Client Update: Outlook for the 2019 proxy season
In preparing for the 2019 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 2019 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 2019 proxy season. ISS’s updates apply for shareholder meetings held on or after February 1, 2019 and Glass Lewis’ updates apply to all meetings held in 2019.
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” / director commitments
For the 2019 proxy season, Glass Lewis did not change its current definition of director overboarding. 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.
For meetings held on or after February 1, 2019, ISS’ recommendation is now similar to Glass Lewis. 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 director’s meeting attendance record will no longer be relevant as the trigger of 75% has been be removed. ISS will generally recommend voting against a director who is “overboarded”.
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.
Board gender diversity
New for the 2019 proxy season, Glass Lewis 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. However, this recommendation may be limited to issuers in the S&P/TSX Composite Index and may not apply if boards have provided a sufficient rationale for not having any female directors or have disclosed a plan to address this issue.
ISS continues to generally recommend “withholding” 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.
In 2018, ISS’s policy on board gender diversity was applicable to S&P/TSX Composite Index companies; however, in 2019, the policy will be applicable to all “widely-held” companies listed on the TSX, which ISS defines to include S&P/TSX Composite Index companies and other companies that ISS designates as a “widely-held” company based on the number of ISS clients that hold securities in that company.
Virtual shareholder meetings
New for 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). ISS has not made a recommendation for the 2019 proxy season.
Environmental and social risk oversight
ISS continues in 2019 to recommend voting on a case-by-case basis on environmental and social (“E&S”) proposals. 2019 guidance has been updated to update factors taken into account in determining recommendation, including making it explicit that a factor to be considered will be whether there are significant controversies, fines, penalties or litigation associated with E&S proposals.
Glass Lewis may recommend voting against members of the board who are responsible for oversight of E&S risks where companies have not properly managed or mitigated E&S risks.
Update on potential use of Economic Value Added (“EVA”) data in pay-for-performance model
ISS has been assessing the potential use of EVA data in the Financial Performance Assessment screen of its pay-for-performance model to add insight into company performance beyond market performance (TSR) and accounting performance (GAAP) measures. For the time being, ISS will continue to use GAAP measures in the Financial Performance Assessment and explore the use of EVA data. ISS plans to feature EVA metrics in ISS research reports on a phased-in basis over the 2019 proxy season.
Follow-up on of previously reported updates
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 received Royal Asset on May 1, 2018; however, many of the key provisions in Bill C-25 will come into force on a day to be named by order of the federal cabinet. Some CBCA issuers received correspondence from the Minister of Science, Innovation and Economic Development in November which seemed to suggest that the regulations would take effect in the near term. However, there has not been any indication of a proposed effective date, and our enquiries with Corporations Canada staff suggest that they have not yet been given a date.
Canadian Securities Administrators (“CSA”) – gender diversity disclosure
As described in our securities client update of January 29, 2015, since that time 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 4 – 2018) – Report on the Fourth Staff Review of Disclosure regarding Women on Boards and in Executive Officer Positions (September 27, 2018). This report outlines key trends and provides some useful statistics on how Canadian issuers of different sizes are managing board renewal and gender diversity issues. Below are the key trends that were observed:
Executive officer positions
Term limits and other mechanisms of board renewal
In light of the trends noted in the report, the CSA is considering whether: (i) changes to disclosure requirements are necessary; and (ii) new or supplemental guidelines should be introduced in connection with corporate governance practices.
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 2019 proxy season please contact one of the following members of our securities group listed below, or your other Stewart McKelvey contact:
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