ISS Releases 2020 Policy Guidelines for Canada

by Peter Landers | 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:

Ratification of Auditors
Election of Directors (several updates)
Equity-Based Compensation Plans for Venture companies
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

Glass Lewis Releases 2020 Proxy Guidelines for the United States

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

Summary of Guideline Updates

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

Updates in Compensation and Governance

Post fiscal year-end changes

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

Company responsiveness to Low shareholder support

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

Short-term incentives

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

Change in control

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

Contractual arrangements and amended employment agreements

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

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

Additional key updates for the 2020 proxy season

Shareholder Proposals

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

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

Standards for Assessing the Audit Committee

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

Compensation Committee Performance

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

Nominating and Governance Committee Performance

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

Forum Selection Clauses

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

Shareholder Proposals – Supermajority Vote Requirements

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

Shareholder Proposals – Gender Pay Equity

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

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

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

Glass Lewis Releases 2020 Policy Guidelines for Canada

by Peter Landers | 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:

Engaging with large shareholders to identify concerns; and
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:

Excessively broad definitions of change of control;
inappropriate severance entitlements;
excessive sign-on arrangements without accompanying rationale; and
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:

Targeting overall compensation above median without adequate justification;
Paying discretionary bonuses when short & long-term incentive targets are not met; and
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

Glass Lewis Releases 2019 Proxy Voting Guidelines

by Peter Landers | Nov 19, 2018 | Glass Lewis, Governance, Proxy 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: http://www.glasslewis.com/2019-policy-guideline-updates-united-states-canada-shareholder-initiatives-israel/

The Importance of Understanding Proxy Voting Guidelines

by Peter Landers | Sep 24, 2018 | Glass Lewis, Governance, ISS, Proxy 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:

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.
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:

Relative Degree of Alignment;
Multiple of Median; and
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

by GGA | Nov 27, 2017 | Canada, Governance, ISS, Proxy Guidelines

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.