Having completed our annual deep dive into the past year's corporate governance developments and trends, we have developed a four-part series on what you need to know to prepare for the 2020 proxy season. In this last post in the series, we look at proxy developments and reporting updates.
Shareholder activism in 2019 resulted in 30 campaigns, led by the materials and healthcare sectors in Canada (11 and 6 campaigns, respectively) (as reported in Gryphon Advisors' Proxy Season in Review). An "activism campaign" is defined for these purposes as including:
- A shareholder opposing management by public initiation of a shareholder meeting requisition;
- An announcement of an intent to launch a campaign to replace directors or otherwise oppose management; and
- The filing of activist materials opposing or soliciting against management.
It does not include hostile bids.
While the representation of mining companies in activism campaigns is high, it is important to remember that the mining sector accounts for nearly half of all issuers on the TSX and TSX-V. The concentration of claims in the healthcare sector can be accounted for, at least in part, by increased activity in the cannabis industry.
In transactional contexts, a recent activist tactic has been to use "mini-tenders" to acquire up to 19.9% of a target without triggering the takeover bid requirements under National Instrument 62-104 Take-Over Bids and Issuer Bids (NI 62-104). We note that overall the number of unsolicited offers (hostile bids) continues to decline since the changes to the take-over bid regime that were implemented in NI 62-104.
On the shareholder proposals front in 2019, the Shareholder Association for Research and Education (SHARE) and ISS counted 84 shareholder proposals submitted at 32 companies (excluding TSX-listed issuers who are US domestic issuers). This is a significant jump from the 2018 count of 40 proposals at 21 companies.
The shifting focus of shareholder proposals is arguably even more noteworthy than their overall numbers. The increasing emphasis on ESG is reflected by significant growth in environmental and social shareholder proposals. ESG was the focus of 45% of all proposals in 2019 (up from 30% in 2018), including 18 proposals aimed at integrating ESG metrics into compensation determinations (as reported in Gryphon Advisors' Proxy Season in Review).
Other areas of focus were the adoption of a Say-on-Pay vote and CEO compensation including the disclosure of CEO to median employee compensation ratio.
In 2019, the majority of shareholder proposals were withdrawn prior to voting—likely a reflection of satisfactory management engagement before a vote was held. Moving into the 2020 proxy season, board and management considerations of their company's ESG framework could include opportunities for shareholder and broader stakeholder engagement on these topics to address issues that could otherwise encourage a shareholder proposal or activist effort. This type of engagement could also be considered as part of company policy design in support of good corporate governance and proactive socialization and management of shareholder and stakeholder concerns.
While still the exception, we expect the use of virtual shareholder meetings to continue to increase in the 2020 proxy season, as we have seen an uptick in their use by a number of S&P/TSX 60 issuers in a virtual-only format with others adopting hybrid formats. Potential advantages of virtual or hybrid meetings include the potential for increased access and participation by shareholders. However, the primary governance concern is ensuring such virtual formats afford shareholders who are participating electronically the same rights and opportunities as those afforded to shareholders participating in person.
While ISS has yet to take a policy position on virtual meetings, Glass Lewis, in its 2020 Proxy Paper Guidelines for Canada, has indicated that it may vote against governance committee members if there is not adequate disclosure to support the preservation of shareholders' right to participate virtually.
Scrutiny of Proxy Advisors
Last year a new lens was cast across proxy advisory firms' reporting and recommendations as well as the diligence responsibilities of investment advisors' in connection with proxy advisory reporting. The Securities Exchange Commission (SEC) voted in favour of new guidance regarding the responsibilities of investment advisors and regarding the application of proxy rules to proxy voting advice (the Proxy Voting Guidance).
The Proxy Voting Guidance is intended to address concerns relating to the proxy firms' significant level of influence across the industry, as well as ensure that investment advisors meet their fiduciary standards by doing the appropriate diligence on proxy advisor recommendations. Proxy advisory firms' reports have occasionally aroused concerns stemming from what were purported to be:
- Conflicts of interest inherent in the firms' business models;
- Uncorrected errors in their reports; and
- Insufficient transparency around methodology.
A fourth complaint that has been raised in certain cases concerns the firms' perceived unwillingness to engage with issuers (especially small to medium sized issuers who may be disproportionately affected by their guidance).
The SEC's Proxy Voting Guidance will likely be experienced most by the investment advisor community in response to increased pressure to engage in more thorough due diligence, particularly upon finding errors in the reporting or gaps in methodology used by the proxy firms. Given the significant added cost of addressing quality issues and the need for more interaction between proxy advisors and issuers, other impacts could potentially include:
- Increased costs to investors and investment advisors;
- Dampening of proxy advisor recommendations and reports; and/or
- Greater support for management-backed proposals.
Proxy Advisor Firm Reports for 2020
Both Glass Lewis and ISS published updates to their proxy guidelines for the 2020 proxy season, which included updates to director attendance and attendance records, board composition (former CEO/CFO, diversity and skills), over-boarding, board oversight expectations for environmental and social risks, executive compensation (contractual payments and arrangements and company responsiveness to low say-on-pay support.
We have summarized the updates in a quick reference guide format which we are pleased to make available for downloading.
Beyond awareness, we encourage you to consider what these trends and developments mean for your organization, specifically how they impact your annual meeting preparation and on-going corporate governance matters. For many issuers, this means a strategic review of stakeholder-focused communication, including continuous disclosure materials as well as board and committee charters, company policies and underlying frameworks to consider whether updates are needed in areas such as the following:
- Identifying gaps in current disclosure, policies and materials, and determining options for your organization to address;
- Reviewing the frameworks and processes that support disclosure, charters and policies (especially as they relate to risk management);
- Simplifying disclosure to focus on quality of disclosure specific to the organization, its business and its risks; and
- Aligning policies and/or public filings with regulatory and best practice updates and changes made this year and in past years, while taking a fresh look to eliminate redundancies or inconsistencies.
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.