5 Trends for Executive Compensation in 2019

by | Dec 17, 2018 | Executive Compensation, Governance, Market Trends

USMCA, Cannabis, Energy Sector, Government, Say on Pay All Have an Impact

Several developments over the last year will have an impact on trends in executive compensation for 2019, including the North American Free Trade Agreement (NAFTA) revamp — upgraded to the United StatesMexico-Canada Agreement (USMCA) — increased scrutiny of cannabis companies, “say-on-pay” adoption, and a downturn in the energy sector.

High-sector growth will also drive additional upward pressure on talent and compensation into 2019, which will have a retention impact on the pharmaceutical, fast-moving consumer goods and tech sectors.

Tariffs and USMCA

While the full effect of U.S.-imposed tariffs on aluminum and steel and the new USMCA remain unclear, they could have an impact on how executive compensation is structured for 2019. In late 2018 and early 2019, compensation committees will be working with their advisers and CEO to determine key performance objectives for 2019 for the C-suite. This will include discussions around performance expectations for 2019 to achieve “target,” “threshold” and “superior” performance as part of finalizing the annual performance scorecard used to determine 2019 short-term incentive payouts. With U.S. tariffs and the new trade deal threatening certain Canadian companies, committees are expected to take this threat into account and set performance expectations accordingly. An emphasis on measures such as earnings or revenue may be lowered, with more put on maintaining market share, developing new markets for products or cost-cutting measures to deal with trade concerns.

Cannabis Sector

2018 has seen the continued rise in share prices of cannabis companies, leading up to the legalization of recreational cannabis use as of Oct. 17. Many of these employers have witnessed such rapid growth that their compensation programs have been unable to keep up. They have been playing catch-up by trying to implement more formalized compensation structures for executives and staff. This has forced companies to review the dilution of current equity incentive plans (for many companies, stock options only) which have been highly diluted by equity grants made to attract key executives and staff at much lower share prices. This means current equity pools have little room left to make future grants for new hires heading into 2019. Companies are forced to review who has and has not received equity grants in the past year, and also the share price these grants were made at, to determine who is in most need of a grant to keep them engaged, as well as allow for the equity pool to eventually be replenished and provide the right pay-for-performance balance.

Aside from the cannabis sector, it’s expected companies across Canada (especially small- to mid-cap companies) will review the dilution level in current equity plans when developing 2019 recommendations. For companies looking for shareholder approval of equity plans at the annual general meeting in 2019, conducting this review against Institutional Shareholder Services (ISS) and Glass Lewis guidelines will be imperative to ensure they receive positive vote recommendations and have their plans approved. In addition to equity plans, more structure is expected through the development of balanced scorecards identifying five to seven key corporate and individual performance measures for 2019 to be put in place for cannabis companies to measure 2019 performance and determine 2019 short-term incentive payouts at the end of the year. This trend is expected to grow in prevalence across Canada for all industries as ISS, Glass Lewis and shareholders demand more rigor and structure be put in place to align executive pay with performance — both on an annual and long-term basis.

Downturn in energy sector

The Canadian energy sector has witnessed another downturn in share prices, especially in the energy equipment and services industry. In 2019, energy companies are expected to review executive compensation levels and determine whether downward adjustments (similar to earlier this decade) are required to send a message to shareholders that executives are feeling the pain, too. Companies are expected to review whether short-term incentives should be paid for 2018 at all, or whether deferral into a long-term incentive grant to preserve liquidity for the business and tie executives more to the company’s long-term performance makes more sense. Employers will also face dilution concerns due to lower share prices, so they need to be diligent in ensuring they do not overly dilute their equity pools and restrict their ability to make grants in future years. Focus on the retention of critical talent and high-potentials will be imperative in 2019.

Government intervention

Government scrutiny of executive compensation has received much attention in recent years. During 2018, the Doug Ford government in Ontario rallied against executive compensation at Hydro One which led to the removal of many executives and board members. In Alberta, the NDP government has also shown a willingness to intervene to control executive compensation at universities, colleges, agencies, boards and commissions. With less than one year before an election, will the NDP government implement more rules on executive compensation in Alberta? And will Ford look to intervene in other quasi-public sector organizations? Only time will tell.

Say-on-pay adoption

Say-on-pay failures continued in 2018 with Crescent Point Energy, IMAX and Maxar Technologies each receiving less than 50 per cent approval. While say-on-pay adoption has stagnated of late, the recent announcement by Alimentation Couche-Tard that a say-on-pay vote will be held at its 2019 annual meeting sparked hope that other companies will follow. In looking at Canada’s top 100 companies, close to 30 have yet to adopt such a vote, according to Global Governance Advisors, including corporate titans such as Power Corporation of Canada, Rogers Communications, Canadian Tire and Loblaw.

Will Alimentation Couche-Tard’s decision influence these companies or will these companies continue to lag behind other large companies in Canada? With all these developments, companies are rethinking the structure of their executive compensation programs in terms of the type of compensation offered and metrics used to measure performance. And with the changing economic outlook, they are also determining how to best attract and retain the key talent needed to successfully handle the new reality.

Paul Gryglewicz is a senior partner and Peter Landers is a partner at Global Governance Advisors in Toronto, a human capital management firm providing boards of directors and senior management teams with advisory and technology solutions. For more information, visit www.ggainc.com.

Glass Lewis Releases 2019 Clarifying Amendments

by | Nov 21, 2018 | Glass Lewis, Governance, Regulations, United States

Summary of Policy Updates

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

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

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

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

Director Recommendations on the Basis of Company Performance

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

NOL Protective Amendments

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

OTC-Listed Companies

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

Quorum Requirements

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

Global Governance Advisors (“GGA”) continues to monitor the evolving proxy voting guidelines on a regular basis and will be reporting any changes coming out of ISS in the coming weeks as they emerge. Companies should be reviewing their compensation and governance practices against these updated guidelines to ensure that their current designs align to the updated guidelines as we move into the 2019 proxy season.

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

Glass Lewis Releases 2019 Proxy Voting Guidelines

by | 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/

An Essential Tool for Improving Board Composition

by | Oct 22, 2018 | Board Dynamics, Diversity, Governance, Leadership

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

by | 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:

  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.