Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
Following the publication by Institutional Shareholder Services (ISS) of its updated guidelines earlier this month, Glass Lewis (GL) has updated its Canadian proxy voting guidelines for the 2021 proxy season. In addition to a number of clarifying amendments, GL’s updates relate to policies on board gender diversity, board skills and refreshment, environmental and social (E&S) risk oversight, financial expertise of audit committee members, director attendance/committee meeting disclosures, exclusive forum provisions, changes of jurisdiction of incorporation, shareholder/management proposals on environmental, social and governance (ESG) issues, and poor disclosure. Unless otherwise noted, the revised guidelines are generally applicable to meetings held on or after January 1, 2021.
GL has expanded its existing policy on board gender diversity at TSX-listed issuers. Beginning in 2021, GL will note as a concern boards with fewer than two female directors and, beginning with meetings held on or after January 1, 2022, will generally recommend voting against the chair of the nominating committee in such cases. For boards consisting of six or fewer directors, GL’s existing policy of requiring a minimum of one female director will continue to apply.
Consistent with its existing policies, GL will continue to recommend voting against a nominating committee chair where there are no female directors and the board has not provided a sufficient explanation or disclosed a plan to address the lack of diversity.
GL will continue to carefully review a company’s diversity-related disclosure in making its recommendations. GL clarified that the existence of a diversity policy with non-boilerplate language and clear targets or disclosure around the board’s timeline for increasing its female membership may mitigate against an otherwise unfavourable voting recommendation.
Beginning in 2021, GL may recommend withholding votes from the chair of the nominating committee if a board has not addressed major issues of board composition, including the mix of skills and experience of the non-executive directors. Issuers should refer to GL’s Board Skills Appendix for an overview of the skills that GL considers in relation to certain key industry sectors in its analysis of director elections at large-cap TSX-listed issuers; there were no changes to GL’s Board Skills Matrices from January 2020.
Beginning in 2021, GL may recommend withholding votes from the chair of the nominating committee if, in addition to other governance or board performance concerns, the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board in the past five years.
Beginning in 2021, GL will note as a concern when boards of S&P/TSX 60 Index companies do not provide clear disclosure concerning director oversight of E&S issues, and beginning with meetings held on or after January 1, 2022, GL will generally recommend withholding votes from the governance committee chair of S&P/TSX 60 Index companies that fail to provide such disclosure.
When evaluating a board’s role in overseeing E&S issues, GL will examine a company’s proxy statement and governing documents (e.g., committee charters) to determine if directors maintain a meaningful level of oversight of, and accountability for, a company’s E&S-related impacts and risks.
Consistent with its current policy, in 2021 GL may recommend withholding votes from board members responsible for E&S risk oversight where GL believes a company has not properly managed or mitigated E&S risks to the detriment of shareholder value, or when such mismanagement has threatened shareholder value. In the absence of explicit board oversight of E&S issues, GL may recommend withholding votes from members of the audit committee.
Beginning in 2021, GL will increase its scrutiny of the level of financial expertise on audit committees of TSX-listed issuers by flagging as a concern audit committees without a minimum of one member with experience as a CPA, CFO or corporate controller of similar experience, or demonstrably meaningful experience overseeing such functions as senior executive officers. However, GL will generally refrain from making recommendations solely on this basis in 2021, except where there are other concerns with the audit committee’s performance.
GL will generally consider committee members to be “financial experts” if they meet GL’s definition of having experience in “Financial/Audit & Risk” matters under its Board Skills Appendix.
As announced last year, in 2021 GL will recommend withholding votes from the governance committee chair of TSX-listed issuers where records for board and committee meeting attendance are not disclosed and the number of audit committee meetings that took place during the most recent year is not disclosed. GL will recommend withholding votes from the audit committee chair where an audit committee does not meet at least four times during the year.
Like ISS, GL has introduced a new policy for board proposals to adopt an exclusive forum bylaw. GL generally believes that exclusive forum provisions are not in the best interests of shareholders. Accordingly, GL will recommend voting against any amendments to the bylaws or articles seeking to adopt an exclusive forum provision unless the company:
If a board seeks shareholder approval of a forum selection clause pursuant to a bundled bylaw amendment (as opposed to a separate proposal), GL will weigh the importance of the other bundle provisions in making its vote recommendation on the proposal.
GL expanded its discussion of governance structure and shareholder franchise to address proposals requesting a change of jurisdiction of incorporation of a company (typically referred to as a “continuance,” which involves a company ceasing to operate as an entity in one Canadian province in favour of another province or jurisdiction).
Where a continuance is presented to shareholders at an annual or special meeting, GL will expect a company to present shareholders with a comparison of the substantive changes between the two jurisdictions. GL will continue to analyze such proposals case by case and decide if the proposed continuance, on balance, is in the best interests of a company and its shareholders.
In 2021, GL will continue to support shareholder resolutions that seek to enhance companies’ governance structures, and will continue to vote case by case on shareholder resolutions related to E&S issues (taking into account financial materiality).
GL will generally recommend voting for resolutions that it believes will promote more and better disclosure of relevant risk factors where such disclosure is inadequate, or that will otherwise serve the best long-term interests of shareholders. Where GL believes a company has not adequately managed E&S issues, it will generally note its concerns and may recommend that shareholders “vote to signal” these concerns on any applicable management or shareholder proposal.
GL has introduced a stricter voting policy for companies with poor, unclear, outdated or contradictory disclosure. GL will include in its assessment the quality and clarity of CBCA companies disclosing the rate of representation of “Designated Groups” at board and management level and will hold the chair of the governance committee responsible for poor disclosure standards.
More specifically, GL will recommend withholding votes from the governance committee chair when the board has provided poor, contradictory or outdated disclosure on key issues (such as the identity of its chair, related-party transactions, composition of key committees, other directorships, or other information necessary for shareholders to properly evaluate the board).
GL also made a number of clarifying amendments to its policies on executive compensation and other governance matters, including:
Independence Classification. GL clarified that it will consider employees of significant shareholders and explicit designees of such shareholders to be “affiliated.” GL will consider employees of a company’s ongoing major beneficial shareholder or party of interest through a material financial relationship (related-party transactions) to be affiliated for three years after they cease to be employed by such party, so long as the party continues to have a relationship with the company.
Exceptions to Overboarding Policy for Directors of Venture Companies. GL clarified that its existing director overboarding policy (under which GL will generally recommend withholding votes from executive directors who serve on more than two public company boards and any other director who serves on more than five public company boards) would not apply to executive directors who serve on up to five TSX-V boards or any non-executive director who serves on up to nine venture boards. In addition, GL added the Aequitas NEO Exchange to its list of small exchanges (which previously included only the Canadian Securities Exchange) to which GL’s venture policy guidelines will apply.
Compensation Committee Performance. GL clarified that compensation committee member re-election at an annual meeting will receive close scrutiny where a board does not provide shareholders with an advisory say-on-pay vote.
Option Exchanges and Repricing. GL clarified that, in evaluating option exchanges and repricing proposals and considering any exceptions to GL’s general opposition to such proposals, it will emphasize the importance of excluding directors and officers from the program as well as that the program be value-neutral or value-creative.
Peer Group Methodology. GL clarified that, in determining peer groups used in its pay-for-performance letter grades (“A” to “F”), GL uses a proprietary methodology in which GL considers (on a weighted basis subject to size-based ranking and screening) both country-based and sector-based peers, along with each company’s network of self-disclosed peers (which may differ from the peer group selected under GL’s methodology due to the subjective nature of the selection of peer groups).
As a reminder, GL’s previously issued COVID-19-related guidance on virtual-only AGMs applied only to meetings held from March 1, 2020, through June 30, 2020. For meetings falling outside of that timeframe, GL has reverted to its pre-COVID-19 guidance, under which it will recommend withholding votes from a company’s governance committee members where that company seeks to hold a virtual-only meeting, unless the company provides robust disclosure (assuring shareholders they will be afforded the same rights and opportunities to participate as they would at in-person meetings) and corresponding shareholder protections.
Depending on their institutional shareholder base, issuers will also want to consider the voting recommendations issued by other institutional shareholders that may, in some instances, exceed the GL guidelines. The GL 2021 Proxy Paper Guidelines can be accessed here.
Legalflyer provides legal and market commentary, addressing the key questions and topics of interest to our clients operating in the aviation industry. The content of Legalflyer covers the breadth of our global aviation practice and is contributed by our aviation lawyers across our 50+ offices worldwide.
© Norton Rose Fulbright LLP 2021