Institutional Shareholder Services Inc. ("ISS") has
published for comment proposed updates to its proxy voting
guidelines. The proposed guidelines are to take effect for
shareholder meetings held on or after February 1, 2014, subject to
any changes that arise from comments received from financial market
The proposed changes that affect Canadian proxy voting policies
concern three areas: director over-boarding; problematic
audit-related issues; and quantitative pay for performance.
Director Over-Boarding for TSX Listed Issuers
Directors often sit on more than one board. While a director may
gain valuable experience sitting on a number of boards, ISS has
stated that it is important that a director be able to devote
enough time and attention to the boards he or she sits on. Where a
director of a public company is also its CEO, ISS considers the
director to be "over-boarded" if he or she sits on more
than two additional boards. A director who is not the CEO of a
public company is considered over-boarded if the director sits on
more than six public company boards.
The current ISS board attendance policy states that if a company
has a majority voting policy, ISS will issue a withhold
recommendation for a director if that director has attended less
than 75% of the board and committee meetings within the past year
(without good reason) and has a pattern of low meeting attendance
over the prior years.
If the proposed policy is implemented, ISS will recommend to
withhold votes on a director that is over-boarded (as described
above) AND has attended less than 75% of meetings in the last year
without good reason.
ISS data shows that in the first half of 2013 approximately 25% of
directors in Canada are over-boarded. While over-boarding itself
may not be a problem, in ISS's view over-boarding combined with
a pattern of low meeting attendance may indicate that a
director's time and attention is stretched too thin for the
director to effectively serve on those boards.
Problematic Audit- Related Issues
Where a TSX reporting issuer discloses a material weakness in its
internal controls over accounting process and financial reporting,
such weaknesses are expected to be remedied in a reasonable period
of time. Some issuers still report having weaknesses over more than
two annual meetings. ISS has raised concern about the effectiveness
of audit committee oversight of internal controls when such a
material weakness continues to be reported for an extended period
To address this issue, ISS is considering adopting a
"case-by-case" policy when recommending a vote on members
of an audit committee and potentially the full board "if
adverse accounting practices are identified that rise to a level of
serious concern, such as: accounting fraud; misapplication of
applicable accounting standards; or persistent material weaknesses
identified in the internal control process." Seriousness and
duration of the internal control issues and the corrective actions
of the issuer to addresses such issues are taken into consideration
when ISS is recommending whether shareholders should withhold votes
for an audit committee member. If the breaches are so egregious and
persistent, ISS will recommend that shareholders withhold votes for
the entire board.
Pay for Performance Quantitative Screen
ISS employs certain quantitative "pay-for-performance"
measures to determine if a CEO's pay is aligned with the
issuer's total shareholder return ("TSR"). ISS is
proposing to simplify the methodology for calculating the Relative
Degree of Alignment ("RDA") pay for performance
Presently the ISS calculates the RDA as the difference between the
issuer's TSR rank and the CEO's total pay rank within a
peer group, measured over one-year and three-year weighted average
periods. ISS proposes to now calculate the RDA over a three-year
period. ISS has stated that the three-year measure smoothes out
volatility issues and provides a more accurate view on long-term
pay and performance alignment. ISS has noted that issuers who have
significant differences in their one-year and three-year
pay/performance results will have their RDA number materially
affected as a result of this change in policy.
The comment period on the proposed changes to ISS policy is open
until November 4, 2013.
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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