Institutional Investor Services (“ISS”) and Glass Lewis have released their updates to proxy voting guidelines for 2020. These guidelines shape the recommendations both bodies will give in reports concerning specific issuers which are often followed by institutional investors. For issuers with an institutional investor as a majority shareholder, these guidelines can be determinative of votes on matters put to shareholders. Key changes impacting TSX-listed companies are outlined below. Changes generally take effect for the 2020 proxy season.
Director Attendance & Committee Meeting Disclosure
ISS generally recommends withholding votes for individual directors where:
- the company has not adopted a majority voting director resignation policy and they have attended fewer than 75% of their board and key committee meetings held within the past year; or
- the company has adopted a majority voting director resignation policy and they have attended fewer than 75% of their board and key committee meetings held within the past year and a pattern of low attendance exists based on previous years’ attendance.
While these recommendations are not new, ISS has clarified for 2020 that there is an exception for nominees who have served for only part of the fiscal year or issuers that are newly publicly listed or have recently graduated to the TSX. In these cases, decisions will be made on a case-by-case basis.
Glass Lewis will generally recommend withhold votes for a governance committee chair when attendance records for board and committee meetings are not disclosed. Beginning in 2021, they will also recommend withholding votes for a governance committee chair when the number of audit committee meetings that took place in the most recent year are not disclosed. Beginning in 2021, Glass Lewis will also recommend withholding votes for an audit committee chair when the audit committee met fewer than four times in the most recent year.
Neither ISS or Glass Lewis have updated their board diversity policies in light of the recent changes to the CBCA which expand diversity disclosure requirements.
For the 2020 proxy season ISS has clarified its preferred methodology for directors to transition on and off of boards. ISS will generally recommend withholding votes for a non-CEO director who serves on the boards of more than five public companies, and CEOs who serve on boards of more than two public companies besides their own.
ISS now recommends directors step down at annual meetings, recognizing that this may result in a director being temporarily “overboarded.” Where it has been publicly disclosed that the director will be stepping down at the next annual meeting, that board membership will generally not be counted for the purposes of this policy. Conversely, for the purposes of this policy, ISS will count boards that directors will be joining even if the relevant meetings and elections have yet to take place.
Glass Lewis has not changed its policy regarding overboarded directors—they continue to recommend shareholders withhold votes for any directors who serve as an executive officer of any public company while serving on more than two public company boards and any other director who serves on more than five public company boards.
Assessment of a board’s responsiveness to investor concerns relating to say-on-pay votes and the clarity of compensation disclosure remains a primary factor in ISS’s case by case assessment of say-on-pay proposals.
Absent robust disclosure on engagement activities following a low say-on-pay vote at the previous annual meeting, Glass Lewis may recommend voting against subsequent say-on-pay proposals.
Glass Lewis considers 20% or more opposition to a say-on-pay proposal to constitute “significant” opposition, which should trigger responsiveness to shareholders and their concerns. Their expectations of what will constitute sufficient responsiveness will vary depending on the magnitude and duration of the opposition, but examples can include engaging with large shareholders and, if reasonable, implementing changes to directly address their concerns.
Auditors and Audit Fees
ISS broadened the scope of other or “non-audit” fees that can be incurred by the auditors and considered separately from the standard “non-audit” fees when the latter are evaluated for excessiveness. In 2019, this list was limited to IPOs, emergence from bankruptcy and spinoffs, but going forward these will only serve as a non-exhaustive list of examples.
Glass Lewis may recommend withholding votes for all members of the audit committee in the event of a second successive year of excess non-audit fees (making an exception regarding minimum board sizes they expect to see for public companies).
ISS will continue its policy of recommending to withhold votes for any director serving on the audit or compensation committee who has served as the CEO of the company within the past five years. Going forward, this will also apply to those who have served as CEO of an affiliate or a company acquired within the past five years.
Similarly, ISS will continue its policy of recommending to withhold votes for any director who has served as CFO in the past three years and is a member of the audit or compensation committee. Beginning in 2020, this will also apply to those who have acted as CFO of an affiliate or a company acquired within the last three years.
Following 2019 amendments, Glass Lewis believes companies should make sufficient disclosure to ensure shareholders can meaningfully evaluate a director nominee or an entire board’s competencies. Glass Lewis’ Board Skills Appendix provides guidance on the types of skills expected for different industries and how these skills may be gained.
Glass Lewis has also stated a general concern regarding compensation arrangements that are overly favourable to the executive. For example, this includes overly generous severance payments, single-trigger change of control arrangements, or multi-year guaranteed awards.