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Client Update: Outlook for the 2017 Proxy Season

In preparing for the 2017 proxy season, you should be aware of some regulatory changes and institutional investor guidance that may impact disclosure to, and interactions with, your shareholders. This update highlights what is new in the 2017 proxy season.

What’s New in Institutional Investor Commentary

Glass Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services (“ISS”), two companies that advise institutional investors on how to vote at shareholder meetings of publicly traded companies, have each released updates to their Canadian guidelines for the 2017 proxy season. ISS’s updates apply to shareholder meetings held on or after February 1, 2017 and Glass Lewis’ updates apply to all meetings held in 2017.

The guidelines, largely unchanged from earlier years, continue to focus on several key areas, including director accountability, governance, shareholder rights, transparency and integrity in reporting and appropriate compensation. The key updates to these guidelines are highlighted below.

Companies with a significant percentage of their shares held by institutional shareholders should review and consider these updates as they plan for their upcoming annual general meetings.

Director “Overboarding”

Both ISS and Glass Lewis have adopted stricter definitions of Director “overboarding”, the term used to describe a situation where an individual is over-committed due to appointment to an excessive number of boards of directors.

Glass Lewis now regards a director to be “overboarded” if he or she: (i) is an executive officer of a public company while also serving on two or more public company boards or (ii) serves on five or more public company boards, and recommends withholding votes for such a director. Last year, its thresholds were three public boards for executive officers and six public boards overall.

Glass Lewis may not recommend withholding votes, notwithstanding a director being “overboarded” if the issuer provides sufficient rationale for the director’s continued service, including information related to the scope of the director’s other commitments and details of the director’s contributions, specialized skill and knowledge, diversity of skills, perspective and background, and any other relevant factors, to allow shareholders to make an informed decision as to why the director should be elected.

ISS now views a director to be “overboarded” if he or she is (i) the CEO of a public company while also serving on more than two public company boards (including the board of the company for which he/she is CEO) or (ii) a director that serves on four or more public company boards. Last year, ISS permitted a non-CEO to serve on six boards. ISS recommends voting against a director if he or she is “overboarded” and has failed to attend at least 75% of the board and committee meetings he or she should have attended in the past year without a valid reason.

Glass Lewis continues to recommend voting against the election of a director who fails to attend 75% of the board and committee meetings the director should have attended, separate and apart from whether or not the director was “overboarded”.

Again this year, ISS’s and Glass Lewis’s positions on “overboarding” do not apply to TSX Venture Exchange (“TSXV”) issuers.

The above recommendations are generally not applied in relation to an executive officer director in relation to the public company for which the director serves as an executive officer.

Board Responsiveness to a Failed Advisory Vote

Advisory votes on executive compensation are not mandatory in Canada; however, where a company listed on the TSXV or Toronto Stock Exchange (“TSX”) voluntarily provides its shareholders with an advisory vote on executive compensation, Glass Lewis takes the view that shareholders’ concerns should be addressed. Accordingly, its guidelines now state that it may recommend voting against members of that company’s compensation committee if that committee fails to address shareholders’ concerns following a failure to secure majority approval of a “say-on-pay” proposal.

ISS did not update its position on “say-on-pay” proposals in its 2017 update. However, in its 2016 guidelines for TSX-listed companies, ISS stated that it would consider a company’s response to a “say-on-pay” vote that received less than 70% support in its recommendations as to director election.

Non-Employee Director Compensation

ISS is now recommending that shareholders withhold votes for members of the board of TSX-listed public companies who serve on committees responsible for director compensation in cases where the director compensation practices of the issuer create risk to the independence of non-employee directors. If the company does not have a designated committee responsible for director compensation, ISS may recommend withholding votes for the Chair of the board or the full board. Two examples of compensation arrangements identified by ISS as potentially problematic and which may compromise independent judgment include: excessive inducement grants issued at the time of the appointment or election of new directors (relative to market practices) and performance-based equity grants to non-employee directors that could align directors’ interests toward management rather than toward shareholders.

Glass Lewis’ guidelines on director compensation practices were not updated for 2017. Glass Lewis continues to take the position that non-employee directors should receive compensation that is reasonable and appropriately recognizes their time and effort. It remains concerned that excessive fees may compromise objectivity and independence and that equity grants to non-employee directors should not be tied to performance conditions to avoid the risk of undue alignment with management.

Shareholder Rights Plans

In response to amendments to National Instrument 62-104 Take-Over Bidsand Issuer Bids and National Policy 62-203 Take-Over Bids and Issuer Bids (Bid Amendments) both Glass Lewis and ISS have updated their policies to recommend that shareholders vote against shareholder rights plans that require take-over bids to remain open for a minimum period that is greater than the 105 day minimum period imposed by the Bid Amendments.

Equity Compensation Plans

Glass Lewis has tightened its position in relation to equity compensation plans which provide for awards of equity at their full value at no cost to the recipient (e.g. restricted share plans, deferred share plans, performance share plans) and has confirmed that it will not support “full value award plans” which reserve shares above a rolling maximum of 5% of a company’s share capital.

ISS has not updated its guidelines in relation to equity compensation for 2017. It continues to recommend using the “scorecard” model adopted in 2016 to evaluate equity compensation plan proposals by TSX-listed companies and voting against a plan proposal if the overall scorecard indicates that the plan is not in the shareholders’ interests. The scorecard to evaluate equity compensation plan proposals by TSX-listed companies, focuses on three key factors: (1) plan cost, (2) plan features and (3) grant practices.

Non-Audit Fees Paid to an Auditor

ISS has updated its position on the appropriate level of non-audit and other fees to be paid to audit firms and will now recommend voting against the appointment of an auditor and withholding votes for the election of members of the audit committee if non-audit fees and other fees (e.g. fees for tax advice and other consulting services) paid to the auditor exceed the sum of the audit fees, audit-related fees and tax compliance/preparation fees paid to the auditor.

ISS does acknowledge that certain tax-related services (e.g. tax compliance and preparation services) are most cost effectively provided by a company’s auditor and that such fees should not, therefore, be included within “non-audit” fees for the purpose of the required calculation. ISS suggests that where non-audit fees include those related to significant one-time restructuring events (e.g. emergence from bankruptcy or spin-offs), a company should disclose the amount and nature of those fees so that such fees may be excluded from the consideration as to whether non-audit fees are excessive.

Glass Lewis has not made any changes to its policy on non-audit fees for this year. Glass Lewis’ policy remains that it may recommend against the appointment of an auditor when the sum of audit fees and audit-related fees is less than 50% of the company’s total fees paid to its auditor (excluding fees resulting from one-time transactions).

Proposed Canada Business Corporations Act (“CBCA”) Changes

In October 2016, the federal government introduced Bill C-25 which proposed significant amendments to the CBCA related to corporate governance of reporting issuers (and other distributing and prescribed corporations) incorporated under the CBCA. In December 2016 proposed regulations under the CBCA were published, which provide additional detail to the amendments proposed in Bill C-25. Together, the amendments and related regulations would impose obligations similar to several that have recently been introduced under TSX rules and applicable securities laws relating to the election of directors, diversity disclosure and facilitation of the notice-and-access system for shareholder communications.

Election of Directors

The proposed CBCA amendments and related regulations would require that all directors of distributing corporations (essentially, public companies) be elected annually, eliminating staggered boards, require individual votes in respect of each nominee, eliminating the possibility of slate voting, and would require the use of a majority voting standard for uncontested elections of directors. Each of these requirements is consistent with existing TSX rules, except that the CBCA rules will allow votes against director nominees, rather than withheld votes, so that a nominee failing to achieve a majority of votes “for” would not be elected. As a result, there would be no requirement for such a nominee to tender his or her resignation, which resignation may be accepted or rejected, as is the case under existing TSX policies. There would also be a prohibition on a board using its appointment power to fill a vacancy to appoint as a director a nominee who failed to achieve a majority of votes cast at the previous election of directors, unless the nominee is needed to meet one of the following two existing CBCA requirements:

  • to have at least two directors who are not officers or employees of the corporation or its affiliates; or
  • to have at least 25% of the directors be resident Canadians (or where a corporation has fewer than four directors, to have at least one resident Canadian).


Recent changes to securities laws have required reporting issuers, other than venture issuers, to include certain disclosures relating to gender diversity among the issuers’ directors and senior management. The existing rules follow a “comply or explain” model, requiring reporting issuers to disclose whether they have a written policy on gender diversity, and if so, to provide a summary of the policy, and if not, to explain the reasons why not. Disclosures must also include any targets for representation of women on their boards and in senior management and the issuer’s current number and proportion of women on their boards and in senior management. The proposed changes to the CBCA would require similar disclosures be put before shareholders at every annual meeting, again using a “comply or explain” model, but the disclosures must extend to other forms of diversity in addition to gender diversity. The proposed amendments and related regulations do not define diversity, so it remains to be seen how this requirement will be interpreted.


Under the current CBCA, exemptive relief is required in order to use the “notice-and-access” system of delivering shareholder materials in respect of annual meetings that is available under securities laws, and the exemptive relief that is available does not cover all aspects of shareholder communications, particularly communications with beneficial owners. As a result, it is difficult for CBCA corporations to take advantage of the cost savings available under “notice-and-access”. The proposed amendments and related regulations eliminate the requirement for physical delivery of financial statements for corporations using “notice-and-access” and allow intermediaries to satisfy their delivery requirements in respect of such corporations by complying with the “notice-and-access” requirements. However, exemptive relief with respect to delivery of information circulars will still be required on a case-by-case basis, unless a blanket exemption is provided under new Section 258.3 of the CBCA.

Other Amendments

Other proposed amendments would clarify the timing for shareholders to submit proposals to be included in a distributing corporation’s annual meeting materials, which may require changes to existing advance notice bylaws.

CSA Updates

Non-GAAP Disclosures

The annual report of the OSC corporate finance branch in July 2016 stated:

Non-GAAP financial measures – Many issuers include non-GAAP financial measures in press releases, MD&A, prospectus filings, websites and marketing materials, as issuers believe this information provides additional insight into their overall performance. We continue to be concerned about the prominence of disclosure given to non-GAAP financial measures in comparison to GAAP financial measures, as well as the larger differences reported between GAAP and non-GAAP measures. When providing non-GAAP financial information, issuers should not mislead investors nor obscure the company’s GAAP results. We caution issuers that we may take regulatory action if an issuer discloses information in a manner considered misleading and therefore potentially harmful to the public interest. While we have raised repeated reminders for issuers to meet staff disclosure expectations as outlined in CSA Staff Notice 52-306 Non-GAAP Financial Measures, we continue to see non-compliance and potentially misleading disclosures. We intend to monitor this area closely in the coming fiscal year.”

OSC Staff Notice 52-723 – Office of the Chief Accountant Financial Reporting Bulletin in November 2016 also discusses non-GAAP financial measures as an ongoing area of focus, including application of CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures. Recent OSC observations in this area include:

  • inappropriate prominence of disclosure given to non-GAAP financial measures related to earnings when compared to the prominence of earnings measures specified, defined, or determined under a reporting issuer’s GAAP;
  • numerous non-GAAP financial measures presented in the same disclosure document, increasing the potential for investors to be confused and/or material information to be obscured; and
  • non-GAAP financial measures, particularly those presented in press releases, not reconciled to the most comparable GAAP measure.

The OSC’s focus on non-GAAP financial measures is consistent with other securities regulators in Canada and abroad. In May 2016, the staff of the U.S. Securities and Exchange Commission’s (“SEC) Division of Corporation Finance issued new and revised compliance and disclosure interpretations regarding the SEC’s rules and regulations on the use of non-GAAP financial measures following a number of public statements by SEC staff about their renewed focus on companies’ use of non-GAAP financial measures.

Update on Proxy Voting Protocols

It has been accepted for some time that the proxy voting system in Canada is flawed, including problems with both over-voting and missing votes. In March 2016, the CSA published Multilateral Staff Notice 54-304 – Final Report on Review of the Proxy Voting Infrastructure. This Notice included proposed Meeting Vote Reconciliation Protocols, and requested public comments on those protocols by July 2016. The CSA stated its intention to publish final protocols at the end of 2016 in time for the 2017 proxy season.

On January 26, 2017 CSA published Staff Notice 54-305 – Meeting Vote Reconciliation Protocols. The protocols contain CSA staff expectations on the roles and responsibilities of the key entities that implement meeting vote reconciliation and guidance on the kinds of operational processes that they should implement to support accurate, reliable and accountable meeting vote reconciliation. Furthermore, in CSA’s view, the protocols lay the foundation for the key entities to work collectively to eliminate paper and move to electronic transmission of vote entitlement and proxy vote information, and develop end-to-end vote confirmation capability that would allow beneficial owners, if they wish, to receive confirmation that their voting instructions have been received by their intermediary and submitted as proxy votes, and that those proxy votes have been received and accepted by the tabulator.

The protocols are not mandatory, and the CSA will monitor use of the protocols to determine their effectiveness. Issuers should check with their transfer agent on whether and how the new protocols may impact their AGM this year.

New Whistleblower Rules

Ontario’s new whistleblower program may play a role in identifying misleading financial disclosures. The OSC launched its whistleblower program in July 2016. Under the program, the OSC can offer rewards of up to $5 million for tips that lead to successful prosecution of serious securities law violations, which could include improper disclosure.

Gender Diversity Disclosure

As described in our 2015 proxy season update, rule changes required issuers to include additional information in their corporate governance disclosure relating to term limits/board renewal, as well as gender diversity on boards and in executive management. These additional disclosures were contained in proxy circulars starting in 2015.

The CSA has published the findings from their review of the required new corporate governance disclosure in CSA Multilateral Staff Notice 58-307 (for 2015) and 58-308 (for 2016) – Staff Review of Women on Boards and in Executive Officer Positions – Compliance with NI 58-101 Disclosure of Corporate Governance Practices. These notices provide some useful statistics on how Canadian issuers of different sizes are managing board renewal and gender diversity issues. The notice also identifies some areas where disclosure deficiencies are common, including descriptions of how issuers are considering the representation of women on boards and in executive management, although the deficiencies in 2016 were fewer than in 2015.

The foregoing is a summary only intended for general information. If you are interested in any of these topics, a more complete analysis will be required. If you have any questions, comments or concerns respecting the 2017 proxy season please contact your firm lawyer, representative or one of the following members of our securities group:

Andrew Burke

Gavin Stuttard

Colleen Keyes

Tauna Staniland



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