In light of COVID-19, Institutional Shareholder Services (ISS) and Glass Lewis have provided updated guidance ahead of the upcoming shareholder meeting season.
The guidance reflects how ISS and Glass Lewis will apply their proxy voting guidelines in light of the pandemic and the unprecedented impact it has had on companies and markets. They cover a wide range of topics from meeting logistics and activism and defensive measures to executive compensation, board composition and payouts and financings. Although their guidance is global, this update explores the items of relevance to Canadian issuers.
Shareholder meeting logistics
Both ISS and Glass Lewis have confirmed they support virtual-only shareholder meetings for 2020, which is not a surprise but still likely a relief to the 115-plus issuers that have already announced they will be holding virtual-only meetings this year. However, Glass Lewis has advised that its standard policy on virtual-only meetings, which requires issuers to provide adequate disclosure regarding how shareholder participation rights will be safeguarded, will apply to all shareholder meetings occurring after June 30, 2020, even if the pandemic continues well beyond that date. For meetings held on or before June 30, issuers are still advised to disclose, at a minimum, their rationale for doing so (i.e., that it is related to the COVID-19 pandemic).
Activism and defensive measures
ISS and Glass Lewis both expect to see a rise of shareholder activism, M&A and consolidation as a result of the COVID-19 crisis.
Since shareholders must submit their proposals well in advance of the meeting, those being considered during the 2020 proxy season are unlikely to have taken into consideration the COVID-19 crisis. Glass Lewis is cautioning shareholders to be mindful of proposals that would require resource-intensive actions during this period of uncertainty. At the same time, Glass Lewis cautions issuers against using the crisis to dismiss or hamper the ability of shareholders to put forward their resolutions, speak at virtual-only meetings and vote on such matters.
Given the dramatic decline of stock prices, issuers that do not already have a rights plan in place may wish to consider implementing one, recognizing, however, that Canadian issuers and their boards and shareholders benefit from the legislative protection of a 105-day minimum deposit period with a mandatory majority tender condition for non-exempt hostile or unsolicited take-over bids, thus limiting in Canada the general protection afforded by rights plans in other jurisdictions. ISS’s current policy provides issuers with latitude in choosing to adopt a rights plan, provided it meets the definition of a “new generation” plan. Note that, as required by the TSX, the adoption of a shareholder rights plan must be ratified by shareholders within six months of adoption.
Sharing the Pain
Glass Lewis has provided a frank assessment of the actions issuers should take to avoid a negative “say-on-pay” vote (or worse), including rolling back planned salary increases and bonuses and otherwise taking measures to share the pain felt by employees and shareholders.
Changes in Metrics, Goals and Targets
ISS advises issuers to provide full disclosure on material changes to 2020 compensation programs, including performance metrics, goals and targets. ISS is generally not supportive of in-flight changes made to long-term awards plans and will look at any such changes on a case-by-case basis, together with any changes to the structure of such long-term plans to take into consideration the new economic outlook.
ISS considers option repricing to be a problematic pay practice, and will generally recommend voting against proposals to reprice outstanding options. ISS is not proposing to change this policy, even in light of the current situation.
Board effectiveness and composition
Changes to the Board
ISS advises that it will use appropriate discretion and flexibility in examining, on a case-by-case basis, boards that need to fill vacancies due to the disability or incapacity of a director or to bring needed expertise to address concerns created by the pandemic.
Glass Lewis has noted a particular risk in the lack of age and gender diversity on boards and in management, given men and those aged 65 and over are more likely to die or become seriously ill from COVID-19. While Glass Lewis has not indicated a change to its voting recommendations for 2020, this may signal that it will apply more scrutiny to issues of diversity in future years.
Payouts and financings
Since proper cash management is critical during this time, both Glass Lewis and ISS have provided guidance on the spending and raising of cash.
Dividends and Normal Course Issuer Bids
Glass Lewis states that the suspension of dividends and share repurchase programs appears to be a forgone conclusion in most cases. ISS advises that it supports boards re-examining the appropriateness and prudence of continuing to pay dividends at previously anticipated levels. In terms of normal course issuer bids, ISS notes that boards may open themselves and their companies up to intense criticism and reputational damage by undertaking repurchases at the current time.
Both ISS and Glass Lewis expect to see a rise in financings and that some issuers will need to seek flexible arrangements from shareholders. ISS makes voting recommendations regarding private placement issuances on a case-by-case basis and has advised that the exceptional circumstances caused by COVID-19 will be taken into consideration when making any voting recommendation.
A pragmatic and flexible approach
Both Glass Lewis and ISS have recognized the unprecedented challenges faced by businesses and their shareholders. The key words that Glass Lewis uses to describe its approach to proxy season 2020 are pragmatism, discretion and context. ISS has advised that it will use discretion and flexibility and a thoughtful and considerate approach in applying its policies. And both have indicated that proxy season 2021 will likely be impacted as well.
Click here to read the ISS policy guidance and here to read the Glass Lewis notice.
Click here to read our earlier summary of the ISS and Glass Lewis general proxy voting guidelines for 2020.