consider diversity within their matrix in order to stay in line with this evolving trend. Diversity should also go beyond just gender to include age, race, religion and ethnicity as well.

Closing Thoughts

Getting the composition of your board right is a tough job, especially with the evolving nature of the world as we transition to a more digital world and deal with emerging issues such as climate change, cyber-security and sustainability. It is important for boards to put in the proper processes in place to ensure they are operating efficiently and effectively. One of the essential tools in doing this is the development of a well thought out Board Skills Matrix to identify the skills and experiences required and evaluating your board members against this criteria. By using this tool, boards can prepare themselves to deal with a company’s major issues, both today and into the future, thereby acting in the best interests of stakeholders.

Like what you read? Feel free to browse through the rest of our blog content (how about checking out The Power of Board Assessments) for more.

The Importance of Understanding Proxy Voting Guidelines

Autumn brings more than crimson leaves, pumpkin spice lattes, and the resurgence of candy corn on the shelves of your local corner store. The start of fall is also a glaring reminder that proxy voting guideline season is upon us.

ISS and Glass Lewis

Institutional Shareholder Services (“ISS”), an influential shareholder advisory firm that conducts research on publicly-traded companies and uses specific voting guidelines to make voting recommendations for companies, begins each proxy voting guideline season by launching its annual Global Policy Survey, which is comprised of two specific surveys:

  1. ISS Governance Policies Survey: Covers high-profile governance topics in the areas of auditors and audit committees, director accountability, board gender diversity and the “one-share, one-vote” principle that apply globally. This survey closed on August 24th.
  2. ISS Policy Application Survey: Covers a more expansive and detailed set of questions, broken down by region. This allows respondents to drill down into many specific voting issues across the Americas, EMEA, and Asia-Pacific. This survey closed on September 21st.

In addition to these two surveys, ISS also conducts a variety of regionally-based round-tables and conference calls to gather broad input from investors, company executives, directors and other organizations. It uses the data collected to make updates and develop its benchmark proxy voting guidelines for the upcoming year and beyond.

Draft guidelines are then sent out by ISS for public comment during the fall with the final published guidelines released in November of each year for annual general meetings occurring after February 1st of the following year.

Glass Lewis is another example of an influential shareholder advisory firm that assists in proxy voting guidelines season. It prefers to take a more private approach when developing these guidelines throughout the year and only releases a final, up-to-date, version in November of each year.

Both organizations have a significant impact on the voting results at Annual General Meetings (“AGMs”) for publicly-traded companies as over the past decade or so, many institutional shareholders have relied on the research of both ISS and Glass Lewis in order to decide on important voting matters such as:

  • Annual Election of Directors
  • Annual Advisory Vote on Executive Compensation (“Say on Pay”)
  • Vote on Frequency of Advisory Vote on Executive Compensation (“Say on Frequency”)
  • Vote on Golden Parachutes
  • Approval of Equity Incentive Plans
  • Annual Approval of Auditors and their Fees
  • Mergers & Acquisitions
  • Shareholder Rights & Defenses
  • Separation of Chairman and CEO Roles
  • Environmental & Social Factors

In past years, a lot of institutional shareholders would rely not only on the research, but also the voting recommendations of ISS and Glass Lewis to vote their shares at each company’s AGM. However, in recent years organizations such as Blackrock, Vanguard, JP Morgan, Ontario Teachers’ Pension Plan and many more have started to develop their own proxy voting guidelines. While these guidelines tend to align with ISS and Glass Lewis, each institutional shareholder has developed their own nuanced approach to voting their shares. Institutional shareholders will also use these voting guidelines to conduct engagement with specific companies to try to influence change in areas where a company’s current approach does not align with their views.

With this in mind, it is important for publicly-traded companies to understand the proxy voting guidelines not just of ISS and Glass Lewis, but also those of its largest institutional shareholders. By better understanding the views of these groups, a company can look for areas that are currently mis-aligned with the guidelines. The company can then determine whether changes should be made to align with the guidelines of its major shareholders or whether there are valid reasons for not aligning to the guidelines and be able to defend why the company’s approach is in the best interest of shareholders.

A thorough understanding of proxy voting guidelines also allows companies to model and stress test how current equity plan designs, executive compensation and corporate performance levels will fare when tested under ISS and/or Glass Lewis research and stress tests.

At Global Governance Advisors (GGA), we often are asked by our Board clients if their current Stock Option Plan or Restricted Share Unit Plan that is up for shareholder approval at the next AGM will pass the ISS Equity Plan Scorecard test. Over the years, we at GGA have done extensive work in this area and have created a proprietary Equity Plan Scorecard Modeller (see example below) that seeks to estimate how a plan will stack up against ISS criteria. The Modeller allows our clients to work with us to enter in the parameters of its current equity compensation plan up for approval in each of the areas assessed by ISS and our proprietary model will provide an estimate of whether the plan design will “Pass” or “Fail” the test ahead of time. While GGA cannot guarantee the results will be exactly the same as the ISS results, the Modeller provides clients with a sense of their chances of receiving a “Fail” result. GGA can then work with the client to make amendments to the current plan design that will increase the likelihood of a more positive “Pass” result when the actual ISS test is conducted in advance of its AGM.

Illustrative Example: Equity Plan Scorecard Simulator

ISS also runs an annual Pay-for-Performance Test, which it uses when making voting recommendations on a company’s Say on Pay vote on executive compensation. This test covers:

  1. Relative Degree of Alignment;
  2. Multiple of Median; and
  3. Financial Performance.

Understanding how each of these tests is conducted allows companies to get out ahead of the curve and work with its compensation advisor to test the current compensation levels and performance prospectively in advance of the ISS analysis. At GGA, we have also created proprietary tools to estimate the results of ISS’ Pay-for-Performance tests that we use with our clients as an estimate of ISS results. Based on the results of this analysis, we can then work with our clients to improve their chances of receiving a “Yes” recommendation for their Say on Pay vote and to improve their annual Compensation Discussion & Analysis disclosure to provide appropriate rationale for why compensation levels have been set the way they have.

Closing Thoughts

Proxy voting guideline season is upon us. Be on the lookout for ISS and Glass Lewis draft proxy voting guidelines for 2019, which will be coming out in the next few weeks. ISS will provide a window for companies to comment on the proposed 2019 guidelines, so be sure to review any updates to their policies and any of their existing guidelines and consider providing feedback. After this comment period ISS will take into account any feedback received and finalize its guidelines, so look for their finalized 2019 proxy voting guidelines which will most likely be published in November of this year. Understand how your current compensation plans and governance practices align with ISS and Glass Lewis guidelines, but also those of your major shareholders so you can prepare in advance of your 2019 AGM. Work with your compensation advisor to review any discrepancies between your current practices and the guidelines and be prepared to test whether your policies will “Pass” or “Fail” ISS, Glass Lewis and major shareholder assessments. Ultimately, understanding proxy voting guidelines will allow companies to get out ahead of the curve and prevent negative vote outcomes during the 2019 proxy season.

Like what you read? Feel free to browse through the rest of our blog site (how about checking out Four Steps a Board Should Follow When Determining Executive Compensation) for more information.

Strategy Mapping & Succession Planning

Fifty years. That’s how long it has been since Japanese manufacturers introduced the world to “just-in-time” production methods. Toyota is credited as the initial birthplace of this methodology, which is aimed primarily at reducing flow times within production systems as well as response times from suppliers and customers. A huge aspect of this process is understanding production schedules and timelines and making sure that inputs, resources and parts are supplied and readily available.

One of the many responsibilities for Boards of Directors is to hire and oversee the compensation and performance of the top executive within their organization. As well, Boards are responsible for establishing the organization’s long-term strategic direction. Embracing the “just-in-time” approach and applying it to human capital management will allow Boards to anticipate what executive skills and characteristics are needed, at each stage of their strategic plans.

Ideally, Boards should be mapping their executive succession planning activities to their strategic planning responsibilities to help ensure that they have the right leadership within their strategic evolution. Like just-in-time manufacturing, proper succession planning requires organizations to proactively understand what skills they will need and when they will be needed.

All succession planning should begin with a review of strategic plans to understand what leadership skills are required at each stage. Once Boards have clarity on what will be needed, they will then be able to properly establish an inventory of:

  • What skills they have,
  • What skills can be developed, and
  • What skills should be acquired.

After Boards successfully implement a just-in-time mindset and map their succession responsibilities to their strategic planning responsibilities, they will have positioned their organizations for future success.

Global Governance Advisors (GGA) works solely for the board, in collaboration with senior management. GGA successfully provides expert, state of the art compensation and governance advice without apparent or perceived conflicts of interest. Our Executive Compensation consulting practice implements comprehensive reviews to ensure pay-for-performance linkage, successful succession planning, fulfillment of disclosure requirements and the optimum alignment of compensation to corporate strategy. We provide rigorous competitive assessments of pay levels for Chairman, Committee Chair, Committee Member and Board Director positions. These assessments include key financial metrics relative to peer groups in terms of retainer, meeting fees and equity compensation.