Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis) have both released updates to their Canadian proxy voting recommendation guidelines for the 2016 proxy season.
The following summary outlines the significant changes made by ISS (ISS Updates) and Glass Lewis (Glass Lewis Updates) to their respective Canadian proxy advisory guidelines.
Definition of “Overboarded”. While existing overboarding thresholds will remain in place for 2016, the ISS Updates provide that beginning as of February 1, 2017, ISS will generally recommend a withhold vote for a director of a Toronto Stock Exchange (TSX) listed issuer (i) who serves as a CEO of any public company while serving on a total of more than one (down from the current two) public company boards (other than the board of the company he or she is CEO of) and any other director who serves on a total of more than four (down from the current six) public company boards; and (ii) has attended less than 75% of the board and committee meetings within the past year without a valid reason.
Externally-Managed Issuers. ISS’ current guidelines do not have a recommendation regarding externally-managed issuers. The ISS Updates set out a framework on how ISS will vote on say-on-pay resolutions or on individual directors, committee members or boards when an issuer is externally-managed and has provided inadequate disclosure about the relevant management services agreements and how senior management is compensated. The factors ISS may consider including the following:
- the size and scope of the management services agreement;
- comparison of executive compensation with peers;
- overall performance;
- related party transactions;
- independence of board and committee;
- existence and the process for managing of conflicts of interest;
- disclosure and independence in the selection of the management services provider;
- risk mitigating factors in the management services agreement such as fee recoupment mechanisms;
- historical compensation concerns; and
- executives’ responsibilities.
Equity Compensation Plans. The ISS Updates set out a new model for evaluating equity compensation plans of TSX listed issuers. Previously, ISS would recommend an against vote for an equity based compensation plan which had certain features which were against ISS guidelines. The new model used by ISS is a “scorecard” model that will consider a variety of positive and negative factors of the compensation plan leading to a score which will determine ISS’ recommendation. The factors considered are in three categories: Plan Cost, Plan Features and Grant Practices.
- The Plan Cost aspect will assess the total estimated cost of the benefit plan relative to the issuer’s peers.
- The Plan Features aspect will assess whether:
- the plan contains change of control provisions which do not meet ISS standards;
- the plan allows for financial assistance for the exercise of equity grants;
- public disclosure of the full text of the benefit plan is available to shareholders; and
- there is reasonable share dilution compared to market best practices.
- The Grant Practices aspect considers how grants have been made in the past by the issuer including:
- reasonable three year burn rate compared to market best practices;
- meaningful time vesting requirements for the CEO’s most recent grant;
- issuance of performance-based grants to the CEO;
- a clawback provision for equity awards; and
- post exercise or settlement shareholding requirements.
If the combination of these factors, as determined by an overall score, indicates that the plan is not in shareholders’ interests, ISS will generally recommend that shareholders vote against the plan.
ISS will continue to recommend generally that shareholders’ vote against a plan with:
- discretionary or insufficiently limited non-employee director participation;
- plan amendment provisions which are not in line with ISS requirements; and
- a history of repricing options without shareholder approval.
We understand that ISS will be providing additional guidance to clarify how benefit plans will be evaluated under the new scorecard approach described in the ISS Updates.
Director Overboarding Policy – TSX Issuers.