Glass Lewis releases its 2021 proxy voting guidelines

Proxy advisory firm Glass Lewis (GL) recently released its 2021 proxy voting guidelines, with notable updates focused on a range of governance-related matters including gender diversity, board composition, ESG oversight and executive compensation.

Women on boards

GL’s new guidelines reflect the continuing market demand for increased representation of women on boards.

• For the 2021 proxy season, GL will note as a concern boards of TSX-listed issuers with fewer than two female directors.
• 2021 voting recommendations will still be based on the current requirement of at least one female board member.
• For shareholder meetings held after January 1, 2022, boards with seven or more members will risk an adverse voting recommendation for the nominating committee chair if there are fewer than two female directors. For boards with six or fewer members, at least one female director will be expected to avoid a negative voting recommendation. In making voting recommendations, GL will take into account an issuer’s disclosure concerning its diversity considerations and any targets and timelines, including whether the issuer has provided an explanation or plan to address the current lack of diversity on the board.

In addition to gender, GL also noted that it intends to evaluate the disclosure required of federally incorporated (CBCA) companies concerning the representation of “designated groups” (women, Aboriginal persons, members of “visible minorities”, and persons with disabilities) at the board and management level, and will hold the chair of the governance committee responsible for poor disclosure.

Institutional Shareholder Services (ISS) has taken a different approach to gender diversity, focusing instead on the percentage of female directors at larger market cap companies. Effective February 1, 2022, ISS expects every S&P/TSX Composite Index constituent to have at least 30% of its board comprised of women, or a written gender diversity policy that includes a commitment to achieve at least 30% female board representation over a reasonable timeframe. For all other widely-held companies, ISS will recommend a withhold vote where there are no women on the board.

In a related development, Nasdaq has filed a proposal with the U.S. Securities and Exchange Commission (SEC) for permission to adopt new listing rules, which will require all companies listed on its U.S. exchanges to publicly disclose diversity statistics regarding their boards. Additionally, the rules would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+. Foreign issuers would be permitted to satisfy this requirement if they have two female directors. Companies will be allowed a phase-in period to satisfy the requirements. The Nasdaq proposal will be subject to SEC approval, following a public comment period.

Board renewal and composition

GL may recommend voting against the chair of the nominating committee board has not addressed major issues of board composition, including the composition, mix of skills, and experience of the non-executive members of the board. The following are some of the board composition considerations GL has raised:

• Director tenure. For the 2021 proxy season, GL will note as a potential concern instances where 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. While GL will not be making voting recommendations solely on this basis, it may take this into consideration along with other board-related concerns.
• Financial expertise. The revised GL guidelines promote increased financial expertise among audit committee members, with criteria that are closer to the U.S. requirements for “audit committee financial experts” than the current Canadian requirements. For TSX-listed issuers, GL will identify a concern when the audit committee does not have at least one member with experience as a certified public accountant, CFO or corporate controller of similar experience, or demonstrably meaningful experience overseeing such functions as senior executive officers. GL indicates that it will generally make recommendations on this basis only where it has identified other concerns with audit committee performance.
• Employees of significant shareholders. GL clarifies that a director that is also an employee of a significant (20%+) shareholder will be considered an affiliated director, and therefore not independent, for three years after the individual ceases to be employed by the significant shareholder.

Environmental and social risk oversight

For the 2021 proxy season, GL will note as a governance concern weaknesses in disclosure concerning board-level oversight on environmental and/or social issues by S&P/TSX 60 issuers. For shareholder meetings held after January 1, 2022, GL will generally recommend voting against the governance chair of a S&P/TSX 60 issuer that fails to provide explicit disclosure concerning the board’s role in overseeing these issues. GL notes that issuers should determine the best structure for this oversight for themselves, whether it be by specific directors, the entire board, a separate committee, or combined with the responsibilities of a key committee. When evaluating the board’s role in overseeing environmental and/or social issues, GL will consider the issuer’s management information circular and other governance mechanisms (such as constating documents and committee charters) to determine if directors maintain a meaningful level of oversight of and accountability for a company’s environmental and/or socially-related impacts and risks.

Exclusive forum provisions

Exclusive forum provisions, popular in the U.S., that restrict the choice of venue for lawsuits to a specific jurisdiction, have been gaining momentum in Canada. GL’s position is that such provisions are not in the best interests of shareholders, and that such clauses may effectively discourage the use of shareholder claims by increasing their associated costs and making them more difficult to pursue. As a result, GL will recommend that shareholders vote against any amendments seeking to adopt an exclusive forum provision unless the company: i) provides a compelling argument on why the provision would directly benefit shareholders; ii) provides evidence of abuse of legal process in other, non-favored jurisdictions; iii) narrowly tailors such provision to the risks involved; and iv) maintains a strong record of good corporate governance practices.

ISS adopted a similar policy on exclusive forum proposals for 2021.

Short-term and long-term incentives

Clarifying amendments have been made to GL’s guidelines on short-term and long-term incentive arrangements, which will be relevant to boards considering how these programs will be assessed for 2020 and structured for 2021 in light of the COVID-19 pandemic. A retroactive pro-ration of a performance period will be viewed as an exercise of upwards discretion by the company. For example, if a board only considers performance in the first and fourth quarters of 2020 in assessing whether annual bonus targets have been achieved for 2020, GL would expect the company to provide a compelling rationale for any such action. In addition, any significant reduction in the use of performance-based long-term incentives for executives will, outside exceptional circumstances, be viewed negatively. GL expects clear disclosure to justify any exercise of discretion under, or structural changes to, a company’s short-term or long-term incentive programs.

Option repricing

While GL remains generally opposed to option repricing proposals, it has clarified that an option repricing may be acceptable if macroeconomic trends, as opposed to specific company issues, cause a dramatic drop in a company’s share price and there is a demonstrated need to reprice options to retain employees. In considering any option repricing program, GL expects that officers and directors not be permitted to participate and that vesting conditions for exchanged or repriced options be extended beyond one year.

Virtual and hybrid shareholder meetings

The advisory firms have addressed the continued impact of COVID-19 on the manner in which shareholder meetings are likely to be conducted in 2021.

GL recognizes that “hybrid meetings” (allowing virtual meeting technology to be used together with an in-person meeting format) can be beneficial to expand participation of shareholders who are unable to attend a shareholder meeting in person; however, GL continues to express concern regarding “virtual-only” meetings on the basis that they may restrict the ability of shareholders to meaningfully communicate with management. GL’s guidelines provide that, when analyzing companies that choose to hold virtual-only meetings, GL will look for assurances that shareholders will be afforded the same rights and opportunities to participate as they would at an in-person meeting—specifically noting disclosure regarding the ability and protocols for shareholder questions during the meeting, posting questions on the company’s website, and disclosure regarding technical and logistical support. GL will generally recommend voting against members of the governance committee where the company does not provide such disclosure or shareholder protections in the case of a virtual-only meeting.

ISS has provided guidance that it will generally support management proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. ISS encourages disclosure regarding the circumstances when virtual-only meetings would be held and similar assurances that shareholders will have comparable rights and opportunities to participate electronically as they would during an in-person meeting.

As explained in our prior bulletin this past spring, issuers will need to evaluate their corporate statutes and bylaws to determine if they are permitted to hold meetings by electronic means.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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