ISS Releases 2020 Policy Guidelines for Canada

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:

Further information on preliminary changes to ISS’ Canadian compensation policies for 2020 can also be found here:

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.

ISS Proxy Voting Guidelines Updates 2017

What do these updates mean for Canada?

Last week, ISS released the 2018 Americas Proxy Voting Guidelines Updates, detailing policy changes for U.S, Canada and Brazil.

Changes for Canada

Pay for Performance Evaluation – Relative Quantitative Screening

Now incorporates the ranking of total pay for CEO and financial performance of a company within a peer group, each measured over a three-year period within the Relative Pay & Performance test under Quantitative considerations. A detailed white paper will be provided at a later date.

Director Overboarding Policy

(effective for meetings on or after February 1, 2019 for TSX-listed companies only. Does not apply to TSX Venture)

Withhold votes for individual director nominees including:

  • Non-CEO directors serving on more than five public company boards; or
  • CEOs of public companies serving on the board of more than two public companies besides their own, i.e., votes to be withheld only at their outside boards.

Gender Diversity Policy

(effective for TSX Composite Index companies starting 2018. Applies to all TSX-listed companies starting February 2019)

  • Withhold votes for the Chair of the Nominating Committee where:
    • The company has not disclosed a formal written gender diversity policy; and
    • There are zero female directors on the board.

Board Structure & Independence (TSX only)

New language has been added relating to votes withheld for any Executive Director or Non-Independent, Non-Executive Director where the board:

  • Is less than majority independent; or
  • Lacks a separate compensation or nominating committee.

Non-Independent Directors on Key Committees for TSX-listed companies

Withhold votes for members of the audit, compensation, or nominating committees who:

  • Are Executive Directors;
  • Are Controlling Shareholders; or
  • Is a Non-employee officer of the company or its affiliates and among the five most highly compensated.

Non-Independent Directors on Key Committees for TSX Venture companies

Withhold votes for Executive Directors, Controlling Shareholders or a Non-employee officer of the company or its affiliates who is among the five most highly compensated, on condition that they:

  • Are members of the audit committee;
  • Are members of the compensation committee or the nominating committee and the committee is not majority independent; or
  • Are board members where the entire board fulfills the role of a compensation committee or a nominating committee and the board is not majority independent.
ISS also made certain modifications to their policy on defining Director Independence, i.e. re-classification of certain situations under different categories, Majority-Owned Company policies and Advance Notice requirements.
For more information, please refer to the link above.