Preparing for the 2018 Reporting Season

Torys Quarterly: Take the Long View

A broad range of corporate governance considerations will influence this year’s reporting season. Read our detailed review of what Canadian public companies should have on their watchlist for 2018.

Boardroom Diversity

Institutional investors are increasingly advocating for gender diversity in the boardroom. Heightened scrutiny of board composition, and in particular the number of women on boards, is becoming a growing area of focus for investors and issuers alike.1 The number of Canadian reporting issuers that have adopted board gender diversity policies relating to the representation of women on their boards has more than doubled over the last two years,2 and we expect this trend will continue to grow in the coming months, especially in light of changes introduced by ISS in its latest policy update.

With effect from February 2019 for all TSX companies (but applicable in 2018 to S&P/TSX Composite Index companies), ISS may recommend withhold votes against nominating committee chairs of issuers with all-male boards and having no written gender diversity policy in place. Importantly, ISS’ new voting guidelines will not apply to issuers with four or fewer directors, or to those that were publicly listed within the preceding year. ISS expects diversity policies to include a clear commitment to increase board gender diversity within a reasonable timeframe, evidenced by measurable goals and/or targets.

From 2019, Glass Lewis will also generally recommend voting against the nominating committee chair of a board that has no female members, or that has not adopted a formal written gender diversity policy.3

TSX Developments

Majority Voting

As in prior years, directors failing to receive a majority of favourable votes cast in uncontested elections will be required to tender their resignation immediately, and boards will have to accept those resignations, absent exceptional circumstances. Recent guidance released by the Toronto Stock Exchange (TSX) on its majority voting requirements sets a high bar on the circumstances in which a board may choose not to accept a director resignation, such as where the issuer would be in breach of corporate or securities law requirements or a commercial agreement.4

The TSX guidance also identifies several deficiencies in TSX-listed issuers’ majority voting policies, notably that policies which “expect” directors to resign following a failed vote were problematic. We anticipate that issuers’ majority voting policies will remain under the Exchange’s watch this upcoming season, so public companies should consider taking a second look at their policies in light of the latest TSX guidance.

Advance Notice Policies

Also attracting greater scrutiny from the TSX are advance notice policies requiring shareholders to provide advance notice to the issuer of any proposal to nominate a director at an upcoming meeting. The TSX published a staff notice last year cautioning issuers not to impose on nominating shareholders burdensome requirements, such as requiring them to be present at the meeting or disclose irrelevant information such as the dates when the shareholder acquired securities in the issuer.5 ISS’ 2018 policy update similarly aligns with the TSX guidance.

Adopting an advance notice by-law or policy is not mandatory and many issuers do not have one. For those issuers that do, they should review their policies and, if necessary, amend them to conform with TSX guidelines before the issuer’s next annual meeting of shareholders.

Website Postings

New TSX requirements for website postings have been introduced to promote easier access to issuers’ corporate governance information. Under the new rules, effective April 1, 2018, TSX-listed issuers (except for certain inter-listed issuers with minimal trading volume in Canada) will have to post a number of their documents on their websites, including majority voting and advance notice policies, board mandates and committee charters.6

Given that first movers are emerging in Canada, proxy access—a prominent governance trend in the U.S.—is likely to continue to garner shareholder attention in the year ahead.

Proxy Access

Proxy access, a mechanism enabling shareholders to include director nominees in the management proxy circular and have those nominees listed directly on the company’s proxy card, has become widely adopted in the U.S.—60% of the S&P 500—and has now broken ground in Canada.7

Two major financial institutions, The Toronto-Dominion Bank and Royal Bank of Canada, received shareholder proposals for proxy access last year. Both institutions now have proxy access policies in place and we expect that proxy access will, given its prevalence as a governance trend in the U.S., continue to garner shareholder attention in Canada in the coming year. Glass Lewis has also recently indicated that it will take a case-by-case approach to examining shareholder proxy access proposals in order to assess if existing proxy rights under the current regulatory landscape are sufficient or preferable to those requested by the relevant proposal.

Update on Executive Compensation

Executive compensation remains a hot topic for investors, and is the subject of ongoing heightened public scrutiny. Non-binding, advisory shareholder votes on executive compensation (say-on-pay) are now being held by over 80% of S&P/TSX 60 companies which have generally garnered strong shareholder support for their executive compensation packages. Where issuers received a poor say-on-pay vote at their last shareholders’ meeting, increased focus may be necessary on disclosure of the shareholder engagement process and specific actions taken to address shareholder concerns.

Investors are also increasingly focusing on non-employee director compensation. For instance, excessive inducement grants to directors may be perceived as threatening a director’s objectivity and independence and may limit the benefits of director share ownership guidelines. Where inducement grants are made, issuers should consider disclosing the rationale for the awards to preempt these concerns.

Likewise, issuers may want to consider limiting or prohibiting non-employee director compensation that is tied to company performance or share appreciation (e.g., stock options, RSUs or PSUs) as they may raise questions concerning director independence, or suggest that directors are focused on short-term share price appreciation.

More broadly, listed issuers with financial years ending on or after October 31, 2017 will need to comply with new TSX rules on security-based compensation arrangements. These include stock option plans, stock purchase plans, treasury-settled incentive compensation plans and other compensation arrangements that involve the issuance or potential issuance of shares from treasury. Under these new requirements, listed issuers will have to disclose annual burn rate information for each of the three most recently completed fiscal years for each security-based compensation arrangement. Details about any multipliers on awards (such as treasury-settled PSUs which vest based on the level of achievement of certain performance criteria) will also have to be disclosed.

In addition, default term and vesting provisions will need to be summarized for all security-based compensation arrangements, not only for stock options. Other than the burn rate information, annual security-based compensation arrangement disclosure will be presented as at the end of the most recently completed fiscal year, rather than as at the date of the meeting materials.

Environmental, Social and Governance Disclosure

While issuers are already required to disclose material environmental and governance matters under Canadian securities laws,8 investors are increasingly focusing on the need for this type of disclosure and its financial significance. For example, for the first time in the U.S., shareholder proposals concerning climate change risk reporting received majority support by shareholders of Occidental Petroleum Corp., PPL Corp. and Exxon Mobil.9

In response to the growing scrutiny on reporting issuers’ climate-related disclosure, last year Canadian securities regulators announced a climate change disclosure review project to study climate-related disclosures in Canada and internationally. As part of the initiative, regulators will be reviewing companies’ public disclosures on climate change and sustainability, together with international disclosure requirements and voluntary frameworks.

In its Statement of Priorities for 2017-2018,10 the Ontario Securities Commission also acknowledged the ongoing importance of disclosures in these areas and is monitoring developments to determine whether additional or new forms of disclosure will be required.

Financial Disclosures

Securities regulators will continue to actively scrutinize non-GAAP financial measures this year. The OSC has cautioned issuers that it may take regulatory action if these measures are used in a manner that is considered misleading, such as in circumstances when non-GAAP financial information is given excessive prominence or includes inappropriate or unclear adjustments.11 In light of the risks of liability and reputational harm, issuers should continue to be mindful of how they present non-GAAP financial measures in 2018.

With regard to management’s discussion and analysis, the OSC is also encouraging issuers to provide more meaningful disclosure, especially in respect of results of:

  • operations: beyond simply reporting numbers, issuers should include things like detailed discussion of factors affecting revenue;
  • risks and uncertainties: this discussion should be more robust, with a focus on risks that are specific to the issuer;
  • liquidity and capital resources, including discussion of material cash requirements rather than just a general statement that the issuer has adequate working capital; and
  • changes in accounting policies and their anticipated impact on business.

In respect of accounting changes, issuers are reminded that a new revenue recognition standard, IFRS 15, is effective for annual periods commencing on or after January 1, 2017. New requirements for recognizing revenue from contracts with customers have been introduced, and issuers will be required to provide disclosure on their expected impact.


Issues dominating the 2018 reporting season are a reflection of many of the unique governance challenges that have surfaced in recent years: the rising influence of shareholders, who are now more active than ever in engaging with the companies in which they invest; as well as an increasingly complex regulatory environment in which compliance matters, heightened scrutiny from regulators and regulation are evolving. Issuers will need to exercise agility in the year ahead to navigate these changing frameworks and developments.

Other Key Canadian Proxy Advisory Policy Updates

  • Overboarded directors: ISS has eliminated director attendance (at less than 75% of board meetings without a valid reason) as a relevant factor in determining a vote recommendation on an overboarded director. It has also revised its current overboarding thresholds. With effect for shareholders’ meetings held on or after February 1, 2019, ISS will generally recommend voting withhold for non-CEO director nominees who sit on more than five (rather than the current four) public company boards, and voting withhold for CEO director nominees at their outside boards if they sit on more than two (rather than the current one) public company boards (excluding the company for which they serve as CEO).
  • Board responsiveness: In 2018, Glass Lewis will evaluate board responsiveness in circumstances where 20% or more of shareholders vote against a management-sponsored proposal. Glass Lewis will not automatically vote against a future proposal if the threshold is triggered, but may treat it as a contributing factor to vote against management recommendations if the issuer did not respond appropriately. In respect of dual-class share structures with disproportionate voting and economic rights, the level of disapproval warranting board responsiveness will be a majority of unaffiliated shareholders.
  • Dual-class share structures: Glass Lewis believes that dual-class share structures are generally not in the interests of shareholders and will, in respect of recently IPO’d or spun-off companies, now consider this structure’s effect on shareholder rights.
  • Virtual shareholder meetings: From 2019, Glass Lewis will generally recommend voting against an issuer’s governance committee members if the issuer plans to hold a virtual-only shareholder meeting and does not provide adequate disclosure to shareholders assuring them that they will have the same participation rights as they would at an in-person meeting.


1 For details, see Torys’ bulletin: “Women on Boards and in the C-Suite: Will Institutional Investors Close the Gender Gap?

2 See CSA Multilateral Staff Notice 58-309 – Staff Review of Women on Boards and in Executive Officer Positions – Compliance with NI 58-101 Disclosure of Corporate Governance Practices.

3 See Glass Lewis’ 2018 Proxy Paper Guidelines for Canada.

4 See TSX Staff Notice 2017-0001 issued March 9, 2017.

5 See TSX Staff Notice 2017-0001 issued March 9, 2017.

6 For details, see Torys’ bulletin: “New TSX Amendments Impact Equity Compensation Plans and Company Websites.”

7 See the update by The Council of Institutional Investors to its 2015 report on “Proxy Access: Best Practices” dated August 28, 2017.

9 See CSA Staff Notice 51-333 Environmental Reporting Guidance (October 27, 2010), National Instrument 51-102 Continuous Disclosure Obligations and National Instrument 58-101 Disclosure of Corporate Governance Practices.

9 See “The Delightful Dozen: Top Governance Advances in 2017,” John Roe, Institutional Shareholder Services, Inc. July 19, 2017.

10 See OSC Notice 11-777 Notice of Statement of Priorities for Financial Year to End March 31, 2018.

11 See OSC Staff Notice 51-728 Corporate Finance Branch 2016-2017 Annual Report.


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