In preparing for the 2014 proxy season, you should be aware of some regulatory changes that may impact disclosure to and interactions with your shareholders. This update highlights what is new in the 2014 proxy season.
What's New from the TSX:
Director Election Guidance
A prominent component of our update last year was a description of the amendments to the TSX Company Manual with respect to director election requirements. For ease of reference, these amendments required issuers to:
- Elect directors individually and not as a slate.
- Hold elections annually for all directors to be elected by holders of listed securities (i.e.: without staggered boards).
- Disclose annually in the management information circular whether the reporting issuer has adopted a majority voting policy and, if no such policy has been adopted, disclose election practices and reasons why they have not adopted a majority voting policy (commonly referred to as "comply or explain").
- Advise the TSX (by email) if a director receives a majority of "withheld" votes, if no majority voting policy has been adopted.
- Promptly issue a news release providing detailed disclosure of the voting results for the election of directors.
The TSX published Staff Notice 2013-0002 on July 10, 2013, which provided further guidance on some of the above amendments. The Staff Notice included the following guidance:
- In satisfying the requirement to issue a news release disclosing the results of a vote for director elections, issuers should provide: the percentages of votes "for" and "withheld" for each director, the total votes cast by proxy and ballot, together with the total received "for" each director, or the percentage and total number of votes received for each director. If no formal count has occurred that would meaningfully represent the level of support received by each director, for example when a vote is conducted by a show of hands, the TSX expects the disclosure at least to reflect the votes represented by proxy that would have been withheld from each nominee had a ballot been called as a percentage of votes represented at the meeting.
- The TSX addressed concerns raised regarding situations where a board of directors may conclude that a recommendation to amend the articles of incorporation of an issuer (to comply with annual director election requirements) could be contrary to the board's fiduciary duty. The TSX advised that the board would satisfy the TSX requirements if it stated in its circular that the proposed amendment is "as required by TSX".
- Issuers are required to ensure that security holders are allowed to vote for each director to be elected by class or series. The TSX advised that this requirement does not apply to issuers with appointment rights approved by the TSX at the time of listing.
The TSX also discussed relief from the director election requirements for international and interlisted issuers.
What's New from the Ontario Securities Commission:
Women on Boards
On July 30, 2013, the Ontario Securities Commission (OSC) launched a 60 day comment period on OSC Staff Consultation Paper 58-401 regarding disclosure requirements associated with female representation on boards. This has been a popular topic in recent years, particularly following a 2011 UK government report which called upon chairmen of FTSE 350 companies to set a target of 25 per cent female representation on boards by 2015. Steady progress towards that goal has been observed since the release of that report.
The potential disclosure model suggested by the OSC would result in non-venture issuers providing disclosure as part of their annual corporate governance practices summary in the following areas:
- policies regarding female representation on their boards and in senior management;
- consideration of the representation of women in the director selection process;
- consideration of the representation of women in the board evaluation process; and
- measurement regarding the representation of women in the organization, on the board and in senior management.
Regarding the first factor, an issuer should disclose whether it
has adopted a policy regarding representation of women on its board
and if so, it should provide a summary of the policy and its
implementation, its measurable objectives, whether those objectives
have been met and the method by which the board measures the
effectiveness of the policy.
The second and third factors listed above simply expand upon existing disclosure requirements. Issuers are currently required to disclose how they identify new candidates for board nominations and whether or not the board is regularly assessed with respect to its effectiveness and contribution. The contemplated disclosure model would expand upon the second factor by requiring a non-venture issuer to determine whether its female representation policy has any bearing on the director nomination process. Additionally, an issuer who has such a policy would be required to disclose how adherence to the policy and its objectives are assessed in connection with board effectiveness.
The last factor would require an issuer to disclose the percentage of women in the organization as a whole, in senior executive positions (as defined in the proposed amendments), and on the
The OSC made a request for comments with respect to proposed amendments to NI 58-101 Disclosure of Corporate Governance Practices on January 16, 2014 (comments must be submitted in writing by April 16, 2014) on a number of topics, including a reiteration of the proposed amendments concerning female representation discussed above.
Statement of Priorities
The OSC released its annual statement of priorities for the
fiscal year ending March 31, 2014, and one of the relevant topics
was a continued focus on shareholder democracy. This was also a
common theme found throughout the CSA's three year business
plan released on July 9, 2013.
In addition to the proxy voting infrastructure discussed below, the OSC stated that it planned to improve shareholder democracy and protection by facilitating the adoption of majority voting for election of directors by TSX-listed issuers.
As stated above, the "comply or explain" aspect of majority voting was a large development last year and the TSX had anticipated that this would be replaced by mandatory majority voting for TSX-listed issuers by December 31, 2013. Adoption of the mandatory policy has not yet occurred but the comments from market participants such as Glass Lewis, ISS (defined below), and the Canadian Coalition for Good Governance are certainly in favour.
OSC Staff Notice 52-722 - Report on Staff's Review of Non-GAAP Financial Measures and Additional GAAP Measures was published in mid-December, 2013. Among other things, the OSC continues to have concerns with how non-GAAP financial measures are often disclosed as well as additional sub-totals in some GAAP financial presentations. Some specific noteworthy items:
- OSC staff identified concerns in the disclosure of 86 per cent of the issuers reviewed.
- Issuers generally provide an explanation for their use of non-GAAP financial measures which contain boilerplate language that is not meaningful.
- Non-GAAP financial measures generally should not describe adjustments as non-recurring, infrequent or unusual when a similar loss or gain is reasonably likely to occur within the next two years or occurred during the prior two years.
What's Brewing with the Canadian Securities Administrators:
Proxy Voting Infrastructure
Canadian Securities Administrators (CSA) released CSA
Consultation Paper 54-401 on August 15, 2013, which solicited
comments and discussion regarding the integrity and reliability of
Canada's proxy voting infrastructure. The CSA note that, in
Canada, approximately 97 per cent of intermediaries have contracted
with Broadridge Investor Communication Solutions Canada to provide
The CSA provided a detailed background on the importance of shareholder voting to the overall concept of robust corporate governance. Since the vast majority of retail investors hold their shares through intermediaries, it is critical that the reconciliation of proxy voting is accurate and relatively transparent. Using this theme, the CSA identified two key questions.
- Whether proxy votes and voting instructions are properly reconciled with securities entitlements in the "intermediary holding system" (i.e. CDS).
- Whether the shareholder is provided with information which confirms that their proxy votes and voting instructions have been properly transmitted by the intermediaries to which they were submitted
The complexity of the intermediary holding system becomes more convoluted when other factors are considered, such as share lending, voting agents and the concept of objecting and non-objecting beneficial owners (whether a beneficial owner authorizes an intermediary to disclose his/her/its name).
The CSA released an update on the Consultation Paper on October 31, 2013, which signalled its intention to engage in further consultations targeted at specific topics with market participants in early 2014. While it is clear that this consultation is still in the early stages, any changes to proxy voting infrastructure could have a significant impact on the interaction between market participants and should be monitored closely.
What's New in Institutional Commentary:
Glass Lewis & Co. (Glass Lewis) and Institutional Shareholder Services (ISS), two companies that advise institutional investors on how to vote at shareholder meetings, released Canadian guidelines for the 2014 proxy season. We provide the following highlights from these guidelines.
Glass Lewis will introduce a proprietary "pay for
performance" model in 2014 which is based on the quantitative
pay and performance of Canadian executives. The new metrics will
result in the issuance of a letter grade (A-F) to each issuer which
is intended to provide a more accurate comparison between peer
groups. Glass Lewis may vote against a company's "say on
pay" vote and recommend withholding votes from compensation
committee members based on the results of the revised methodology.
It's worth noting that this system will remain independent of
the qualitative evaluation which Glass Lewis employs regarding the
overall compensation structure of a company.
ISS has also released a revised methodology for calculating a company's "pay for performance" alignment. The main update is that ISS will calculate the difference between the TSR (total shareholder return) ranking of a company and the CEO's total pay within a peer group, as measured over a three year period. ISS previously compared these figures using a one year and three year weighted average method. ISS uses its quantitative methodology to calculate the "relative degree of alignment" for a company's compensation and, like Glass Lewis, also conducts a separate qualitative assessment of the CEO's pay and company performance.
Quorum at Shareholder Meetings
For TSX and TSXV reporting issuers, Glass Lewis has increased the quorum it generally considers acceptable from 25 per cent of voting shares to 33 per cent of voting shares. Glass Lewis has also indicated that it will support a company which adopts new articles in connection with a continuance so long as the quorum is set at 25 per cent or higher. This is an important consideration for companies that are contemplating a continuance and currently operate with a quorum that is less than 25 per cent.
You may recall from the last yearly update that Glass Lewis had
generally recommended voting in favour of proposals to implement
majority voting polices (for directors of S&P/TSX composite
issuers in uncontested meetings) resulting from the amendments to
the TSX Company Manual. As discussed above, pursuant to the
amendments, issuers were required to disclose in their management
information circulars whether they had adopted a majority voting
policy or explain why a policy had not been adopted. Glass Lewis
previously recommended withholding votes for members of the
governance committee of issuers which had not adopted a majority
voting policy but has reversed this stance for 2014 with respect to
controlled companies (where an individual or entity holds more than
50 per cent of the company).
Audit Committee/External Auditors
ISS has introduced a new policy to vote case-by-case on members of an audit committee and potential members of the full board if problematic accounting practices are identified which are not remediated in a reasonable period of time. ISS explains that this policy has been introduced in light of recent disclosure of material weaknesses by certain TSX reporting issuers in recent proxy seasons.
Glass Lewis has introduced a new recommendation for 2014 regarding proposals which require auditor rotation. Glass Lewis will typically support proposals requiring auditor rotation provided that the required rotation is not less than five to seven years.
ISS has amended its definition of "inside director"
and "affiliated outside director" and generally
recommends withholding votes from such directors where the majority
of the board is not independent or where the board does not have a
separate nomination or compensation committee. The update to the
definition codifies and clarifies policy application with respect
to certain criteria that relate to controlling entities, former
interim executives on the board, and the definition of
"Executive Officer" for this purpose; it also delineates
those "affiliated outside directors" who would be subject
to a cooling off period versus those who would not be subject to
any cooling off period under ISS policy. It should be noted that
the ISS definitions go beyond the meaning of independence for audit
committee and corporate governance disclosure purposes.
Glass Lewis generally believes that the majority of a board should be independent (as a minimum threshold) to adequately protect the interests of shareholders. Glass Lewis holds issuers listed on the S&P/TSX to a higher standard and recommends that two-thirds of the boards of such issuers should be independent. Glass Lewis expects issuers listed on the TSXV to have a minimum of two independent directors, which represent at least one-third of the board.
ISS has introduced cautionary language regarding individual
directors who sit on a number of boards which could result in
excessive time commitments. ISS considers a director to be
"overboarded" where a CEO of a public company also sits
on more than two outside public company boards or where the
director is not a CEO of a public company and sits on more than six
public company boards.
ISS will generally recommend withholding from an individual director who is overboarded and has also attended less than 75 per cent of his/her respective board and committee meetings within the last year without a valid reason. ISS also generally recommends withholding from an individual director nominee based on the attendance history of the director for the past year (and will take the attendance of a director in prior years into consideration when making recommendations for issuers that have adopted a majority voting policy).
Advance Notice Requirements
In the context of director elections, advanced notice bylaws and policies are gaining traction in Canada. Generally speaking, advanced notice bylaws require shareholders who intend to nominate directors for election to provide notice to the issuer of their intentions prior to the shareholders' meeting. Shareholders are also normally required to submit background information on the nominee directors as part of the notice, which helps ensure that other shareholders cast an informed ballot at the meeting. Issuers that have not adopted advanced notice bylaws should be aware of the risks associated with dissident shareholders initiating a stealth proxy contest directly before a meeting.
ISS continues to call for voting on a case-by-case basis for
proposals to adopt or amend the articles or bylaws in relation to
advance notice requirements. However, ISS has introduced new
language to its recommendation indicating that the board must be
able to waive any provision of the advanced notice requirement
which may provide nominating shareholders legal recourse if denied
access to the ballot. ISS also recommends voting against proposals
which require proposed director nominees to deliver written
agreements which may impede their ability to affect positive board
and corporate governance change.
Glass Lewis has revised its definition of timely notice regarding the early notice to shareholders of new director nominations. Glass Lewis continues to support a minimum notice period for nominations of 30 days (prior to the meeting date) but has extended the outside limit from 65 days to 70 days. ISS continues to support a minimum of 30 days and a maximum of 65 days notice.
Equity Compensation Plans
ISS continues its recommendation to vote against discretionary non-employee director participation in management equity compensation plans. ISS does not oppose the use of equity compensation for non-employee directors but it does advocate for reasonable limits on annual grants. ISS previously recommended voting against an equity compensation plan for an annual individual non-employee director which exceeded $100,000. ISS has clarified the language of this recommendation and has also increased the annual limit from $100,000 to $150,000 worth of shares in the case of an equity plan that does not grant stock options (but has maintained the maximum of $100,000 for equity plans which do grant stock options).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.