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Client Update: Outlook for the 2018 proxy season

In preparing for the 2018 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 2018 proxy season and beyond.

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 2018 proxy season. ISS’s updates apply for shareholder meetings held on or after February 1, 2018 and Glass Lewis’ updates apply to all meetings held in 2018.

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. This update focuses on developments in the areas of director overboarding, gender diversity, virtual shareholder meetings and board responsiveness.

Companies, especially those 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 (“AGMs”).

Director “overboarding”

For the 2018 proxy season, both ISS’ and Glass Lewis’ current definitions of director “overboarding” will continue to apply. The term “overboarding” is used to describe a situation where an individual is over-committed due to appointment to an excessive number of boards of directors.

Glass Lewis 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. Glass Lewis generally recommends withholding votes for such a director unless 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, as well as any other relevant factors, to allow shareholders to make an informed decision as to why the director should be elected.

ISS 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 corporation for which he/she is CEO) or (ii) a director that serves on four or more public company 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 also 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’ and Glass Lewis’ positions on “overboarding” do not apply to TSX Venture Exchange (“TSXV”) issuers. Glass Lewis generally permits TSXV directors to sit on up to nine boards. Where directors are on both Toronto Stock Exchange (“TSX”) and TSXV boards, Glass Lewis will consider on a case-by-case basis.

Both Glass Lewis and ISS generally do not apply the overboarding test for a director in relation to the public company for which the director serves as an executive officer.

Changes for 2019 proxy season

For meetings held on or after February 1, 2019, ISS will be adopting a stricter definition of Director “overboarding”. ISS will view 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 corporation for which he/she is CEO) or (ii) a director that serves on five or more public company boards. The attendance trigger of 75% will be removed. ISS will generally recommend voting against a director who is “overboarded”.

Board gender diversity

For the 2018 proxy season, ISS is introducing a general diversity guideline applicable to S&P/TSX Composite Index companies. Glass Lewis has not adopted a voting recommendation related to board gender diversity but has noted that in 2018, it will consider gender diversity as one factor in its overall review of companies’ corporate governance practices.

For meetings held after February 1, 2018, ISS will generally recommend “withhold” votes for the chair of the nominating committee or the chair of the committee designated with the responsibility of a nominating committee (or the chair of the board if no nominating committee has been identified or no chair of such committee has been identified), if both: (i) the corporation has not adopted a formal written gender diversity policy; and (ii) no female directors serve on its board.

ISS’s policy on board gender diversity does not apply to: (i) newly publicly listed companies within the current or prior fiscal year; (ii) companies who have graduated from the TSXV within the current or prior fiscal year; or (iii) issuers with four or fewer directors.

Changes for 2019 proxy season

Glass Lewis has indicated that starting in the 2019 proxy season, it will (generally) recommend voting against the chair of the nominating committee if the corporation has either: (i) no female directors; or (ii) no formal written diversity policy in place.

In 2019, ISS’s policy on board gender diversity will be applicable to all TSX-listed companies.

Virtual shareholder meetings

Currently, there are no guidelines in Canada regarding virtual shareholder meetings and neither Glass Lewis nor ISS is making recommendations for the 2018 proxy season. A virtual-only shareholder meeting would be a meeting that is held exclusively online. Under corporate law, the governing legislation and by-laws (or similar constating documents) of a corporation would need to permit a virtual-only meeting. For example, the Canada Business Corporations Act (as defined herein) provides that unless the by-laws of the corporation otherwise provide, any person participating in the meeting may vote by means of a telephonic, electronic or other communication facility that the corporation has made available. Virtual meetings would require a sophisticated technical setup and coordination to facilitate both registration and voting. Providing this type of setup could entail additional costs and technical issues for the corporation.

Changes for 2019 proxy season

Commencing in the 2019 proxy season, Glass Lewis will generally recommend voting against members of the corporate governance committee if the board holds a virtual-only shareholder meeting and does not include in its management information circular robust disclosure that explains and assures shareholders that they will have the same rights and opportunities to participate in the meeting (as they would have if they attended the meeting in person).

Board responsiveness

Advisory votes on executive compensation are not mandatory in Canada; however, where a corporation listed on the TSXV or 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 corporation’s compensation committee if that committee fails to address shareholders’ concerns (e.g. engaging with large shareholders to identify concerns and responding accordingly) after receiving opposition of 20% or more on a “say-on-pay” proposal. Glass Lewis has lowered that threshold from 25% to 20% of the votes cast on the proposal.

In evaluating board responsiveness, Glass Lewis has indicated that it would review the public disclosure record of the corporation from the date of the previous annual meeting to the publication date of their most current proxy paper. Glass Lewis’ review would generally focus on the following areas: (i) at the board level, changes in directors, committee members, etc.; (ii) any amendments made to the corporation’s constating documents; (iii) the adoption by the corporation of new policies or business practices; and (iv) any amendments to the corporation’s compensation program.

In addition, for the 2018 proxy season, Glass Lewis has also amended its “board responsiveness” threshold to 20% (from 25%) in situations where shareholders have withheld votes from a director nominee, voted against a management proposal or voted for a shareholder proposal. In these situations, if the board of directors has not appropriately responded to the shareholders’ concerns, then Glass Lewis may take this into consideration as a contributing factor and recommend against a future management proposal (e.g. director nominee, say-on-pay proposal, etc.).

ISS will generally recommend withholding votes for continuing directors where the board of directors has failed to act on a shareholder proposal that received majority shareholder support at the previous shareholders meeting.

Pay for performance

There were no amendments this year to Glass Lewis’ methodology regarding pay for performance; however, ISS has added the Relative Financial Performance Assessment (“RFPA”) test to its quantitative pay for performance evaluation. The RFPA test compares the issuer to a peer group with respect to: (i) chief executive officer pay; and (ii) financial performance (based on industry-specific metrics) over a three-year period. ISS has two-step process to determine if there is a disconnect between the chief executive officer’s pay and corporation performance. Step one is a quantitative assessment (which includes the RFPA test) and step two is a qualitative assessment.

ISS will generally recommend voting against management say-on-pay proposals and/or withhold votes for members of the compensation committee and/or against an equity-based incentive plan proposal if there is significant long-term misalignment between the chief executive officer’s pay and the corporation’s performance.

Dual-class share structures

In 2017, Standard & Poor’s announced that, moving forward, it will not allow companies with dual-class shares to join certain indices (including the S&P 500). In relation to the 2018 proxy season, Glass Lewis has added a discussion on how they treat dual-class structures, which structures they generally view to not be in the best interests of shareholders. Glass Lewis will typically recommend that shareholders vote in favour of proposals to eliminate dual-class share structures and recommend that shareholders vote against proposals that seek to adopt a dual-class share structure.

Glass Lewis generally considers a dual-class structure to reflect negatively on a corporation’s overall corporate governance. The 2018 guidelines added a discussion of how Glass Lewis considers dual-class share structures in analyzing a corporation’s governance. The guidelines indicate that Glass Lewis will carefully examine the level of approval or disapproval attributed to unaffiliated shareholders to determine whether board responsiveness is warranted. If the vote results indicate that a majority of unaffiliated shareholders supported a shareholder proposal or opposed a management proposal, then the Glass Lewis guidelines indicate that the board of directors should demonstrate an appropriate level of responsiveness. See discussion under “Board responsiveness” for a more detailed analysis.

ISS also has a general recommendation to vote against proposals that seek to adopt a dual-class share structure. In order to support a dual-class structure, ISS includes a list of five exceptional criteria that must all be met. The five criteria are: (i) that the dual-class structure is required due to foreign ownership restrictions and financing is required to be done out of country; (ii) the dual-class structure is not designed to preserve the voting power of an insider or significant shareholder; (iii) a subordinate class may elect some board nominees; (iv) there is sunset provision; and (v) there is a coattail provision that places a prohibition on any change in control transaction without approval of the subordinate class of shareholders.

TSX provides guidance on majority voting policies and advance notice bylaws/policies

In March 2017, the TSX published TSX Staff Notice 2017-0001 (“Staff Notice”), which provides guidance in connection with the TSX requirement for issuers to have a mandatory majority voting policy for the election of directors (subject to certain exceptions). The TSX Company Manual was amended in February 2014 to institute this requirement (see our securities client update of January 29, 2015 for a more detailed discussion of this amendment).

The Staff Notice notes that the TSX conducted a review of 200 randomly selected majority voting policies from TSX-listed issuers to assess compliance with the TSX Company Manual requirements. The TSX found that many majority voting policies of TSX-listed issuers were deficient and did not meet the requirements of the TSX Company Manual. In connection with this review and the deficiencies noted, the TSX is offering the following additional guidance, which is intended to clarify the requirements of the mandatory majority voting policy (“MV Policy”):

  • MV Policies are to have the effect of requiring a director to tender his or her resignation immediately if not elected by a majority of votes cast. The following additional provisions may be required in the MV Policy in order comply:
    • all proposed nominees and directors agree to the terms of the MV
    Policy in order to be nominated to the board; and
    • if a director refuses to tender his or her resignation, such director will
    not be nominated for election in the following year.
  • MV Policy must include a provision setting out a time period to make determination on whether to accept the resignation.
  • MV Policy must provide that resignation will be accepted absent exceptional circumstances.
  • The TSX will contact an issuer if they do not accept the resignation and review the circumstances on a case-by-case basis.
  • A director who has tendered his or her resignation should not attend or participate in any meeting at which the resignation is being considered. If the director is required to attend to meet quorum requirements, then the individual must not speak or otherwise participate (or vote on any resolution).
  • MV Policy should include requirement to issue a news release once the decision to accept or not accept the resignation has been made. If the decision has been made to not accept the resignation, the news release must fully state the reasons why the resignation was not accepted.
  • The TSX considers the inclusion of the following types of provisions to be inconsistent with the MV Policy:
    • a higher quorum requirement for the election of directors compared
    to the quorum requirement for other resolutions; and
    • MV Policies that exclude certain nominees (i.e. incumbent directors
    or insider nominees).

In addition, the Staff Notice provides guidance on the use of advance notice policies in the connection with the election of directors. The TSX considers the current guidelines published by Glass Lewis and ISS in connection with “advance notice policies” to be generally satisfactory. According to the TSX, the following provisions are inconsistent with the policy objectives of the TSX rules:

  • Requiring the nominating security holder to be present at the annual meeting at which his or her nominee is standing for election.
  • Requiring the nominee or nominating security holder to provide additional documentation (i.e. personal information form, questionnaire, written consent) unless this is also required by the issuer for the management or board nominees.

Reminder of previously reported updates

Updates to TSX Company Manual – website disclosure and security-based compensation arrangements

As described in our securities client update of November 16, 2017, the TSX has made two recent changes to the TSX Company Manual that will impact disclosure:

A. It introduced a requirement for many corporate listed issuers to disclose specified policies and corporate documents on the issuer’s website, effective April 1, 2018, which the TSX refers to as the Part IV Amendments; and,

B. It amended the disclosure requirements for securities-based compensation arrangements in circulars for securityholder meetings of the issuer, effective for financial years ending on or after October 31, 2017, which the TSX refers to as the Part VI Amendments.

Therefore, in connection with the 2018 proxy season, TSX issuers must add a few additional calculations, including compensation plan burn rates, to the circular in connection with their upcoming AGMs. The requirement does not apply to venture issuers. For a more detailed discussion of this requirement, please refer to our securities client update of November 16, 2017 or one of the members of our securities group.

Proposed Canada Business Corporations Act (“CBCA”) changes

As described in our securities client update of February 8, 2017, 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, the federal government announced proposed regulations under the CBCA 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 been introduced under TSX rules and applicable securities laws relating to majority voting for directors, election of directors, diversity disclosure (including information on women, Aboriginal peoples, persons with disabilities and members of visible minorities) and facilitation of the notice-and-access system for shareholder communications. The adoption of the regulations would also require CBCA corporations listed on the TSXV to prepare and provide the required diversity disclosures. Bill C-25 is currently before the Senate for its third reading. At this time, it is not known when the proposed amendments will come into force.

Canadian Securities Administrators (CSA) – gender diversity disclosure

As described in our securities client update of January 29, 2015 since 2015, the CSA has required disclosure by TSX-listed issuers to include information in their corporate governance disclosure relating to term limits/board renewal, as well as gender diversity on boards and in executive management.

The CSA recently published the findings from their review of the required corporate governance disclosure in CSA Multilateral Staff Notice 58-309 (Year 3 – 2017) – Staff Review of Women on Boards and in Executive Officer Positions-Compliance with NI 58-101 – Disclosure of Corporate Governance Practices (NI 58-101). This notice provides some useful statistics on how Canadian issuers of different sizes are managing board renewal and gender diversity issues. The notice also identifies five areas where disclosure was not sufficient and reminds issuers that they are required to provide the disclosure in accordance NI 58-101. Below are the five areas where the deficiencies were noted:

  • Disclosure must include (for each year) both the number and the percentage of women on an issuer’s board of directors (the “Board”) and in its executive officer positions.
  • If a written policy regarding the representation of women on the Board has been adopted, a description of the policy along with a clear explanation of how the policy applies to the identification of women directors, must be included.
  • If gender targets have been adopted, disclosure of annual and cumulative progress in achieving those targets must be included.
  • If there is consideration of the representation of women in the identification and selection of directorship and executive officer candidates, a description of the process must also be disclosed.
  • If term limits or other mechanisms for Board renewal have been adopted, a description of the limits and/or other renewal mechanisms as well as their contribution to Board renewal, must be disclosed.

For certain public companies, proposed amendments to the CBCA, once in force, will require disclosure similar to that required by NI 58-101.

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 2018 proxy season please contact one of the following members of our securities group listed below, or your other Stewart McKelvey contact:

 Andrew Burke
 Laurie Jones
Colleen Keyes
 David Randell
 Tauna Staniland
 Gavin Stuttard


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