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Outlook for the 2020 proxy season

In preparing for the 2020 Proxy season, you should be aware of some of the regulatory developments and institutional investor guidance that is likely to impact disclosure to, and interactions with, shareholders. This update highlights what is new in the 2020 proxy season and on the horizon for 2021.

What’s new for corporations incorporated under the Canada Business Corporations Act?

Starting January 1, 2020, public corporations incorporated under the Canada Business Corporations Act (“CBCA”), including those listed on the TSX, TSX-V and CSE, are subject to new disclosure requirements relating to the diversity of directors and senior management. The new CBCA requirements involve disclosure relating to women, aboriginal peoples, persons with a disability and visible minorities. These disclosure requirements are broader than the existing requirements applicable to TSX-listed entities which only require disclosure relating to women. For more information, please see our recent Thought Leadership piece here.

What’s new from the Canadian Securities Administrators?

A. Climate change disclosure

On August 1, 2019, the Canadian Securities Administrators (“CSA”) issued Staff Notice 51-358 – Reporting of Climate Change-Related Risks. The regulators’ message in this notice is that issuers are not doing an adequate job of disclosing climate change-related risks to their business in Annual Information Form and Management’s Discussion & Analysis (“MD&A”) disclosure.

The notice discusses risks resulting from climate change, which can be acute or chronic. Acute physical risks refer to those that are event-driven, including increased severity of extreme weather events, such as cyclones, hurricanes or floods. Chronic physical risks refer to longer-term shifts in climate patterns (e.g., sustained higher temperatures) that may cause sea level rise or chronic heat waves. Physical risks may have financial implications for organizations, such as direct damage to assets and indirect impacts from supply chain disruption. Issuers’ financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting their premises, operations, supply chain, transport needs and employee safety.

B. Access equals delivery proposal

As part of its initiative to reduce regulatory burden, the CSA recently published CSA Consultation Paper 51-405 – Consideration of an Access Equals Delivery Model for Non-Investment Fund Reporting Issuers. The CSA is soliciting views until March 9, 2020 on a proposal to eliminate printing and mailing certain documents to investors unless the investor specifically requests delivery of a copy. Instead, it would be sufficient for documents to be filed on SEDAR and an issuer’s website, and a press release issued to announce the documents’ availability. This model is being contemplated for prospectuses, financial statements and MD&A. The CSA is seeking comments on whether this model would be appropriate for proxy-related materials, as well as documents relating to rights offerings, take-over bids and issuer bids.

What’s new in institutional investor commentary?

Glass Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services (“ISS”), two companies that provide guidance to institutional investors as to how to vote at shareholders’ meetings of publicly-traded companies, have each released updates to their Canadian guidelines for the 2020 proxy season. ISS’s updates apply for shareholders’ meetings held on or after February 1, 2020 and Glass Lewis’ updates apply to all meetings held in 2020.

Both sets of guidelines focus on several key areas including director accountability, governance, shareholder rights, transparency and integrity in reporting and appropriate compensation. 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”).

A. Director attendance & committee meeting disclosure

In respect of directors’ attendance at meetings of the board and various committees, both Glass Lewis and ISS have provided additional guidance regarding their policies.

Consistent with past commentary, Glass Lewis continues to recommend voting against the governance committee chair of a TSX-listed issuer if the directors’ attendance records for that issuer’s board and committee meetings are not disclosed. For meetings in 2021, Glass Lewis will further recommend voting against the governance committee chair of TSX issuers if the number of audit committee meetings in the past year were not disclosed. Glass Lewis will also recommend voting against the audit committee chair if the audit committee did not meet at least four times during the year.

In its 2020 guidelines, ISS advises that it will adopt a more case-by-case approach in its recommendations. It clarifies that exceptions to its standard tests will be made for nominees who served for only part of the fiscal year, or for directors of newly publicly-listed companies, or in respect of companies that have recently graduated to the TSX.

ISS’s 2020 guidelines specify that ISS will withhold voting for individual director nominees of TSX-listed companies, if:

  • the company has not adopted a majority voting director resignation policy AND, without reason, the individual director has attended less than 75% of the meetings at which that director’s attendance was expected in the last year (with attendance calculated as the aggregate of all board meetings and the meetings of the “key” committees on which the director serves, as applicable (i.e. audit, compensation and nominating committees)); or
  • the company has adopted such a policy AND an individual director has a pattern of low attendance AND has attended less than 75% of the meetings at which that director’s attendance was expected in the last year (determined as above).

The ISS 2020 guidelines also refer to a number of other factors[1] that should be taken into account when assessing director attendance.

B. Director overboarding

The term “overboarding” is used to describe a situation where a director is over-committed due to being appointed to an excessive number of boards. Both ISS and Glass Lewis continue to recommend voting against an “overboarded” director, as they have in past years.

Glass Lewis identifies an “overboarded” director as a director who is (i) an executive officer who sits on more than two outside public company boards; or (ii) a non-executive board member who sits on more than five public company boards.

Glass Lewis specifies that:

  • for TSX-V companies, directors are allowed to sit on up to nine boards;
  • where directors are on both TSX and TSX-V boards, it will look at specific duties and responsibilities of the individual on a case-by-case basis to determine whether there is overboarding or whether an exemption is warranted.

As in previous years, ISS confirms that it will continue to treat and count subsidiary boards as separate boards, and that it will not recommend withholding voting for a CEO director of any controlled subsidiary.

With respect to directors stepping down from their positions at AGMs, ISS states in its 2020 guidelines that “temporary overboarding” is likely to occur and it indicates that, in calculating overboarding:

  • when it is publicly disclosed that a director will be stepping away from a board at the next AGM, it will generally not count that board in the overboarding calculation, provided such disclosure is included in the company’s proxy circular; and
  • it will include the new boards that a director is joining in the calculation, even if the shareholders’ meeting to elect the director has not yet taken place.

C. Ratification of auditors and excessive non-audit fees

Both ISS and Glass Lewis have made changes to their policies regarding excessive non-audit fees.

Glass Lewis states that it may recommend voting against all audit committee members in the second successive year of excessive non-audit fees.

In the past, ISS has considered whether “non-audit” fees paid exceeded the sum of audit fees, tax compliance and tax preparation fees.  Historically, ISS has excluded from “non-audit” fees only those relating to initial public offerings, emergence from bankruptcies and spin-offs.  ISS’s 2020 guidelines state that, in the calculation of “non-audit” fees, it may now exclude fees related to M&A transactions, including dispositions (except for those companies regularly in the business of acquiring and disposing assets). Further, fees connected to re-domiciliation may also qualify as a one-time fee eligible to be excluded.

ISS also confirms its position from past years that fees related to all one-time capital structure events will be eligible to be excluded, only if there is adequate disclosure about the transactions together with a clear breakdown of fees.

D. Majority owned/controlled companies

Policy updates have been made both by Glass Lewis and ISS and are applicable to TSX and TSX-V-listed companies that are controlled or majority-owned.

Glass Lewis’ 2020 guidelines, no longer require controlled companies to meet the minimum board size threshold (i.e. five directors for TSX-listed issuers and four directors for TSX-V issuers).

ISS’s 2020 guidelines confirm that ISS continues to support a one-share, one-vote principle. However, ISS has expanded its policy on supporting director nominees who are or represent a controlling shareholder of a majority-owned company. ISS will support such nominees on a case-by-case basis if they are non-management and meet all of the other independence and governance criteria set out in the policy.

E. Compensation

ISS and Glass Lewis continue to refine their policies regarding executive compensation and contractual payments and arrangements.

Consistent with past guidelines, ISS will continue to vote on a case-by-case basis on TSX-V issuers’ share-based compensation plans. However, in its 2020 guidelines, ISS generally advocates voting against an equity compensation plan if the plan is a rolling equity plan that enables auto-replenishment of share reserves without the requirement of periodic shareholder approval at least every three years.

Glass Lewis’ 2020 guideline indicates that it expects comprehensive disclosure regarding mid-year adjustments to short-term incentive plans. Glass Lewis will also expect that extensive discussion be included regarding short-term bonuses to management when goals were lowered mid-year, or calculated payouts were increased.

Further, for ongoing and new contractual payments and executive entitlements or arrangements, Glass Lewis has clarified that it will not comment favourably in respect of contracts that are either excessively restrictive in favour of the executive, or that incentivize behaviours that are not in the best interest of the company. Elaborating on its recommendation last year, Glass Lewis has expanded on factors that may support its negative voting recommendation to include: excessive severance payments, new or renewed single-trigger change-in-control arrangements and failure to remedy problematic provisions in a revised or renewed contractual arrangement.

New for meetings on or after February 1, 2021, if a company (i) maintains an evergreen plan, (ii) has not sought shareholder approval in the past two years and (iii) does not seek shareholder approval of the plan at the meeting, ISS will recommend withholding votes for the continuing compensation committee members. If the entire board constitutes the compensation committee, ISS advises that votes for the board chair should be withheld.

F. Former CEO/CFO on audit/compensation committee

ISS confirmed it will continue to recommend that votes be withheld for any director that is an audit or compensation committee member of a company who has served as CEO of the company or its affiliates within the past five years (or as CEO of a company acquired within the past five years). ISS also advocates the continued application of this guideline to any director who has served as the CFO of a TSX-listed company and/or its affiliates within the past three years, or of a company acquired within the past three years, and is a member of the audit or compensation committee.

G. Say-on-pay

Glass Lewis’ 2020 guidelines have clarified that it will include both qualitative and quantitative analysis in its measurement of the compensation and performance of an issuer against its competition.

Glass Lewis also states that it will consider in its recommendation on say-on-pay, any post-fiscal year-end changes and one-time awards, particularly where such changes are in respect of issues material to its recommendations.

Further, Glass Lewis has provided more detail on its focus areas when it reviews say-on-pay proposals. It has added the following criteria: (i) the selection and challenging nature of performance metrics, and (ii) the implementation and effectiveness of the company’s executive compensation programs, including pay mix and use of performance metrics in determining pay levels.

In addition to the pay practice trends it previously found to be problematic[2], Glass Lewis has identified three new problematic trends: (i) targeting overall levels of compensation at higher than median without adequate justification, (ii) discretionary bonuses paid when short-term or long-term incentive plan targets were not met, and (iii) insufficient response to low shareholder support.

With respect to insufficient response to low shareholder support (i.e., where there is 20% or more shareholder opposition) for a say-on-pay proposal at the previous annual meeting, Glass Lewis states that it will expect disclosure of engagement activities and specific changes made to the compensation programme, in response to shareholder feedback. Glass Lewis is likely to recommend against an upcoming say-on-pay proposal, if no such disclosure is made.

See below the view of the Canadian Coalition for Good Governance (“CCGG”) on say-on-pay.

What’s new in governance commentary?

The CCGG advises on governance issues and released its 2019 guide on best practices for information circular disclosure, for circulars to be released in 2020. Below are highlights from this year’s guide.

A. Say-on-pay

The CCGG continues to advocate for shareholders participating in a say-on-pay vote. CCGG recommends that if less than 70% of the votes favour the say-on-pay motion, the board should engage in a consultation process with shareholders who voted against the resolution. The consultation process recommended must aim at understanding the concerns of dissenting shareholders and provide all shareholders a comprehensive report of the feedback received, as well as any decision taken on the basis of the feedback.

B. Director continuing education

CCGG continues to recognize the importance of ongoing education for directors. CCGG highlights that the continuing education must focus on both internal and external education programs to expand the board’s knowledge of the issuer’s operations and relevant ongoing and emerging issues. As an example, the CCGG recommends that board meetings be periodically located where a company has significant operations, commercial activities and/or local stakeholders, who may enhance the understanding of the company and its operations.

C. Independence of board chair

CCGG continues to maintain its position that board chair should be separate from the CEO and the chair should be independent of a company’s management team.

CCGG recommends that where an issuer has a controlling shareholder, it is acceptable for the board chair to be a “related director” (i.e. a director who is either (i) directly or indirectly a significant shareholder of the controlling shareholder; or (ii) directly or indirectly employed by a significant or controlling shareholder; or (iii) an immediate family member of a controlling shareholder) provided that the issuer has appointed a lead independent director. For further guidance on its policy, CCGG refers its readers to its earlier publication on Governance Differences of Equity Controlled Corporations.

D. Chair’s letter to shareholders

The board chair’s letter to shareholders is an avenue for the chair to provide a glimpse into key corporate governance initiatives. CCGG in past guides has urged and commended statements that reflect commitment to critical environmental and social issues connected to a company’s business. CCGG also recommends the inclusion of a “Sustainability” section in the information circular, focusing on environmental and social impact initiatives.

E. Reporting past voting results

TSX-listed companies are required under securities laws to disclose results for each matter voted upon, promptly after the conclusion of a shareholder meeting. CCGG has recommended in the past that prior year’s voting results be disclosed. CCGG makes a further recommendation that the details of the previous year’s election results be included as part of each director’s biography, while the preceding say-on-pay vote results be included as part of the current year’s say-on-pay recommendation.

F. Executive compensation and non-GAAP measures

CCGG undertook a study in 2019 of the compensation structures of a representative group of 100 public companies listed on the S&P/TSX Composite Index, and included its recommendations in a position paper titled Use of Non-GAAP Measures in Executive Compensation.

The paper includes recommendation for improved disclosure by public companies. For companies that use non-GAAP measures in their executive compensation, CCGG recommends (at Page 16 of the paper above) that the following be included:

  • an acknowledgement of the board’s responsibility for vetting non-GAAP measures and scrutinizing any adjustments proposed by management, along with a discussion of the process involved in doing so;
  • an explanation of the parameters used by the board to determine the appropriateness of individual adjustments and rationale for any material adjustments made in the previous year;
  • clear definitions of all non-GAAP measures used;
  • where applicable, a detailed reconciliation of non-GAAP measures to the closest GAAP measure and some context regarding the magnitude and trend of adjustments historically approved by the board;
  • confirmation as to the year-over-year consistency in calculation of non-GAAP measures or, alternatively, disclosure of changes made to calculation methodology, along with a rationale for such changes and their implications in terms of year-over-year comparability of performance measures; and
  • while not intended as a proxy for board accountability, the potential involvement of independent third parties in the review process may be beneficial (for example, in ensuring year-over-year consistency in the calculation of key metrics). Boards should report on any such involvement by independent third parties.

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 upcoming 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
Divya Subramanian


[1] Other factors that ISS will consider include: (i) absence due to illness or company business; (ii) telephonic participation; and (iii) number of days on which meetings were missed. If the director missed one meeting or one day’s meetings, votes should not be withheld even if such absence dropped the director’s attendance below 75 percent. Out of country location or residence is not a sufficient excuse not to attend board meetings, especially given technological advances in communications equipment. Board and “key” committee meetings include all regular and special meetings of the board duly called for the purpose of conducting board business.

[2] Past say-on-pay practice trends that the Glass Lewis considers problematic include: (i) inappropriate or outsized peer group and/or benchmarking issues, such as compensation targets set well above peers; (ii) egregious or excessive bonuses, equity awards or severance payments, including golden handshakes and golden parachutes; (iii) performance targets which are not sufficiently challenging, and/or provide for high potential pay­outs; (iv) performance targets lowered without justification; (v) problematic contractual payments, such as guaranteed bonuses; (vi) executive pay that is comparably high (as compared to the company’s peers), and is not reinforced by outstanding company performance; and (vii) inappropriate terms of long-term incentive plans.



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